Gold prices hit a two-year high after the U.K voted to leave the European Union. Brexit has been doubly positive for the yellow metal.
Gold surges to a two-year high following Brexit. Source: @stockcharts.com.
Stock Markets Sell-off
The NASDAQ Composite Index heading south. Source: @stockcharts.com.
We already warned on June 1 that a global sell-off in stocks was on the table and that this would make investors rotate money from stocks to gold.
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Brexit was enough to shake markets and trigger a panic-driven stock market sell-off. Investors looked for safe-havens like gold, the Japanese yen, Swiss franc and bonds. Gold prices will continue to gain if markets get uglier, which we see as likely.
Treasury Yields Sink
The 10-year U.S. Treasury yield hits a a four-year low. Source: @Stockcharts.com.
U.S. Treasury prices soared and yields plunged to four-year lows as investors continued to seek haven assets. The benchmark 10-year Treasury yield fell as low as 1.45% on Monday, the lowest level in 4 years. Bond yields not only fell in the U.S., British 10-year government bond yields sank below 1 percent on Monday for the first time ever. Similarly, Japanese bond yields fell below 0.1% for the first time, reflecting unprecedented long-term pessimism.
The lower the yield, the lower the returns investors get from their bonds. That’s important, because in periods where yields are near zero, many investors prefer to buy gold rather than bonds. In this manner, in the current stock market turmoil, part of the money that would normally go to assets paying a yield is going to gold instead.
US Dollar Rises With Gold
The U.S. Dollar Index surges after the Brexit vote. Source: @stockcharts.com
The dollar and gold usually move in opposite directions. However, over the past few days both are surging, an interesting convergence that we don’t see often. The reasons why gold is gaining despite a stronger dollar are the ones explained above.
Moreover, this dollar rally could run out of steam after the initial fear fades and both the euro and pound stabilize after the recent sell-off. Finally, a rising dollar combined with increasing global economic fears might make the Federal Reserve think twice before raising interest rates which, in turn, would depress the dollar’s value.
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Gold owners should be happy, the second half of 2016 might be a good one.