Brexit Crushes British Pound…
Gold is known as a universal reserve asset. Our focus must increasingly expand past what is occurring in the United States and more towards the international dynamics in which are at play across the world. Futures contract settlements and profits are usually priced in US Dollars as reported by mining companies. The international recognition that no central bank created fiat currency is intrinsical of more value than any other is revolved by the long term thesis for precious metals. Therefore, at a different time, we expand past our horizon, past the shores of the northeastern United States. Thus following, the broad perspectives on other reaches of Earth.
Let’s turn to the United Kingdom. Thursday or last week included of the UK Prime Minister Theresa May approached a summit of European Union leaders in Salzburg, Austria. This was in order to propose an outline for a “smooth” exit from the European Union. Brexit (the British vote) is followed from June 23, 2016. This was when the popular vote of 52% decided to exit the common European market. The United Kingdom is to officially leave the European Union on March 29, 2019. This is unless some sort of compromise can be reached by both sides.
Various sources have reported that during the late hours on Thursday, talks at Salzburg reached a critical impasse. May’s proposal was rejected by European politicians in order to keep a free trade clause for after the United Kingdom officially leaves the European Union in March.
May’s responded to the negation by stating that it was “simply unacceptable” for the European Union to reject her plans since an alternative had not been offered. An impasse indeed.
When Will Gold Benefit?
Without a doubt, we are not privy to the many events occurring behind the scenes. Our goal is to not oversimplify a complex set of problems. Contrary, we need to focus on the market’s reactions to international tensions. In addition, we need to concentrate on what to expect moving forward based on the evidence observed in the markets.
Underneath, we can view a cross-market reaction to the negotiation breakdowns which occurred from Thursday through Friday, the end of the trading week:
View the British pound (black) falling over 1.7% in the 12 hours after the negotiation breakdown.
The US dollar (green) has risen slightly, although it didn’t receive an increased proportion to the pound’s decline. Thus, gaining just over 0.3% from trough to peak.
The gold price (having been priced in British pounds), (gold) received a partial safe-haven bid. Having raised 0.8% in the 12 hours after the meeting, the gold price was to close at £919 per ounce, yet still not matching the decline of the pound.
Ultimately, following the meeting, see how the London FTSE 100 stock index (blue) gained over 1.5% from trough to peak.
Something will be flawed here still unless we are willing to view the facts as they are presented. Since this is so critical in order to understand the market psychology, as it currently exists, let’s review the dynamics sequentially:
- Dropping over 1.7%, Brexit negotiation breakdowns were perceived as negative for the British pound.
- For safety, US dollars and and gold were slightly more moved in to by pound currency holders.
- The broad London stock market was obviously the clear leader for “British pounds seeking refuge from currency depreciation”,
What is going on here?
Market Perception
If you’ve been following this series of articles, you are aware that often a differentiation is made. Often between what is actually is happening in the world and what we believe should happen to surround us.
What we believe should happen is that as all fiat currencies worldwide are depreciated simultaneously. Also, for the first time in recorded history, those currency holders should seek refuge in the longest serving nongovernmental store of wealth that humankind has ever known: gold.
Although, what actually is happening presently is that currency holders are first looking for refuge through the broad national share markets.
This phenomenon was clearly visible on Friday. As the London FTSE 100 rose practically perfectly opposite to the decline of the British pound.
Purchasing Power?
If the British pound lost 1.7% although the British stock market gained 1.5%, did the stock investors actually gain purchasing power? Obviously, the answer is, no.
Did stock investors keep the purchasing power better than the gold investors? The gold investors who only gained 0.8% over the comparable time-frame? The answer is, yes.
Is this the way it should be? Arguably, British pound holders are being irrational. We can certainly hope that pound holders were wise having purchased gold instead of index shares… but then again: our wishes shouldn’t affect the critical part of the equation.
Importantly, we should focus on what is at this time. This is so that we can protect ourselves. Also, to crucially prepare for when the gold price market psychology finally reverses.
In the United States, the same behavior is currently taking place. In the past, we have covered other articles (please view https://bullionexchanges.com/blog/2018/09/04/metals-suffer-president-trump-cheerleads-stock-market/) that reference how the US stock market has just begun to enter a parabolic advance even through having been overvalued by nearly all historical metrics.
Let’s admit that even with the US government’s own statistics, inflation has run between 2% – 3% per year (and the actual figures are most likely twice that). Does this mean the market gold price must continue to rise by 2% – 3% concurrently?
Most certainly not. Much more factors are at play for the precious metals over a simple direct relationship between gold price increases and inflation statistics. Consequently, the market psychology itself is a critical determinant. As it will determine where inflation refugees seek safety.
Pound Depreciation Flows Into Stock Market
Presently, currency holders all over the world are content using the major stock exchanges as outlets. The outlets are used for the consistent debasement of currency which is occurring every year. To some extent, there is worth to the method. Although, as currency depreciates, the relative value of the real assets of companies on the books should be priced upward.
Actual assets such as agricultural products, land, oil fields, and mineral resources would be valued again upward amidst a depreciating currency. Surely, then at least some percentage of the assets on major stock exchanges should be inflation proof.
When will the gold price finally shine then? It would shine when the inflation becomes bad enough, impacting corporate profits.
Primarily, companies are not able to reprice assets very quickly. A lag of a week, a couple months, or even many years can happen between the time that a market is aware of inflation and the time that companies can impose change on the price that can be relayed onto consumers.
The gold price is without a doubt repriced by the market at a moment’s notice, in a rapid inflationary environment.
Evidently, gold serves as the utmost form of protection when inflation is destructive to the point that it is destabilizing to companies’ operations. We estimate that this destabilization will begin to be felt when inflation exceeds over 6% per year.
Takeaway on Gold and Brexit
The British stock market serves as an outlet for pounds that are presently depreciating. The gold price is currently receiving a minor safe haven bid. Although, the psychology of the market’s focus isn’t cautious enough to view significant inflows into gold at this time.
Nevertheless, some of one’s assets held in physical gold outside the banking system are suggested. If an unforeseen “black swan” event occurs, suddenly depreciations in major currencies have happened previously throughout market cycles as the ultimate hedge. All of the fiat currencies are suspect. It is simply a matter of timing the market focus on the severity of the issues.
We will continuously keep an eye out on this phenomenon, should the British pound weaken even more towards the March of 2019 Brexit deadline.
