Brexit-fueled money printing will send gold to $4,200, CLSA analyst says

Posted on

With silver backing off from its blistering July Fourth run above $21, gold finished Tuesday near two-year highs in a fifth straight trading day of gains.

The metal was trading at $1,355 by midafternoon, while silver dropped about 2% to touch $19.89.

And in another sign the concerns over the United Kingdoms Brexit vote are being felt globally, bullion sales at a top Japanese gold retailer, Tanaka Kikinzoku Kogyo K.K.,jumped 1.8-foldbetween June 24 and July 4, versus the previous week.

Gold-linked exchange-traded funds also continue to draw investors who have been bruised by stock-market volatility, with holdingsrising by 500 tonsin the first half of 2016.

“Safe haven demand has continued to grow, Phil Streible of R.J. O’Brientold Reuters. A lot of people believe that global monetary easing worldwide is going to continue.

Indeed, at the epicenter of the Brexit turmoil, the British poundplunged to a fresh 31-year low. Meanwhile, the Bank of England partnered with eight major commercial banks and promised to stand at the ready with more liquidity, saying the fallout has just begun.”There is evidence that some risks have begun to crystallise. The current outlook for UK financial stability is challenging,” itwrote.

And a top European Central Bank official warned that the UK is facing simultaneous inflationary and recessionary forces. In the short term there is a difficult challenge for the British economic and monetary policy between two contradictory challenges: There is the challenge of inflation, with the effects on inflation of the fall of the pound, which is down 11 percent since Brexit, said Francois Villeroy de Galhau.

And then there is recession challenge with the tendency to see less growth due to the uncertainty impact on investments. And it is always very complicated for monetary and economic policy to be caught in this dilemma.

The Bank of Englands governor, Mark Carney, has already hinted that more quantitative easing andinterest-rate cuts are on the way, and Bank of America Merrill Lynch analysts concurred. Given the uncertainty and likely economic downturn, we expect the BOE to use its financial crises play book, they wrote. That means ignoring sterling-driven inflation, quickly taking interest rates to, or close to, zero and subsequently restarting QE.

And here in the U.S., investors were preparing for the release of the Federal Reserves latest minutes, dueWednesday, and also girding forFridaysrelease of the June employment report.

A factory-orders report for May was released Tuesday,showing a 1% drop. Zero Hedge noted that this marks the 19thstraight monthly year-over-year decline in the metric.In 60 years of historical data, the U.S. economy has never, ever suffered a 19-month stretch of consecutive annual declines, itwrote.

And with the end of June comes the start of another corporate earnings season, with analysts forecasting the longest profit recession since the financial crisis, Londons Financial Timesreported.

With all this pressure on the Fed not to rock a precarious global economy with an interest-rate hike, furthertightening seems off the table for the rest of 2016, at the least. Some experts are even predicting more easing from the Fed in the coming months, with JimRickards of Strategic Intelligencetelling CNBC, Maybe the Feds next move is a rate cut some time next year. Fed chief Janet Yellens needs the weaker dollar to import inflation into the U.S. The Feds nowhere near their inflation target.

As global central banks launch the same old tools to control the Brexit crisis, with bond yields plunging further into negative territory, other gold watchers are predicting new record highs.

“I think over the next 18 months we’ll make new all-time highs,” Swiss Asia Capital’s Juerg Kienersaid. “No, I’m not going to give you a number because I don’t know insane central bankers can be. They are surprising me all the time with new stuff.”

ButChristopher Wood of CLSA is giving us a number. A long-term bullish view is maintained on gold bullion, with the ultimate price target now set at US$4,200 an ounce, Woodtold clientsTuesday.

This is because the view here remains that central banks, including most importantly the Federal Reserve,will not be able to exit from unconventional monetary policy in a benign manner and will remain committed to ongoing balance-sheet expansion in one form oranother. Such policies will ultimately discredit central banks pursuing unconventional monetary policy, threatening the stability and indeed integrity of the current fiat-paper-money system.