Blame it on Brexit

London (July 18)  The British public’s decision to exit the EU – Brexit – is now being used as the scapegoat for all kinds of financial ills, not only in the UK, but virtually throughout the developed world – and probably in the emerging nations too.  But as Grant Williams points out in his latest ‘Things that make you go hmmm…’ newsletter most of these economic indicators, whose downturns are now being blamed on Brexit, were well under way well before the surprise decision by the British public came about.  While the Brexit won’t have helped, Williams reckons it probably has made little difference to the underlying trends anyway.

In one of the researched quotations which invariably comprise the intro to Grant Williams' newsletters, one stands out in this respect: "The best way to avoid becoming a scapegoat is to find one." Attributed to Warren Eyster’s, The Goblins of Eros.  And Brexit appears to be the ultimate scapegoat for all the world’s economic ills – at least until the next mega black swan rears its head.  The abortive Turkey coup might have been another such, but it was nipped in the bud too fast to have any serious impact.  Indeed so much so that some observers have suggested the coup was instigated and staged byTurkey's increasingly autocratic President, in order to arrest and negate many leading opposition figures.

But back to Brexit.  If one listened to the doom and gloom merchants immediately prior to the event with their ‘Project Fear’ campaign, a Brexit decision would push the UK into a downwards economic spiral from which it might not recover for years and years.  Inward investment would be stopped dead and trade deals, adversely affecting UK exports, could take years to negotiate or re-negotiate.  There may be some truth in some of this but to counter these arguments today has seen the announcement of the largest ever inwards investment into UK industry in a £24 billion deal by Japan’s Softbank to take over perhaps the world’s leading chip designer, ARM – a decision presumably helped by the fall in the £ sterling against the yen and the dollar.  Sterling has fallen around 9% post Brexit from the average prevailing rate against the US dollar pre-Brexit, but does appear to be stabilising.  It is expected that the fall in the value of the pound, though, may make more big mergers and acquisitions by overseas companies more attractive, as well as having the potential to boost UK exports.  It’s an ill wind that blows nobody any good.

On trade, we have already seen the Australian Prime Minister seek out a post-Brexit free trade deal with the UK.  One suspectsothers may follow suit and tha,t once the impact of the immediate knee-jerk reaction aftermath of the vote fades, other trade deals, even with individual EU nations, which may have far more to lose from a severing of free trade agreements than the UK itself, will also be forthcoming.

And, of course, that presupposes that Brexit will actually happen between now and the end of the decade, if then!  The new UK Minister responsible for the Brexit negotiations, David Davis, has said he doesn’t see the triggering of Article 50, which would set the withdrawal process actually under way, as likely to happen before the end of the year, and perhaps not until 2017, and with a 2-year timetable to allow for a negotiated exit only triggered then it would probably be 2019 at the earliest before any final break could occur.  And there are certain to be legal challenges to the decision in the UK which may, or may not, have merit and/or a timing impact, although new Prime Minister, Theresa May, has said “Brexit means Brexit” and would have a hard time withdrawing from that position.

So far the Bank of England has refrained from dropping interest rates, or entering into any other kind of economic stimulus preferring to wait and see how things play out and whether or not the UK’s economy does start heading recessionwards.  However statements from the BoE Governor, Mark Carney do suggest a loosening perhaps in August which could drop the £ another couple of notches, but again this could in itself also provide a boost to sectors of the UK economy.  Global economics is a bit of an unpredictable game.

And what of the U.S. Fed?  Grant Williams reckons that Brexit is being used as a scapegoat here to give the FOMC the excuse to further delay interest rate rises – something of a face saving exercise given it had forecast four interest rate rises this year at the end of last.  The longer the Fed refrains from any tightening the better that looks for the stock markets and for precious metals.  Every time it appears the Fed is about to implement even a small 25 basis point rate increase the gold price takes a knock, but when this fails to happen it bounces back very quickly indeed.

At the moment gold, and silver, prices are drifting after some substantial post-Brexit gains.  The big inflows into the gold ETFs have dwindled, but on the other hand analysts see Asian demand, which has been weak in the first half of 2016, picking up in the second half.  As we have noted before we see indications that physical gold is in a very tight supply situation, and this can only probably get worse over the medium to long term failing major liquidations out of the gold ETFs, which at the moment do not seem to be particularly likely.  Gold may have lost some of its upwards momentum in the past week or so, but it has regained some lost ground in terms of being seen by major financial institutions as an important asset class – a position it appeared to have lost over the four and a bit year downturn from its August 2011 peak.

So post-Brexit things are beginning to settle down.  The U.K. Remain supporters may be beginning to accept that the world has not ended – yet.  The pound appears to be stabilising, gold has come back, but not down to immediate pre-Brexit levels.  It may also be stabilising in the mid $1,320s.  But the Brexit blame game will continue, particularly within Europe.  The next big things on the horizon which could immediately affect the gold price – failing any more black swan events of course, - are the next BoE meeting in 3 weeks’ time and the next FOMC one in just over one week’s time.  The former could well see a lowering of UK interest rates by 25 basis points - the latter is expected by the majority of observers to see no change.  But either could surprise.  The short term performances of the £, the dollar and the gold price could well depend on these meetings’ outcomes and the rhetoric surrounding them.

Source: SharpsPixley-LawrieWilliams