Citi shrugs off Brexit fears to turn bullish on gold, commodities
Just a few weeks after the United Kingdoms historic June 23 referendum, getting an accurate read on just how far the Brexits aftershocks will be felt remains a difficult task. However, one major investment bank thinks this monumental threat to the European Union is just another reason to buy commodities, especially oil and gold.
Make no mistake: Pain in being felt across the eurozone, with Barclays declaring Great Britain on the cusp of a recession that will begin in the second half of 2016 despite the Bank of England about to cut interest rates for the first time in seven years.
And the International Monetary Fund is partly citing Brexit in slashing Italys growth forecasts and warning of two decades of economic stagnation for Europes third-largest economy.
IMF sees negligible effects in U.S.
However, the IMF also thinks that Brexit could have negligible effects on the U.S. economy, which although mired in historically low GDP output in recent years remains one of the prettiest horses in the global glue factory. St. Louis Federal Reserve President James Bullard, too, just minimized Brexits potential domestic impact in public comments.
Whether now is the time to minimize concerns over Brexit is unclear, but certainly the resulting global central-bank money printing to alleviate concerns and boost growth is one reason why Citigroup likes commodities.
Citi is especially bullish commodities for 2017, analysts wrote. The oil market is treading water for now, but the oil price overshot to the downside earlier this year and this is clearly setting the stage for a bullish end to the decade.
Citi economists see the damage to global growth from Brexit to be limited in extent and duration in 2016, while stronger growth from China and the U.S. should lift global growth for the rest of the year, they wrote.
Team lifts average price forecast
Some at the firm like black gold better than real gold, but that preference hasnt stopped Citi from raising its price forecasts for bullion. Its now lifted its 2016 target to an average price of $1,265 for the year, up 9% from 2015, partly because its expecting the Federal Reserve to launch no more than one rate hike this year and perhaps none in 2017.
Its more bullish, outlying scenarios call for gold to run as high as $1,400 to $1,425 in the second half of this year.
Now is not the time to fully discount Brexits possible after-effects, but Citis bullish take shows that gold doesnt necessarily need the fear of an EU disintegration and subsequent contagion to keep rising into 2017.