With eye on Trump, China acts to speed up gold imports
Posted onWith Republican presidential contender Donald Trumps decisive win in the Indiana primary solidifying his grip on his partys nomination, China addressed the implications of the billionaires victory through its state-controlled media. Meanwhile, it continues to take steps to corner the market on precious metals in its bid to elevate its yuan currency as a serious rival to the U.S. dollar.
Though a White House win by Democratic rival Hillary Clinton likely would maintain the status quo of Sino-U.S. relations, Chinas Global Times noted that Trump represents a more uncertain outcome. If Trump really captures the White House, what will it mean? This scenario is becoming increasingly serious, it wrote.
A Trump-led U.S. might be inclined to isolationism and attach more importance to America First, and American economy, it added. After enjoying massive trade surplus from the U.S. for years, China and Japan will be demanded by Washington to widen market access.
China with strength awaits president: The newspapers solution for China? Improving strength is the most reliable way to respond to the U.S. uncertainties. We believe that no matter whether Trump or Clinton prevails, they will see a China with strength from different perspectives.
And that show of strength is on display right now, with China planning military drills in the South China Sea as it exercises control over the disputed Spratly archipelago. The maneuvers will involve advanced warships and submarines, including a guided-missile destroyer. Allied closely with the Philippines and other nations with a stake in the area, the U.S. Navy has put on numerous displays of force in the disputed waters in the past year in attempting to limit Chinas moves.
Gold-import rules streamlined: China also is keeping its eyes on the precious-metals sphere, where it continues to mine, amass, import, and trade massive quantities of bullion. And importing it just got a whole lot easier, with Bloomberg reporting that Chinas central bank has relaxed rules to speed up acquisition of the metal.
The central bank and customs will allow companies that have frequent imports and exports of gold and gold products to apply for a single permit that can be used in as many as 12 shipments, Bloomberg noted. The trial to simplify the rules takes effect June 1 and applies to Beijing, Shanghai, Guangzhou, Qingdao, Nanjing and Shenzhen.
The move will reduce paperwork and speed up gold imports because previously importers had to apply for an overall import quota from the central bank and then report and register every single shipment, said Jiang Shu of Shandong Gold Financial Holdings Capital Management Co.
Shanghai bourse stockpiling silver: Moreover, China is devoting efforts to increasing its control over the global silver trade. Steve St. Angelo of the SRSrocco Report says a key Shanghai exchange is on course to amass more silver than JPMorgan has on the Comex.
JPMorgans total silver inventories have declined from 69.4 Moz (million ounces) to 67.2 Moz, while the Shanghai Futures Exchange silver stocks have increased from 54.7 Moz to 60.6 Moz, St. Angelo noted. If the Shanghai Futures Exchange continues to add silver at this rate, it will surpass JPMorgan in a two to three weeks. The Chinese are adding a lot of silver to their Shanghai Futures Exchange warehouses. The build from 7.5 Moz in August 2015 to over 60 Moz of silver in the beginning of May puts JP Morgans four-year inventory growth to shame.
Time is running out fast for London hub: In other words, China is opening up the floodgates even further to accumulate huge quantities of precious metals while also tightening its grip on market pricing mechanisms (witness the recent launch of its yuan-denominated price fix). The goal: to make its currency as good as gold.
Not many in the West are paying attention to these developments, but some are, especially in London, the current world epicenter of the gold trade. One gold dealer there told the Platts news service that someone needs to step in and help rejuvenate Londons importance as a global gold hub. I think it should be the best [London as a global hub for gold trade] and still could be, but time is running out fast, he said.
Some would argue that time also is running out on the U.S. dollars dominance as a global reserve currency. It remains to be seen who will best maintain that primacy, Trump or Clinton (or someone else). But regardless of who wins the presidency, rest assured that China is getting prepared.
Emerging markets dont need a Harvard economist to tell them to buy gold
Posted onHarvard economist Kenneth Rogoff recently penned an article for Project Syndicate in which he urges central banks in emerging markets to buy gold.
That’s somewhat odd advice coming from Rogoff, considering that he is among the crowd of insider economists (along with Larry Summers and Willem Buiter) who have urged a ban on large-denomination cash in order to facilitate the imposition of negative interest rates. (Incidentally, the elite bankers are on their way to doing just that, with news leaking this week that about 100 business executives held a secret meeting last month to test out a digital-cash prototype based on blockchain technology.)
Underweight in gold: But here he is pushing for emerging markets to trade their foreign-exchange reserves for the ultimate form of hard money: gold.
Are emerging-market central banks overweight in dollars and underweight in gold? Rogoff asked. There is a good case to be made that a shift in emerging markets toward accumulating gold would help the international financial system function more smoothly and benefit everyone.
Rogoff goes to the trouble of differentiating himself from so-called American far-right crackpots who favor the gold standard. I am just proposing that emerging markets shift a significant share of the trillions of dollars in foreign-currency reserves that they now hold (China alone has official reserves of $3.3 trillion) into gold, he added.
News flash for Rogoff: They already are, in spades, with China and Russia leading the charge.
Standouts are Russia and China: In reporting a 4% year-over-year rise in gold demand in fourth-quarter 2015, the World Gold Council noted growth was driven by central banks, which added 33 metric tons, largely in emerging markets.
And according to leading precious-metals consultancy Thomson Reuters GFMS, the 483 tons amassed by central banks in 2015 marked the second highest annual total since the end of the gold standard, the Financial Times reported.
Russia accounted for 206 of those tons, while China added 104 tons. Russia and China are real standouts, said GFMS exec Ross Strachan. And the real picture could be even greater, given that many gold analysts say China is hiding the true pace of its gold-accumulation efforts.
The trend of central-bank gold buying has taken off since 2010, marking the end of two decades in which they were net sellers. A key driver was an increase in purchases from developing countries, and net purchases jumped in 2012 to 544 tonnes, the Financial Times added.
Diversifying away from the dollar: Despite some gold sales, most notably by Venezuela, which is in the midst of an unprecedented financial crisis, the super-bullish central-bank buying trend remains intact
There are good reasons for central banks to continue to use gold as part of their reserve assets, including diversification away from the dollar, said Capital Economics economist Simona Gambarini. This is mostly the case for emerging markets central banks, which have lower gold holdings as a percentage of total reserves, compared to advanced economies.
So, emerging markets are buying gold en masse, and for all the reasons that Rogoff notes: its nearly fixed supply with no limit on price, not to mention the fact that its a highly liquid and extremely low-risk asset.
Making the yuan, ruble as good as gold: Why are emerging markets moving into gold? The currencies of Russia, China and other Eurasian countries are moving to become as good as gold, a term applied to the U.S. dollar some six decades ago, wrote author and consultant F. William Engdahl.
But the dollar is no longer as good as gold, and these comparatively dynamic emerging economies are weary of financing the Western standard of living by propping up the U.S. petrodollars hegemony. China is busy rebuilding its ancient Silk Road trading route to widen the influence of its currency, while building up its gold-trading infrastructure and forming strategic alliances with Russia and other resource-rich nations.
Gold-ravenous emerging markets don’t need Rogoff to tell them to buy gold. They already know, without having to watch CNBC, that if you’re buying gold, you’re actually just selling dollars. That’s been their plan all along.
Gold helps power billionaire Einhorns Greenlight fund to 15% first-quarter gain
Posted onDespite regularly being bashed in the mainstream media, gold has some major advocates among billionaire investing gurus. Paulson & Co. founder John Paulson, who holds the largest stake in the worlds biggest gold-linked exchange-traded fund, is one. Bridgewaters Ray Dalio, Elliott Managements Paul Singer, and ex-Duquesne Capital chief Stanley Druckenmiller are some others, while George Soros consistently holds stakes in mining companies.
And another highly respected (and wealthy) gold bull is Greenlight Capitals head, David Einhorn. His hedge funds first-quarter letter to investors confirms his ongoing faith in the yellow metal. The funds shares have gained 15% so far in 2016, and gold has played a large part in that advance, being one of its top-five biggest holdings.
Einhorn cited ongoing easy-money policies from the European Central Bank and the Bank of Japan, which are currently engaged in massive quantitative-easing programs and negative-interest-rate policies. These increasingly aggressive and counterproductive monetary policies are bullish for gold, he noted.
Meanwhile, the U.S. Federal Reserve also has failed to raise rates after an initial hike in December, apparently ignoring the fact that its meeting or exceeding the economic criteria it set as prerequisites for lifting rates. The Feds data dependency doesnt appear to relate to employment, which continues to improve, or core inflation, which is now running above its two percent target, Greenlight analysts wrote. We believe the increasingly adventurous monetary policy is bullish for gold.
Like Paulson, Einhorn has taken some heat over the years by sticking with his gold investment during leaner times. Now that persistence appears to be paying off.
However, unlike Paulson and some other big Wall Street players, Einhorn has made clear in the past that he prefers holding the yellow metal itself, not electronic representations in the form of ETF and mining shares and futures contracts.
According to a June 2013 Reuters story, Einhorn has said he prefers investing in gold bars, as opposed to the popular gold exchange-traded fund, SPDR Gold Shares, partly to have better control over his investment and keep a lid on trading expenses.
Not to say that gold ETFs are all bad: Current inflows have risen back to levels unseen since 2013, and that interest from mainstream investors is one reason why gold is soaring this year. Meanwhile, the central-bank policies that Einhorn cites in his letter likely will keep the yellow metal advancing in 2016.
Silver disme linked to George Washington commands almost $1 million
Posted onOne of the jewels of Americas earliest coinage recently made a strong run toward the $1 million mark, while another 18th-century rare coin brought in almost three-quarters of a million dollars.
A 1792 silver disme pattern, certified at AU50 by NGC and one of only three known pieces classified as Judd 9, commanded $998,750. The other two silver dismes most recently sold for $458,250 (XF Details NGC) and $329,000 (Fine 15 NGC), respectively.
The name Judd refers to famed numismatic scholar and collector J. Hewitt Judd, author of United States Pattern Coins, Experimental & Trial Pieces. In addition to having once been owned by Judd himself, this coin was more recently part of the Donald Groves Partrick Collection. The $998,750 price matched that of the record amount the coin got when sold in early 2015.
Another 1792 coin, a copper disme pattern with reeded edge, garnered $705,000. Classified as a Judd 10 and certified as Specimen 64 brown by PCGS, it is one of only 18 reeded-edge 1792 copper dismes known to exist.
These dismes came into being as a result of President George Washington authorization of Mint Director David Rittenhouses July 1792 request to create half cents, cents, half dismes, and dismes, engraved by Robert Birch and perhaps others. Numismatic legend has it that the silver used for these coins came from Washington himself.
Look for some more potentially eye-popping sales numbers to be announced in the coming weeks in what is shaping up to be another big year for rare coins, which have been bolstered by ongoing easy-money monetary policies and the headline-grabbing runup in gold and silver bullion prices.
Warren Buffett talks mattress money and bank runs under negative interest rates
Posted onOne of the biggest reasons to invest in gold in 2016 has been the rise of negative interest rates imposed by some of the worlds major central banks.
This year the Bank of Japan shocked the world by following the lead of several European banks and unveiling negative rates to try to boost its economy.
Negative rates go one step further than zero percent interest rates by forcing depositors to pay fees for the privilege of parking their cash at a bank. The goal of negative rates is to generate inflation by pressuring depositors to spend their money instead of futilely trying to save it.
The growing preponderance of negative rates has now even generated commentary from famed billionaire investor Warren Buffett in a series of interviews he gave leading up to his annual Berkshire Hathaway shareholders meeting in Omaha, Neb., last weekend.
Long gone are the days of double-digit interest rates, and that has changed investors behavior and the overall attitude toward risk. When interest rates were 15% [in the early 1980s], you know, it was an enormous gravitational pull on all assets, not just stocks, he said. If you can get 15%, it makes the choices way different than if you get zero.
The problem of low rates: Times have changed, however. Zero rates, which central banks set to try to reinvigorate their economies, have long been a problem for savers and retirees, who cant get a return on their interest-bearing accounts. Buffett weighed in on that dilemma last Friday.
Its not just a problem for insurance companies, its a problem for retirees, its a problem for anyone thats stuck with fixed investments and finds that their income is a pittance … and that was something that wasnt in their calculation 50 years ago Buffett said.
Uncharted economic territory: You can read Adam Smith, you can read [John Maynard] Keynes, you can read anybody and you cant find a word to my knowledge on prolonged zero interest rates that is a phenomenon nobody dreamed would ever happen, Buffett added.
Even Berkshire is feeling some discomfort because of zero interest rates. We have close to $60 billion thats out invested at about a quarter of percent or less, Buffett said. One point on $60 billion is $600 million a year. If we were getting 3% or 4% on that money, thats a couple billion to us. You notice it.
Now, though, with negative rates becoming a more common central-bank strategy, fixed-income investors are even worse off. I dont think anybody knows exactly what the full implications of negative rates will be, he said. And for Buffett, negative rates logically require a hitherto-unthinkable course of action.
Better off with money under a mattress: Very, very few people would have dreamt in 2009 that we would have this duration of low rates and have people still expecting low rates after the seven years or so were up, he told CNBC. No, its a different world. And its certainly a different world when you have a lot of money in euros, as we do, and youre better off putting it under your mattress than in a bank.
Did you catch that? The worlds most famous investor, who prides himself on focusing on productive assets, just admitted that money under the mattress is the only way to go in a negative-rate environment.
There could be a point where youd really want to start withdrawing currency. That would be an interesting point, if currency in a bank is worth less than currency in your hands or in a mattress, that could produce something in the way of behavior that nobodys even anticipated.
No choice but to withdraw cash: In other words, bank runs? Well, if the deposits arent doing anything there and, and they charge you for having them there, you know, I might contemplate taking them out.
But in negative-rate setting, there is one place better than a mattress for your money: gold. The biggest knock on gold is that it is a non-interest-bearing asset. With banks and bonds providing at least some return on cash, why risk putting money into gold when the price can fall? That was the argument of golds critics.
But now that banks and bonds are providing negative yields, gold actually looks great in comparison given its upside potential. The World Gold Council recently released a paper arguing that demand for gold may structurally increase as negative-rate policies spread. Gold returns in periods of low rates are historically twice as high as their long-run average, the WGC said. Investors may benefit from increasing their gold holdings up to 2.5 times, depending on the asset mix, even under conservative assumptions for gold.
Warren Buffett has never been a fan of gold, although he once had a massive position in silver. However, if push comes to shove and negative rates come to the United States, Buffett might do well to consider removing his cash from underneath his mattress and trading it for both gold and silver.
Gold prices should continue to climb throughout 2016, Blanchard CEO says
Posted onAfter a 30-year record price increase in gold during the first quarter of 2016, Blanchard and Company CEO David Beahm feels both gold and silver are poised to attain to higher highs during the remainder of 2016 for several reasons, including decreased consumer spending evidenced by weak GDP growth, and a stagnant global economy that has generated new negative-interest stimulus efforts by various central banks.
Gold prices should continue to climb throughout 2016 as investors look for stable assets during what appears to be a troubling time ahead, Beahm said. Consumer spending accounts for two-thirds of Americas total GDP, but through the first quarter of 2016 it is about one-third less than predictions for the year and well below its performance in 2015. This is not a sign that the economy is flourishing quite the contrary in fact.
Beahm said that the outlook for any real overall growth in GDP is dependent upon increased consumer spending because economic headwinds from abroad, business capital spending, financial market turmoil and inventory accumulation are playing a big role to stymie growth without it. Gold and silver have already benefitted from this lack of growth and should continue to over the long-term.
As we await first-quarter GDP data [which printed at 0.5% after Beahms statement] and the inevitable revisions to forecasts for the second quarter and beyond, here is a sobering factoid despite having some the smartest minds in Washington, in five of the last seven recessions the Fed was oblivious to them at the beginning of the quarter each began, Beahm said. With equities markets near all-time highs, yet fundamental economic data painting a less rosy picture, Blanchard sees precious metals that are still at attractive price levels with lots of upside.
Beahm also said that the global attempt to re-energize economies using negative interest rates is going to fail investors, with the outlook for savers being particularly bleak. As governments consider the idea of negative rates, investors should realize there is a distinct possibility that this may be a stimulus effort of last resort as economies slow down. Precious metals are the right investment diversifier to protect wealth when inflation increases and the economy gets volatile, Beahm said.
Gold breaks above $1,300 for the first time since January 2015
Posted onGold continued its breathtaking advance Monday by topping $1,300 for the first time since January 2015, feeding off a trifecta of bullish drivers from last week: inaction from both the Federal Reserve and the Bank of Japan, as well as a mediocre U.S. GDP report.
The yellow metal peaked at $1,303.60 before reversing slightly on profit taking. Meanwhile, silver one of the top-performing assets of April eased somewhat near $17.50. Gold gained more than 4% in April, while silver racked up a 15% advance for the month.
Just the start of a push higher for gold?: Dollar weakness, enabled by the Feds refusal to raise interest rates last week as well as similar paralysis from the Bank of Japan, has been the key driver for gold. We believe that theres a lot of things that are ripe for precious metals right now: a low-interest-rate environment, interest-rate expectations backing down again, and we have a weaker dollar, EverBank World Markets President Chris Gaffney told Bloomberg. We believe this is just the start of a push higher for the precious metals.
The dollar was the reason behind the spike up (last week), and we broke all the important levels on the upside, MKS trader Afshin Nabavi told Reuters. $1,285 was a huge number, and we got through $1,290 pretty easily. $1,300 is going to be a very important one. I think were heading for new numbers on the upside.
$1,325 is really the next resistance level, Trading Advantage strategist Todd Bauer added. Theres a lot of dead air between $1,325 and $1,400.
Gold has a nice tailwind at the moment with the dollar weak and equity markets teetering to the downside, Altavest co-founder Michael Armbruster told MarketWatch. I wouldnt be surprised to see gold near $1,400 in the next month.
Gold partying like its 2007 again: With gold having advanced 22% for the year with its run above $1,300, CNBC recalled similarities between now and 2007. Going back to 1980, there has been only year in which gold has outperformed the S&P by 20% or more while the latter was positive on the year: 2007, it reported. Both gold and the fear-measuring CBOE Volatility Index surged in the second half of that year, even as stocks maintained their footing. The [stock] crash, of course, came in 2008.
A weak PCE inflation report Friday and another contracting PMI manufacturing number continue to suggest an anemic U.S. economy. The chances of a rate hike at any point this year are fast disappearing, for both economic and political reasons, according to American College of Financial Services CEP Robert R. Johnson.
The Fed meeting calendar is going to make it exceedingly difficult for the Fed to move on rates the rest of this year, he wrote. The Fed has five more meetings scheduled in June, July, September, November, and December. There is virtually no chance of rate increases in June and November. The June meeting is eight days prior to the Brexit referendum in the UK and the November meeting is a week before the U.S. presidential election. Moves prior to those political events are highly unlikely, as the Fed doesnt want to be accused of influencing key votes. That leaves July, September, and December for possible rate hikes. I would even take September off the table because of the proximity to the presidential election.
Survey projects higher prices: Even before golds runup to $1,300, analysts already were revising their forecasts. A survey of 30 gold experts at banks and trading firms returned an average 2016 gold price forecast of $1,209 an ounce, up from $1,118 in a similar poll in January, Reuters reported. The price is expected to rise steadily this year, peaking at an average $1,250 an ounce in the fourth quarter, the survey showed, before extending gains to average $1,300 an ounce in 2017. That would be its highest annual average since 2013. At the rate gold is moving, these projections already look like underestimations.
This weeks major data point will be the Labor Departments nonfarm-payrolls report for April. With one of the Feds mandates being lowering the unemployment rate, the report could shed more light on second-quarter growth and influence the Feds decision process on interest rates.
Pivotal year for silver as bullish big banks lift price targets
Posted onJust about a week after its April 19 article titled Silvers bull market has so much more to give, 5 charts show, Bloomberg has zeroed in on another bullish driver for the white metal: supply and demand.
Output from mines will fall for the first time since 2011, while demand for the metal inuses including industrial products and jewelry is heading for a fourth straight gain, the news agency reported in its April 26 article Silver supply trouble shows why rally momentum is building.
Bloomberg was reporting the latest findings of the CPM Group in its Silver Yearbook 2016, which is projecting that newly mined silver production will fall 2.4% this year, while scrap supply will decline 1%. In contrast, industrial and fabrication demand is expected to rise by 1.6%. CPMs decline forecast follows an earlier call this year by Societe Generale.
Therefore, silver is entering what is likely to be a pivotal year, CPM said. Its chief executive, Jeffrey Christian, recently told Forbes contributor Simon Constable that he sees silver trading over $20 and as high as $25 in a few years.
Thanks to surging ETF inflows, net-long futures positioning, and strong coin sales, silver recently broke the $17 level and gained about 15% alone in April.
The most accurate silver forecasters ranked by Bloomberg are both bullish on the metal Cantor Fitzgeralds Rob Chang (ranked No. 1) and Intesa Sanpaolo SpAs Daniela Corsini (No. 2) with Chang saying, We believe there is more upside.
What was resistance becomes support, agreed TradingAnalysis.com founder Todd Gordon in a CNBC appearance last week. We are free from the ceiling and ready to move higher.
Some major investment banks also are raising their price targets for so-called poor mans gold. Bank of America Merrill Lynch has lifted its 2016 average price by 8% to $16.47, citing shrinking supplies and rising demand, particularly in the coin, bar, and ETF sectors. It also increased its long-term forecast to $19.71 from $18.56.
Our analysis shows that fundamentals are now the strongest in years, BofA Merrill analysts said. In our view, a sustained bear market is only possible if we see investor demand take another leg lower, not our base case.
And Deutsche Bank went even further, predicting that silver could reach $20.50 in the near term thanks to ongoing easy-money policies from major central banks like the Fed and the ECB. Its also expecting improving industrial demand to drive the price higher, and for already record-level net-long positions on the Comex to increase even further.
Silver can remain dormant and underperform gold for significant periods before suddenly catching up; it tends to be a late-cycle play in the precious metals space. When this happens, it tends to happen quickly as has been the case this week, it said.
Silver coins remain one of the best ways to invest in the metals rising price. The U.S. Mint has sold 18.889 million ounces of its flagship silver American Eagle bullion coin, well on pace to break the 2015 all-time annual sales record of 37 million. Investors also should consider silver Canadian Maple Leaf coins, silver rounds, circulated Morgan Dollars and Peace Dollars, and silver bullion bars (10 oz. and 100 oz.). A green Monster Box of 500 silver Eagles also is a great way to go!
Gold Now Because the Fed Only Sees Recessions When We’re Already Knee-Deep in One
Posted onAt the beginning of the year, most forecasts looked for household spending to grow in the 3% to 3.5% range for 2016. With such spending accounting for about two-thirds of total GDP, this was an essential element of presuming decent overall growth in GDP, despite headwinds from abroad, business capital spending, financial market turmoil, and inventory accumulation.
The data below, taken from a recent analysis by Daiwa Capital Markets America, are worth studying for a few moments:
Recognizing that the mild winter may be playing havoc with the seasonal adjustment factors, and that the monthly data are notoriously volatile, its nonetheless relatively clear that household spending growth is around 2% to 2.5%, well below the performance in 2015!
Because so much turns on consumer spending, there will be lots of dissecting and spinning of these numbers as well as new ones in coming months; at a minimum, they will be a key driver of continuing market volatility.
As Blanchard and Company predicted, the U.S. economy slowed more than expected in the first quarter: Gross-domestic-product growth was just 0.5%, slipping from 1.4% growth in the fourth quarter of 2015, the Commerce Department reported Thursday the weakest pace in two years and lower than economists expectation for 0.7%. Growth slowed to a crawl thanks to weaker personal spending (1.9%, down from 2.4% in 4Q 2015) as well as business spending (-5.9%, down from -2.1% in 4Q 2015). The dip in personal spending, which occurred despite cheaper gasoline prices, resulted in the slowest clip since the first quarter of 2015.
As we now await the inevitable revisions to forecasts for the second quarter and beyond, here is a sobering factoid: Despite having the best staff in Washington, in five of the past seven recessions, the Federal Reserve did not know we were in a recession in the quarter the recession began!
Brexit fears likely to drive gold higher, HSBC says
Posted onAs the citizens of Great Britain mull a potential exit from the European Union, many of them took umbrage at warnings from U.S. President Barack Obama during his recent visit to London.
Obama said that if the June 23 referendum on a Brexit passes, it might be five years from now, 10 years from now, before the U.S. complete new trade deals with Britain.
Despite the outrage generated by Obamas remarks, which were construed as patronizing, the odds of the Brexit actually occurring have dropped since then.
Still, it will all come down to the wire, and the long-term effects of a Brexit could be considerable. Per-household worth would drop by several thousand British pounds, and GDP would fall by 6.2% over 15 years, according to Britains Treasury.
Gold can move with franc, yen: But HSBC thinks at least one immediate winner could emerge from the carnage: gold.
In a couple of recent notes, HSBCs teams wrote: As perceived safe-haven assets, the CHF (Swiss franc) and gold often move directionally together. A stronger CHF may indirectly support gold.
Like the CHF, gold would also likely benefit from a sizable safe-haven bid in the event of a Brexit vote. The currency team believes the CHF is unlikely to weaken should the UK choose to remain in the EU and we believe the same rationale applies to gold.
Like the CHF, gold does not appear to reflect a substantial premium regarding an exit vote. The lack of sensitivity may make both a good hedge.
Positioning ahead of June 23 vote: And with uncertainty lodged in place until the vote is held, investors eventually will start hedging against the possibility of a Brexit with gold.
Another bullish driver of gold may be the potential for hedging ahead of the UKs referendum on EU membership. HSBC forex strategists offer a variety of reasons why the CHF is a good currency hedge ahead of the referendum.
These include the likelihood of a rally in case of a vote to leave the EU, but likely less downside if the referendum affirms the UKs membership in the EU.
We believe this asymmetric relationship also applies to gold. The bank noted that gold, as well as the Swiss franc and the Japanese yen, all rose in the runup to the UKs general elections in 2015. The same safe-haven appeal could apply in the weeks ahead as the Brexit referendum nears.
Sticking by its $1,300 prediction: The bank also once again reaffirmed its forecast that gold will hit $1,300 in 2016. We continue to see the potential for gold to reach USD1,300/oz this year. As well as a weaker USD, we see global risks and a modest recovery in oil prices as gold-bullish. The more tame Fed tightening cycle, compared to expectations last year, should also support gold.
Until closure on this potentially major shakeup to European governance and commerce is reached, gold looks like a solid play heading toward June 23.
