Brexit Changed Everything For Gold

The Brexit vote changed everything for gold…

The beginning of the longer-term cyclical upswing in gold prices was back in December 2015 when the Fed raised interest rates for the first time in over a decade. And the Brexit referendum just shifted the entire market into second gear for a few reasons.

First, it directly moved gold prices over the key psychological level of $1,300 an ounce — where they’ve found good support all week.

This was an important move because the price of gold has been largely directionless since March, mostly trading between $1,200 and $1,300/oz. And with continued support over $1,300 an ounce, gold prices get a direction: higher.

Secondly, the Brexit referendum all but killed any chances for the U.S. Fed to hike rates anytime soon. In fact, Bloomberg report yesterday that investors are now actually pricing in a rate cut (instead of a hike) throughout the next three FOMC meetings, and don’t assign more than a 50% chance of an increase until 2018.

Source: Bloomberg

But maybe most importantly to the gold market, the Brexit vote showed the entire world, all at once, that gold remains the ultimate hedge against market and fiat currency crises.

The entire world was watching. And it saw the price of gold increase as Britain’s paper money neared collapse. Immediately following the Brexit vote, Google Trends shows a near 100% increase in the search term “buy gold.”

Other safe-haven assets increased in value as well. But gold outperformed all of them — even silver. If just a small fraction of those people became new gold investors, demand could easily skyrocket. Prices would follow.

All things considered, it’s time to reevaluate our outlook for gold prices. I still believe there is a chance to see gold dip below $1,300 an ounce, possibly to $1,280 in the short term. That would be a great place to rebuild short-term gold positions. Still, I’m planning on buying on any significant daily dips.

Gold has a direction (higher), the market did a complete 180 on interest rate expectations, and an untold number of new gold investors could be headed into the market. I’m buying physical gold and gold stocks — specifically small and micro-cap juniors.

I’m interested in small and micro-cap juniors right now specifically because despite strength in gold prices over $1,300 an ounce this week, there was a bit of a pullback in gold stocks on Monday and Tuesday. And juniors have underperformed compared to their larger counterparts since.

Compare the performance this week of Market Vectors Gold Miners ETF (NYSEArca: GDX) to its Junior Gold Miners ETF (NYSEArca: GDXJ):

I think junior gold miners are the absolute best way to gain leverage in the gold market right now.

For even greater precious metal leverage, I still think platinum could outperform gold in the mid-term.

The price of platinum breached $1,000 an ounce yesterday (another key psychological level) as all precious metals found strength following the dollar’s drop.

This indicates that all precious metals (even those with strong industrial demand: silver, platinum, and palladium) are acting as safe-haven bets against the U.S. dollar. But platinum is of special interest right now due to the metal’s discounted price relative to gold.

For most of the past three decades, the price of platinum has been above gold. Only following the metals sell-off beginning in 2011 did platinum become less expensive than gold for any extended period of time.

And now with platinum still at just about $1,000 an ounce (and gold prices at $1,320), the platinum-to-gold price ratio is at its lowest point since 1982. Take a look at the platinum-to-gold price ratio for the past 25 years:

To read more about why I specifically believe platinum could outperform gold, check out another recent article I published on the Energy and Capital website here.

We’ll talk again soon,

Luke Burgess
Energy and Capital