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LAWRIE WILLIAMS: Markets settling – gold down, pound and stocks recovering

It looks like perhaps the immediate impact of Brexit is already behind us as the world realises nothing is going to change quickly – except sentiment.  The UK has not so far invoked Article 50, which would commence a timetable for UK withdrawal, and at the moment seems unlikely to do so until a new Conservative Party leader, and Prime Minister, is in place, which is unlikely to be for around two months or more, if then?  The referendum was, in theory, advisory and, again in theory, Parliament could vote against the decision of the people given a big majority of MPs are actually in favour of remaining in the EU, although the political backlash of so doing is probably too horrendous to contemplate.

EU leaders seem to be calming down after several stating they’d like the UK to break away immediately, but technically Article 50, allows for a two-year transition once it is invoked by the country wishing to secede.  Relationships between the EU and the UK will be fraught in the meantime, but cooler heads may prevail up until the actual break.

So what has happened?  The pound sterling fell back sharply – around 14% in the knee-jerk reaction, but it had previously been riding particularly high in the general anticipation of a Remain vote.  If one takes the fall from the average parity with the dollar prevailing over the previous month or so the fall was nearer around 9%, from which it is already beginning to recover, albeit slowly.

Stock markets fell almost across the global spectrum, but interestingly the UK FTSE 100 index fell less than nearly all of them.  Today markets are virtually all showing a recovery, but also perhaps a slow one.  It looks as though the initial falls were over-done as is often the case in terms of adverse reaction to bad news.

Gold spiked up to the $1,360 level – a rise of over $100 on the day, but only briefly – but again has since come down sharply and is now trading below levels it had already achieved earlier in the month, despite a continuation of significant gold movements into the major ETFs.  Bloomberg described Friday’s global gold ETF inflows as a record.  In terms of the U.S. mostly, SPDR Gold Shares (GLD) added over 18 tonnes on Friday and a further 13 tonnes yesterday.  GLD inflows should set a pattern for the gold price, but undoubtedly those who have most to lose from a gold price rise will be doing their utmost to keep any price rises to reasonable levels, if not to knock them back – they already seem to be succeeding in the latter.  The rising gold price though may well have initiated some profit taking too.  Now, though, there are a number of bank analysts sticking their necks out and predicting gold will reach $1,400 this year.  Even previously ultra-bearish Goldman Sachs has been raising its forecasts.  This is probably a worry for the gold bulls – the price did pretty well when the bank analysts were virtually unanimous in predicting a gold price collapse earlier in the year.  Now they are beginning to be gold positive, the bulls may fear that perhaps the reverse will occur?

The UK has lost its triple A rating from Standard & Poors, and it may be tough to get that back, but that may not affect matters too much except in terms of economic pride.

So where to from here?  Overall the markets are reacting pretty well to the Brexit vote as the initial dust settles.  Indeed it could prove to be something of a non-event, except perhaps for the pound.  The falling gold price is indicative of a reduction of fear in the markets, but they still remain nervous and it won’t take much to trigger more falls.  If EU heads of state look to be playing hardball with the UK over an exit timetable and negotiations, this could be a trigger to set another downturn off.  Hopefully they are sufficiently aware of this to mitigate any initial confrontational attitudes in this week’s EU Heads of State meetings.

28 Jun 2016 | Categories: Gold

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