Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
AI Mega-trend Tech Stocks Buying Levels Q2 2020 - 1st Jun 20
M2 Velocity Collapses – Could A Bottom In Capital Velocity Be Setting Up? - 1st Jun 20
The Inflation–Deflation Conundrum - 1st Jun 20
AMD 3900XT, 3800XT, 3600XT Refresh Means Zen 3 4000 AMD CPU's Delayed for 5nm Until 2021? - 1st Jun 20
Why Multi-Asset Brokers Like TRADE.com are the Future of Trading - 1st Jun 20
Will Fed‘s Cap On Interest Rates Trigger Gold’s Rally? - 30th May
Is Stock Market Setting Up for a Blow-Off Top? - 29th May 20
Strong Signs In The Mobile Gaming Market - 29th May 20
Last Clap for NHS and Carers, Sheffield UK - 29th May 20
The AI Mega-trend Stocks Investing - When to Sell? - 28th May 20
Trump vs. Biden: What’s at Stake for Precious Metals Investors? - 28th May 20
Stocks: What to Make of the Day-Trading Frenzy - 28th May 20
Why You’ll Never Get Another Stimulus Check - 28th May 20
Implications for Gold – 2007-9 Great Recession vs. 2020 Coronavirus Crisis - 28th May 20
Ray Dalio Suggests USA Is Entering A Period Of Economic Decline And New World Order - 28th May 20
Europe’s Coronavirus Pandemic Dilemma - 28th May 20
I Can't Pay My Payday Loans What Will Happen - 28th May 20
Predictive Modeling Suggests US Stock Markets 12% Over Valued - 27th May 20
Why Stocks Bear Market Rallies Are So Tricky - 27th May 20
Precious Metals Hit Resistance - 27th May 20
Crude Oil Cuts Get Another Saudi Boost as Oil Demand Begins to Show Signs of Life - 27th May 20
Where the Markets are heading after COVID-19? - 27th May 20
Silver Springboards Higher – What’s Next? - 26th May 20
Stock Market Key Resistance Breakout Is Where the Rubber Meets the Road - 26th May 20
5 Ways To Amp Up Your CFD Trading Today - 26th May 20
The Anatomy of a Gold Stock Bull Market - 26th May 20
Stock Market Critical Price Level Could Soon Prompt A Big Move - 25th May 20
Will Powell Decouple Gold from the Stock Market? - 25th May 20
How Muslims Celebrated EID in Lockdown Britain 2020 - UK - 25th May 20
Stock Market Topping Behavior - 24th May 20
Fed Action Accelerates Boom-Bust Cycle; Not A Virus Crisis - 23rd May 20
Gold Silver Miners and Stocks (after a quick drop) Ready to Explode - 23rd May 20
3 Ways to Prepare Financially for Retirement - 23rd May 20
4 Essential Car Trade-In Tips To Get The Best Value - 23rd May 20
Budgie Heaven at Bird Land - 23rd May 20
China’s ‘Two Sessions’ herald Rebound of Economy - 22nd May 20
Signs Of Long Term Devaluation US Real Estate - 22nd May 20
Reading the Tea Leaves of Gold’s Upcoming Move - 22nd May 20
Gold, Silver, Mining Stocks Teeter On The Brink Of A Breakout - 21st May 20
Another Bank Bailout Under Cover of a Virus - 21st May 20
Do No Credit Check Loans Online Instant Approval Options Actually Exist? - 21st May 20
An Eye-Opening Perspective: Emerging Markets and Epidemics - 21st May 20
US Housing Market Covid-19 Crisis - 21st May 20
The Coronavirus Just Hit the “Fast-Forward” Button on These Three Industries - 21st May 20
AMD Zen 3 Ryzen 9 4950x Intel Destroying 24 core 48 thread Processor? - 21st May 20
Dow Stock Market Trend Analysis and Forecast - 20th May 20
The Credit Markets Gave Their Nod to the S&P 500 Upswing - 20th May 20
Where to get proper HGH treatment in USA - 20th May 20
Silver Is Ensured A Prosperous 2020 Thanks To The Fed - 20th May 20
It’s Not Only Palladium That You Better Listen To - 20th May 20
DJIA Stock Market Technical Trend Analysis - 19th May 20
US Real Estate Showing Signs Of Covid19 Collateral Damage - 19th May 20
Gold Stocks Fundamental Indicators - 19th May 20
Why This Wave is Usually a Market Downturn's Most Wicked - 19th May 20
Gold Mining Stocks Flip from Losses to 5x Leveraged Gains! - 19th May 20
Silver Price Begins To Accelerate Higher Faster Than Gold - 19th May 20
Gold Will Soar Soon; World Now Faces 'Monetary Armageddon' - 19th May 20

Market Oracle FREE Newsletter

Coronavirus-stocks-bear-market-2020-analysis

The Impact of Brexit on the U.S. Economy and Gold Market

Commodities / Gold and Silver 2016 Aug 26, 2016 - 09:17 PM GMT

By: Arkadiusz_Sieron

Commodities

In the previous edition of the Market Overview, we analyzed briefly the consequences of Brexit vote. We stated that “the most important economic effect of the Brexit vote is so far a significant rise in uncertainty”. It applies particularly to the political future of Great Britain (Will the UK disintegrate? Will the UK really exit from the EU? When and how will it happen?) and the European Union (Will the EU break apart?). However, Brexit could also hurt the U.S. economy. This is why we would like to focus on the impact of Brexit on the U.S. economy and the gold market.


The rise in risk-aversion and any fall in the global stock market will hit consumer and business sentiment in the U.S., and depress consumer spending and business investment. Therefore, the U.S. economic growth would be expected to fall, but the impact should not be substantial. Both the Bank of America and Economist Intelligence Unit cut their forecasts for the U.S. growth rate in 2016 by 0.2 percentage points. It seems a minor reduction, but investors should remember that the pace of growth is already anemic. And Brexit is another in a long string of headwinds which America faces. Although the British referendum did not trigger a “Lehman moment” in the U.S. financial markets (the market did not freeze and the negative effects on prices were less significant), the risk of recession over the next 12 months rose after the Brexit vote. According to the Deutsche Bank, there is 60-percent probability that the U.S. will enter a recession the next year; however other estimates are much lower. The slower pace of economic growth and higher odds of recession should support the price of gold.

Many American firms operate in the UK as they consider it as the gateway to free trade with the EU. Actually, the U.S. is the largest single investor in the UK. Therefore, the Brexit would jeopardize their business and investments, and reduce their revenue. Worse corporate results would intensify negative sentiment in financial markets. It sounds positive for the gold market.

The uncertainty induced by the Brexit vote led to the flight to safety, and to lower yields of government bonds and the appreciation of the U.S. dollar. The stronger greenback would also hit some companies, exacerbating profit recession, and deter the Fed from hiking. The rise in the U.S. dollar should be theoretically negative for the shiny metal; however gold rallied simultaneously with the greenback, as one can see below.

Chart 1: Gold prices (yellow line, left axis, London P.M. Fix), the broad U.S. dollar index (green line, right axis) and U.S. dollar index against major currencies (red line, right axis).

The chart shows two things. First, in the time of global turmoil the price of gold may rise together with the U.S. dollar, as both are considered safe havens against European or global risks. Second, it demonstrates that gold has indeed acted strongly in light of the Brexit voting – it ignored the U.S. appreciation (as well as the rebound in the stock market from the post-Brexit levels). Actually, gold shrugged off much good economic news in the past several weeks, including a surprisingly strong June jobs report. It may be a signal that gold is in the early stages of a bull run, but there are many other factors that have to be assessed to determine that.

The Fed is not likely to hike interest rates in the near future. July is gone. The September move seems to be off the table (as of July 25, the market odds are about 15 percent), as it still may be too early to fully investigate the effects of Brexit and too close to the U.S. elections. The Fed is also expected to refrain from hiking during its November meeting, which is just six days before the U.S. elections. December remains the only option (but as of July 25 the market odds of a hike at the end of the year are about 45 percent), unless there came to be financial turmoil after the US election. In fact, some investors expect a rate cut this year. The Fed’s likely inaction should undermine its credibility and support the price of gold (naturally, to the extent that it surprises the investors).

Last but not least, Brexit may give Donald Trump a boost. The outcome of the British referendum signals the high level of global economic anger against the elites and strong fear over the impact of immigration – the two main drivers of Trump’s political success. Actually, his chances increased after the Brexit vote according to RealClear Politics’ polls. Investors should be aware that his rhetoric is very similar to one used in the “Leave” campaign, so the polls may underestimate the support for him, as it was in case of British referendum. The rise in the likelihood of Trump becoming the president should be positive for the gold market.

The bottom line is that Brexit can affect not only the UK and the EU, but also the US, which is crucial for the gold market, as the shiny metal tends to respond stronger to U.S. developments. Although the trade with the U.K amounts to less than 1 percent of the U.S. GDP, Brexit could affect the American economy and politics in other ways. The two key channels are the appreciation of the greenback, and the rise in uncertainty and stock market volatility. The latter is clearly positive for the yellow metal, while the former has been no longer a drag on the gold rally in the past several weeks. The reasons behind the break-up of negative correlation between the shiny metal and the U.S. dollar are: 1) the flatter expected path of the federal funds rate and 2) the bullish sentiment towards gold. Although gold seems to be shrugging off any good news recently, investors should be aware that fears about Brexit’s consequences may be a bit overblown, so gold could lose its momentum. However, looking at European banks, we see more downside than upside risks connected with the Brexit vote and thus more benefits than threats for the price of gold (based on Brexit alone, that is).

Thank you.

If you enjoyed the above analysis and would you like to know more about the gold ETFs and their impact on gold price, we invite you to read the April Market Overview report. If you're interested in the detailed price analysis and price projections with targets, we invite you to sign up for our Gold & Silver Trading Alerts . If you're not ready to subscribe at this time, we invite you to sign up for our gold newsletter and stay up-to-date with our latest free articles. It's free and you can unsubscribe anytime.

Arkadiusz Sieron
Sunshine Profits‘ Market Overview Editor

Disclaimer

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski's, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

Arkadiusz Sieron Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules