Van Eck gold strategist Joe Foster reports that following the June 23 Brexit vote bond yields fell to record lows and gold rallied to two-year highs, reaching USD1,375 per ounce on July 6. In the US, subsequent strong economic results in manufacturing, retail sales, and housing created US dollar strength and gold consolidated its Brexit gains, declining to USD1,310 per ounce on July 21.
He writes: “However, as was the case throughout the post-crisis expansion, good economic news doesn’t last long and the month ended with disappointing durable goods and pending home sales reports, along with second quarter GDP growth of just 1.2 per cent. The US dollar reversed course and the gold market demonstrated its resilience, advancing to end the month with a USD28.80 per ounce (2.2 per cent) gain to finish at USD1,351 per ounce.
“As we have pointed out repeatedly this year, and discussed in detail in our June update, gold companies are well managed, and gold stocks provide leverage to gold since valuations remain attractive. Therefore it is no surprise that stocks enjoyed another surge higher in July. The NYSE Arca Gold Miners Index (GDMNTR) gained 10.1 per cent and the MVIS Global Junior Gold Miners Index (MVGDXJTR) gained 16.8 per cent.”
Foster goes on to quote Mervyn King, Governor of the Bank of England from 2003 to 2013, who, when interviewed in the World Gold Council’s June edition of Gold Investor, said: “The risk is that we just muddle through with a prolonged period of very low growth. The longer that goes on, the more output we will have lost in the interim. And in the long run, it makes another crisis more likely because, if everyone is relying on monetary policy and it isn’t the answer, we won’t get back to a new equilibrium. We do need to make that jump at some point so the question is do we get there as a result of active, conscious policy decisions and cooperation between countries or will it only happen as the side-effect of another crisis.”
Foster reports that we are now seeing similar levels of demand for gold as followed the 2008 financial crisis. “Gold and gold shares declined with other markets in the massive selloff in 2008. However, both gold and gold equities bottomed in October 2008 and then made a strong recovery. The action in the current gold markets indicates that investors have become more proactive, buying gold as a hedge against future turmoil,” he writes.