Gold and silver are the best performing assets in H1, 2016 and saw gains of 26% and 38% respectively. They were the best performing assets prior to Brexit and they are the best performing assets since Brexit. Gold and silver are up 6% and 11% respectively since the seismic Brexit vote led to turmoil on global markets.
Global stocks had a torrid first half with European and Asian stocks coming under severe selling pressure. The Euro Stoxx 50 fell 10.4%. The Nikkei was down a whopping 17%, while the Shanghai A shares was down by even more – nearly 20 percent. U.S. shares remained elevated – largely due to continuing zero percent interest policies (ZIRP) by the Federal Reserve – contrary to all the speculative, nonsense talk of the Fed rising rates.
Gold and silver made gains due to continuing ultra loose monetary policies, diminished U.S. rate-increase expectations, worries about global economic growth, both U.S. and global geopolitical concerns and turmoil in markets at the start of Q1 and again at the end of Q2.
The UK decision to leave the EU has exacerbated these risks and highlighted them for complacent western speculators and investors who seemed blissfully unaware of the growing geopolitical and macroeconomic risks.
The case for gold and silver was already bullish prior to Brexit. Brexit is the “icing on the cake” and means that the fundamentals for gold and silver are arguably as good now as they have were in the early 1970s and the early 2000s.
The smart money knows this and this is seen in the likes of Soros, Dalio, Druckenmiller and many of the world’s largest financial institutions and indeed insurance companies allocating to the financial insurance that is gold in recent months.
While Brexit is “icing on the cake” for the precious metals, for the financial system, it may be the proverbial “straw that breaks the camel’s back.”
The global financial and monetary system has all the appearances of a very old camel that is on its last legs. Copious amounts of drugs have been pumped into the camel in recent years which has prolonged its miserable life by a few years. But, they have not dealt with the substantive issue of the camel’s very old age. Similarly we have not dealt with the substantive issue of a global financial system that is drowning in trillions and trillions of dollars, euros, pounds etc of debt – some $60 trillion of which has been created since 2008.
Brexit highlights the vulnerability of the Eurozone, the Eurozone banking system and the real potential for contagion in the global financial system.
There is the inconvenient truth that many European banks – French, Italian and Irish for example – remain woefully under capitalised and indeed are border line insolvent. It is not just banks in the unfortunate “PIIGS” that are vulnerable. A cursory glance of the share price of Germany’s Deutsche Bank and Switzerland’s Credit Suisse should give even the most complacent and ‘Pollyannish’, tunnel vision bull pause for concern.
The head of Germany’s financial regulatory authority has sounded the alarm on the real risks Brexit poses to large German banks. Two banks cited as having the largest financial dealings in London are Deutsche Bank (NYSE:DB) and Commerzbank (OTC:CRZBY), with shares of Deutsche breaking to new all-time lows in recent days.
A British vote to leave the European Union would hit large German banks, given their heavy exposure to London, the head of German financial watchdog Bafin said in an interview with German newspaper Tagesspiegel as reported by Reuters. Bafin President Felix Hufeld told the newspaper that if there was a Brexit – “the biggest banks would have the biggest problems … they have the most activities in, and with, London,” he said.
Both Deutsche and Credit Suisse have massive derivative books and exposure and the bankruptcy of either one could lead to the EU’s ‘Lehman moment.’ Indeed, it could contribute to the collapse of the ‘single’ currency and indeed the global banking system. To those who say that this could not happen, it is worth remembering – lest we forget – that we came very, very close to that just eight short years ago.
Yet, the root cause of the initial crisis – insolvent banks and an insolvent world – has not been addressed since then. Indeed the financial position of banks and much of the western world today is arguably much worse than it was in 2008.
Gold and silver are reflecting the fact that we have a massive global financial bubble, especially in western bond markets and arguably in the U.S. stock market. This huge bubble is based on ultra loose monetary policies and the creation of currency to artificially support and pump up to record highs global bond markets. The bubble is beginning to unravel before our eyes.
The global financial system is a complete mess and the drum beat of bank bail-ins and currency devaluations grows louder by the day. Gold and silver have protected investors so far in 2016, as they have done throughout history and will do in the coming years.