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Surprise “Brexit” Vote Reversal Sends Gold Soaring
At 5:59 pm (Eastern time) on Thursday, June 23, The Wall Street Journal sent out this bulletin:
Pound Reaches 2016 High as ‘Brexit’ Poll Shows 52% Back Remaining in EU
Before the Brexit votes were counted, the Journal said “An opinion poll released Thursday just after voting booths closed gave the campaign to stay in the EU a narrow lead over those lobbying to leave. 52% of respondents backed remaining in the European Union while 48% supported leaving the bloc.”
When the Journal sent out that premature bulletin, gold was trading at $1252 (at 6:00 pm on Thursday). Gold rose a little, to $1268, by 9:45 pm Eastern, but then it soared nearly $100 in two hours, peaking at $1362.60 on the futures contract – up a total of $110 in six hours as a result of the Brexit vote reversal.
At 12:15 am on Friday, the Wall Street Journal finally reversed its earlier verdict with this new headline:
U.K. Votes to Leave EU; Pound Nose-Dives Amid Market Turmoil
After gold rose $100 on the EU’s reversal of fortune in Britain, the Journal finally reported some actual vote totals: “With 80% of voting areas reporting, Leave led Remain 51.8% to 48.2% early Friday. If that result holds, the U.K.’s ties with the EU would be severed after 43 years. The pound traded at $1.3482 around 5 a.m. in London…the lowest level against the dollar since 1985 and an epic move for a developed-market currency.”
This WSJ headline reversal may go down in history, along with the blazing all-caps, page-width “DEWEY BEATS TRUMAN” headline in the Chicago Tribune the morning after the 1948 elections:
The Journal’s premature call on the UK vote was based on polling data. The British pollsters had been reporting a change of heart among voters in the week leading up to election day. Their failure to poll the election results accurately was no doubt based on faulty polling techniques – such as polling people that are the easiest to reach – the sophisticated folks who answer cell-phone polls, e-mail polls or Man-on-the-Street interviews. Thereby, they left many of the rural masses of the Midlands un-polled. They also failed to flag the fervor of those voting “no,” indicating a higher turnout than for the status-quo “Remain” votes.
This happened in America in 1936, when The Literary Digest polled 10 million Americans and found a resounding victory in store for Alf Landon over the one-term incumbent Franklin Delano Roosevelt, but FDR won in a landslide. As it turns out, the Literary Digest polled those with a phone or an easy-to-reach address, but ignored those without a phone or with hard-to-reach rural route addresses. In short, they polled the rich and middle class, while the lower middle class and poor favored FDR, creating a landslide:
On election day, November 3, 1936, FDR won handily with 523 electoral votes to just 8 for Alf Landon (who won Maine and Vermont), the biggest landslide ever, to that date. The popular vote totaled 60.8% for FDR to 36.5% for Landon, far from the 57% to 43% pro-Landon poll results released on October 31.
The Literary Digest was a very popular magazine at the time, but it appealed to the rich and middle class. The names on its mailing list – mostly taken from telephone directories, club membership lists and their subscribers – was guaranteed to be slanted toward middle- and upper-class voters, who favored Landon.
In 1936, telephones were a luxury. In addition, there were nine million breadwinners unemployed. They didn’t belong to any clubs, had no phones and may have been homeless. In addition, only 24% of the 10 million names polled actually made the effort to respond – which often required a stamp and an envelope.
The Long-Term Impact of the “Brexit” Vote on Gold
Gold soared $100 in six hours, but it gave back half those gains the morning after. That is to be expected. The 52-48 “Brexit” vote is still just a public opinion poll. It would take an Act of Parliament for Britain to exit the EU. This will take some more time and more political positioning by the opposing Parties.
The immediate effect of the poll reversal was a dramatic market reversal. In the days leading up to the Brexit poll, stock markets advanced and gold consolidated, but the reverse happened – rapidly – when the vote turned against market expectations. This is a knee-jerk over-reaction. Markets won’t tank, globally, and gold won’t rise to the sky, but over time gold could rise gradually as the EU begins to unravel further.
The British pound fell 11% intraday on the news. In time, if more Eurozone nations decide to exit the EU, the euro will also collapse, sending the dollar up. This will cause a flight to gold in Europe, first, since gold would be rising the fastest in terms of the weak British pound and euro. This demand will lift the dollar price of gold, too, but not as rapidly as its price increase in terms of the euro and the Pound.
Prior to the Brexit vote, several seasoned gold analysts made the point that the Brexit vote would also be a vote for gold over the British pound or euro. Here are just a few expert views on gold/Brexit dynamics:
Barnabas Gan, an oft-quoted source on gold markets and an economist at the Singapore-based Overseas Chinese Banking Corp., said “Gold will be a preferred safe-haven asset with a ‘Leave’ vote.” He said that gold could rally to as much as $1400 if the Brexit vote passed. This won’t happen right away, of course, but as the vote for Britain’s exit proceeds through Parliament he expects a rise to $1400 gold.
Ole Hansen, head of commodity strategy at Denmark’s Saxo Bank, said last week before the vote that “a vote to leave the European Union would almost ensure a prolonged period of uncertainty where stocks could suffer” creating “an increased risk that gold could be propelled towards $1400, the 2014 high.” Hansen pointed to the “contagion” effect if Britain leaves the union. “The potential leave vote does not only raise questions about the impact on the UK but also the contagion risk to the rest of Europe. Other countries, if given the chance, would likely also be showing skepticism towards the European Union.”
James Steel, chief commodities analyst of HSBC predicted (before the vote) that gold could rise 10% fairly quickly if Britain leaves the EU. Steel predicted $1400 gold with a Brexit vote, but gold might go higher than $1400, he said, over “broader concerns about the future direction of the EU after the vote.”
Gold vs. the Pound: An Inverse Relationship
Societe Generale SA predicted that volatility in bullion should increase, no matter how Brexit is resolved, but they agreed with others that a decision to leave may push prices up to around $1,400. That was a widespread assumption last week. A Bloomberg survey of 22 gold traders and analysts said in a poll early last week that gold could reach $1350 by June 30, but only IF Britain voted to leave the EU.
The poll was right on the mark. Gold reached $1350 overnight but almost immediately retreated. Gold’s next move up will likely come when Parliament ratifies the exit vote and then we some major mainland European nations stage their own exit polls. There is widespread antipathy toward the EU on the mainland, especially Greece and France, so Britain could be a test case to show how economies survive – even thrive – without the Belgian bureaucrats spelling out exactly what trading nations can and cannot do.
There have been several narrow escapes in secession votes in recent years, including a Scottish referendum to leave the UK last year, but Britain’s successful vote to secede from the EU may set the series of dominoes (represented by nations in the chart, above) to emulate the British in a Grexit, then a Frexit and then more in years to come. Greece is a small economy, but if France were to leave the EU, it might spell “fini” for the 64-year process that began with the European Coal & Steel Community in 1952.
It’s important to remember that this vote does not stop global trade or European trade in its tracks. Trade should continue without impediment, if the EU bureaucrats in Belgium don’t get in the way. It’s also important not to view this as an “isolationist” vote. As Matt Ridley, a Member of Parliament, wrote in the Wall Street Journal on June 22, “Britain has no desire to withdraw from NATO, the United Nations, the International Monetary Fund, the Council of Europe or, for that matter, the Olympics.” In addition, the British soccer team will be fielding their best 11 against Iceland in a weekend European Cup match.
In his article “The Business Case for Brexit,” Ridley argues that “the EU is a supranational government run in a fundamentally undemocratic, indeed antidemocratic, way. It has four presidents, none of them elected. Power to initiate legislation rests entirely with an unelected commission. Its court can overrule our Parliament.” He said the EU may have made sense in the 1950s, after World War II, but not now.
This trend toward decentralization of European power, if it proceeds, will foment confusion and collapse of European-based currencies. Gold is primarily a “currency hedge,” in that it is a form of eternally-recognized wealth vs. the parade of fiat currencies throughout history. It’s unwise to buy into a short-term buying spiral – like last Thursday at midnight – but gold accumulation is still the investor’s best hedge against the declining value of paper money around the world, especially in the European Union.