Pound, markets and gold – let’s get Brexit into perspective
By Lawrie Williams, Founder, LawrieOnGold.com
Edited and updated article first posted on info.sharpspixley.com on Friday, post the UK’s Brexit referendum vote. A minor update taking into account opening of markets following the weekend.
Yes, Brexit has been bad for UK markets, but No it has not been nearly as bad so far as many had feared. It’s generally been far worse for global ones! But it’s early days yet…..
Immediately prior to the referendum vote market indicators had been riding very high in anticipation of a Remain victory. The pound had spiked to over $1.50 against the US dollar – its highest level for around 7 months and the post-Brexit vote headlines have all tended to look to the British currency’s fall against that level – currently around 8%. But compared with just over 2 weeks ago it is only down less than 5%. Bad, but not quite so horrendous, and so far way short of the kind of fall predicted by some very high profile investors and analysts. The knee jerk reaction though, once the Leave vote had become a virtual certainty, was for the pound to spike down to around $1.324, thus a peak to trough move of around 12% – in actuality a move from a spike up to a spike down – but that is what media headlines will have led with. The reality is a somewhat less calamitous fall once the smoke had started to die down, although still an extremely significant one, although we expect to see continuing pressure on the pound as some of the ramifications of the popular vote come home. Indeed the pound has continued to fall this morning as I write coming down a further 2%.
And of the major currency markets the media mostly refer to, the pound was indeed by far the worst performer. But in contrast, let’s take the most followed UK stock market index – the FTSE 100. From media headlines who would realise that the FTSE 100 level at Friday’s close at around 6,139 is actually 3% HIGHER than it was only just over a week ago when it fell below the 6,000 mark, is up, albeit by a small amount, on the year to date and fully 10% higher than it was at this year’s low point to date in mid-February. This was certainly no immediate UK stock market crash as some would appear to have us believe. Some might reckon this is just a mild correction, although again we would anticipate further downwards pressure this week. But the FTSE 100 does have a degree of protection as there are several resource companies in the Index including precious metals miners and precious metals are one of the market sectors benefiting from the vote. Some of the broader-based FTSE Indexes will fare a little worse, but so far again, not a calamitous meltdown. The FTSE100 has continued to drift downwards on Monday morning but so far is still holding above the 6,000 level.
On the other side of the coin let’s take the gold price. ‘Gold price soars’ the media headlines will tell us, but it actually fell back from a knee-jerk peak of $1,360 as it became apparent that Brexit was likely to carry the day, down to below levels it had already previously reached as recently as in mid-June, coming back down nearly $50 or so once the markets had time to digest the reality. Sure it had spiked up over $100 from around the $1,250+ level it had fallen to when the world had anticipated the Remain vote would prevail, but for significant periods in the previous month it had been much higher peaking at around the same level that we saw at the weekend’s close only a couple of weeks earlier. Gold has strengthened more this morning and we would not be surprised to see this trend continuing, particularly if gold ETF inflows remain strong – a massive 18.4 tonnes were added to the SPDR god ETF (GLD) on Friday for example.
With gold rising in US dollars and the pound falling against the US dollar, those in the UK who invested in gold ahead of the vote – as we suggested was a n0-brainer from a waeltah insurance angle in a previous article: Britain Facing Brexit Bombshell. What Would Happen to Gold? have done very nicely indeed thank you, with the play gaining around 20% so far, depending on where you take the gold price level from. But at any pre-Brexit gold price the decision to put some pounds into gold will have been a very positive one. We cautioned all along that whatever the opinion polls were saying there was a huge underlying groundswell of anti-UK feeling and this fully expressed itself in the turnout and the eventual result.
Initial global stock market reactions to the UK decision have mostly been as bad, or worse, than in the UK itself. For example Japan’s Nikkei was down 4%,but has recovered some of this fall in Monday trading. The Dow fell by over 3%, Germany’s DAX by 7%, the French CAC Index down 8% with the major Italian and Spanish Indexes down around 12%. European markets were still continuing to suffer this morning, the major indexes showing further falls. So the real Stock Market carnage so far has not been in the UK (where the FTSE 100 was actually up over the week), but in Global markets – particularly in Europe. One wonders now whether the Brexit decision is the trigger which will prompt a global fall in stock prices which could match, or even exceed the 2008 market crash as some well-thought of economists have been predicting. Is the House of Cards going to collapse?
The rest of Monday is already turning out to be a very interesting day in the markets indeed. Will we see further carnage in global Indexes during the day as the ramifications are digested? Will the UK Indexes plunge as the fall in the pound sterling parity against the dollar might suggest? Or will we see something of a recovery across the board, albeit perhaps a temporary one? Markets tend to over-react to bad, or good, news so it’s a definite possibility.
We suspect global stock markets face an unsettled few days, weeks, or months. Precious metals may continue to gain as safe haven buying accelerates. As noted above we saw an absolutely massive 18.4 tonnes of gold going into the GLD SPDR gold ETF on Friday. Will we see more big rises in the week ahead, or are profits going to start to be taken? GLD is a good proxy for precious metals investment interest and although there may remain something of a concerted effort by the bullion banks to stabilise the gold price, the flows into the ETFs will be further pressuring already tight supplies of available attributable physical gold and one scenario is that the gold price could burst upwards rather than downwards. OK – ‘burst’ is something of an oxymoron but perhaps an apt representation of possibilities.
Look out for volatile markets, we don’t think they will settle down again for some time to come as politicians blow hot and cold over the impact and timetable of the Brexit on the UK, European and global economies. It could presage a very rough time ahead on global markets.
About the Author
Lawrence (Lawrie) Williams is a well known London-based writer and commentator on financial and political subjects, but specialising in precious metals news and commentary. He is a qualified and experienced mining engineer having graduated in mining engineering from The Royal School of Mines, a constituent college of Imperial College, London – recently described as the World’s No. 2 University (after MIT).
He has worked in mines in South Africa (gold, uranium and platinum), Canada (uranium), Zambia (copper) and U.K (coal) and holds a South African Mine Managers certificate. He also worked as a gold mining company analyst for one of the major South African mining houses. He left South Africa to join Mining Journal as Financial Editor and worked his way through that organisation to edit Mining Magazine, and then join the Board. He was Managing Director (CEO) of the company for 13 years up until it was sold in 2001. During part of this period he was also President of Nevada-based U.S. company Mining Media Inc which was publisher of North American Mining magazine.
Following his time at Mining Journal he became editor, and then General Manager, of, taking it from lossmaker to becoming highly profitable before taking partial retirement in 2012. Since then he has continued to write for Mineweb, and for other organisations including Seeking Alpha and for Johannesburg Stock Exchange special supplements and his articles are picked up and linked to by numerous websites around the world. Again these articles mostly concentrate on precious metals markets and mining.