The precious metal’s recent run could just be getting started
SmallCapPower | July 7, 2016: Gold was already one of the best-performing asset classes in 2016 before British citizens unexpectedly voted to leave the European Union on June 23, 2016. We believe this will turn out to be the most important catalyst for the precious metal since it began its most recent bull run.
Despite beginning the New Year below US$1100, gold had a failed a few times to hold above the US$1300 level since its upward move began back in January. We feel confident that the Brexit uncertainty will hang over the markets for at least the remainder of 2016, providing a firm support above $1300.
The most immediate catalyst likely coming gold’s way is U.S. employment data for the month of June, which is expected to be released on Friday, July 8. The Labor Department expects 170,000 new jobs to be created during the month.
Given May’s dismal 38,000 employment gain, only a figure well above 200,000 will create any potential headwinds for the precious metal.
This all leads to the next U.S. Federal Reserve meeting that is happening during the final week of July. Minutes from the last Federal Open Market Committee meeting (released on July 6) suggested that the impact of a Brexit would need to be more certain before the Fed would decide to raise interest rates again, all of which is good news for gold bulls.
Also helping gold is negative interest rates on long-term debt in Germany, France, Japan and, most recently, Switzerland, which has seen its 50-year interest rates go negative for the first time.
Could the United States be next? In fact, that country’s 10- and 30-year interest rates on Wednesday reached all-time lows of 1.32% and 2.10%, respectively. According data released by Fitch Ratings, a record US$11.7 trillion of global sovereign debt has dipped to sub-zero yield territory.
With Britain expressing a desire to leave the European Union, gold enthusiasts will be closely watching to see if the exit contagion spreads to other EU member countries. According to the Eurasia Group, Austria and The Netherlands are the two nations that are most likely to have referendums on EU membership, And, Hungarians will vote in a referendum this fall on a European Union plan to share the responsibility of sheltering refugees.
Adding further fuel to gold’s fire, The World Gold Council said recently that it is expecting an increase in central bank purchases of gold this year.
In the end, gold’s path of least resistance appears to be to upside. At what level it peaks is anybody’s guess – the trend is your friend until it isn’t.
The uncertainty surrounding the potential breakup of the EU, though, will likely continue for months and the global trend towards negative real interest rates shows no signs of slowing.
Gold speculators should ask themselves, “has the global economic environment really improved that much following stimulus measures in the aftermath of the 2008 financial crisis?” If the answer is no, then it would not be surprising to see the precious metal’s price exceed its all-time high sometime during the next few years.