Keep an eye on Brexit and Donald Trump for gold decisions

‘Brexit’ means $1,400 gold but then what happens?

‘If there is anybody in the audience from the United Kingdom we hope you stay in the European Union,” a rather desperate sounding member of the Hungarian government said unexpectedly as he opened the charity concert I attended in the Franz Liszt Institute in Budapest last Sunday night.

There seems to be no avoiding the Brexit debate at the moment, with the referendum on June 23. And there will be also no avoiding the consequences if, or perhaps when it happens as European governments and financial markets are belatedly beginning to realise.

The gold market was listening the week before when the gold price surged by $70 an ounce to $1,270 after opinion polls gave a 10 per cent lead for the Leave campaign. The fear factor is back in financial markets and governments are right to be worried as these things tend to be somewhat self-fulfilling.

Sterling and the FTSE 100 have been other big losers thus far, so too the euro as markets not unreasonably fathom that what is bad for the UK economy, at least in terms of the initial disruption of the Brexit, might be bad for the countries left behind in the European Union as well. The dollar, dirham, yen and precious metals are the safe haven asset classes.

Sadly for the Hungarian government I don’t think their plea for my intervention will help matters one jot. The British public has never really liked being European or understood its version of representative democracy.

The UK’s modest economic success of the past 40 years is put entirely down to its own brilliance and nothing to do with its integration into the EU and the latter’s expansion from nine to 28 countries.

Let’s put that aside and consider what Brexit will mean for investors. Up until very recently financial markets did not really take the prospect of it happening seriously. Surely the British establishment would rally to Remain and the public would dutifully follow?

They forgot the madness of crowds and the power of latent nationalism to defeat a very strong economic argument, and just how confused about the mechanics of democracy people have become when it comes to the EU.

What happens next is more of the recent return of volatility to financial markets with a particularly strong hit on the pound sterling and the London Stock Exchange, and indeed any other asset priced in pounds. Its reserve currency status is very much at risk and if you hold sterling then it would not be too late the dump it while you can.

Buy dollars or dirhams instead if you want to stick to bankable currencies, or go for gold and silver if you really want to cash in on the post-Brexit chaos. The EU president Donald Tusk said last week it will take two years to organise the UK exit and another five to renegotiate its trade and other treaties of association. That’s a long period of uncertainty for any business or multinational. Shame the public does not understand this yet.

But then the EU is a very democratic institution with multiple votes at multiple levels to get anything decided. It won’t be able to rush this process however bad things get.

So short the FTSE for good measure before the Brexit, or at least sell whatever UK shares you can and convert the proceeds into safe haven assets. Hedge fund titans have been moving in this direction since the new year.

That’s one reason why gold is up 25 per cent in the first five months of the year, its best start for 35 years. George Soros, the richest Hungarian who ever lived, is apparently trading gold again having become bored in his retirement.

He likes the largest gold stocks like Newmont and Freeport-McMoRan. These shares tend to rise faster than the underlying gold price because their fixed costs increase by a slower pace.

However, as I have mentioned before in this column the junior explorers and producers in the precious metal sector always do best in a gold price boom. The exchange traded fund for silver juniors SILJ is up 173 per cent so far this year as I write this column while GDXJ for the gold juniors is ahead 108 per cent. You’re already well up if you bought the last time I said tipped these ETFs.

Most gold bulls reckon $1,400 an ounce is easily achievable as financial markets digest a Brexit. After that keep an eye on Donald Trump’s opinion poll rating. Again markets have been perhaps wrong to assume that The Donald is a joke rather than the next US president.

Any sign that he could win will be another bearish development for financial markets and another reason to hold safe haven assets like gold. Then we could be talking about a new all-time high for gold by the end of the year.

Peter Cooper has been a senior financial journalist in the Gulf for the past 20 years.

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