The big news this past week was that the British voted to exit the European Union. This was not the outcome expected by pundits, or the polls.
“Risk on” assets were relentlessly bid up prior to the vote. For example, the S&P 500 futures index had closed the previous Friday, June 17, at 2059. This Thursday, prior to the vote, they were up 60.5 or 2.9%, to 2119.50.
The British pound began its run up a day earlier than the S&P 500, closing at $1.42 on Thursday, June 16. This past Thursday it was up to a high of $1.50. The same pattern occurred in crude oil (West Texas), up over $4 from the June 16 low to the June 23rd high, and in other assets.
After the vote, it was a giant blowout. By Thursday evening (Arizona time), the pound had hit a low of $1.32, a drop of about 18 cents or almost 12%. As of Friday’s close, the S&P was down 3.6% but continued to decline after hours with futures ending down -4.16%.
To hear mainstream gold commentators tell it, gold and silver went up whereas (nearly) everything else went down. That is not how we see it. At all.
The pound, euro, and other currencies are dollar derivatives. Therefore, we think it’s appropriate to price them in terms of the underlying thing from which they are derived. The dollar. The currencies went down in dollar terms, as did stocks.
However, for the same reason that the dollar cannot be properly priced in pounds or euros, gold cannot be priced in the dollar. For the same reason that if you fall off a cliff the height of the cliff top cannot be measured in terms of distance above your head, a meter stick cannot be measured in terms of a rubber band.
The dollar must be priced in gold. The dollar is not precisely a gold derivative. However, it is valuable only because, and only for so long as, gold makes a bid on it.
So we look at it like this. Other currencies and risk assets fell in dollar terms. And the dollar fell in gold terms. The dollar hit its high on that same date (June 16), of 24.36 milligrams of gold. It made a low on Thursday June 23, of 22.89mg, down -1.47mg.
The world’s reserve currency fell 6% in a week. Since everything else went down in terms of that currency, in reality they fell even more.
As always when the dollar falls, most people see only the rise in the price of gold. And gold commentators reiterate their call for gold to go up even more. They say that, now, people are starting to wake up (as if the low price of the metal was due to somnolence), and when they do gold will skyrocket.
We concede that, this time, there is more reason to think that the world of paper may have a big decline (and hence the mirror image, the price of gold, will rise). But as always, we want to see if this price move was real or if it was just leveraged speculators taking on even more leverage and going closer to all-in.
So let’s look at the only true picture of the supply and demand fundamentals. But first, here’s the graph of the metals’ prices…Read More..