Gold Prices Surge To Highest Level In Nearly Two Years On Central Bank And Brexit Safe Haven Demand

Gold prices soared to their highest level in nearly two years yesterday on BREXIT concerns and deepening concerns that central banks are slowly losing control of the financial and monetary system.

Gold subsequently fell quite sharply below the key $1,300 level but remains roughly 1% higher for the week in all currencies and is on track for its third week of gains.

Asset Performance YTD 2016 (Finviz)

Ultra-loose monetary policies are set to get even looser as the Federal Reserve confirmed zero percent interest rate policies are set to continue and negative interest rates deepened as Germany became the latest bond market to experience negative rates.

The backdrop of the most uncertain geo-political and economic conditions in many years is also leading to safe haven demand which pushed gold to the highest level since August 2014 touching $1,315/oz.

Sharp falls in European and Asian stock market indices this week and this year (see Table above) is also contributing to the precious metal gains. U.S. stock market indices remain buoyant for now but the fundamentals of the U.S. stock market continue to deteriorate and we look set to see a very significant correction or indeed worse in the coming months.

Gold and silver remain the top performing assets in 2016 with 21.1% and 25.4% returns in dollar terms respectively. They have seen even larger gains in sterling terms of 24.4% and 28.7% due to sterling’s depreciation on Brexit concerns.

The twin risk of terrorism and war were seen again this week after the massacre in the Orlando nightclub and deteriorating relations between Russia and the North Atlantic Treaty Organization (NATO) powers.

Nato has urged Russia to withdraw its troops and armour from Ukraine and accused Russia of “massive militarisation” around the fringes of Europe, as the alliance traded barbs with Moscow ahead of a major summit next month. The western military alliance’s plans to deploy four battalions close to Russian borders has further heightened tensions in an increasingly destabilised Europe.

The ‘clash of civilisations’ appears to be intensifying on a number of fronts alas.

On the monetary policy side of things, central banks appear increasingly desperate with the Federal Reserve now “legitimately” considering using “helicopter money” and the ECB creating euros to buy European junk debt and being urged to “lavish” consumers with “quantitative easing for the people (see News below).”

The Federal Reserve confirmed Wednesday that zero interest rate policies (ZIRP) are set to continue and rates remain at a record lows. The Fed left interest rates unchanged as expected at 0.25 percent to 0.5 percent. They lowered projections for how much they expect to tighten monetary policy in the next few years due to the uncertain outlook and also cited the risks that BREXIT posed to markets in the short term.

The very patchy economic “recovery” in the U.S. and internationally have made the Fed even more dovish, with a greater number of officials now seeing scope for just a single rate increase this year, rather than two. This makes non-yielding and non-negative yielding gold more attractive to investors internationally.

Continuing ultra-loose monetary policies by all major central banks is benefiting gold as is the increasing specter of negative interest rates. Global sovereign debt with negative yields surpassed a whopping $10 trillion for the first time last month, according to Fitch Ratings.

Japan is by far the largest source of negative-yielding bonds. Other countries with negative bonds include Sweden, Hungary and Switzerland. The amount stood at $10.4 trillion on May 31, up 5% from $9.9 trillion on April 25, when the rating agency last measured the amount. $7.3 trillion of the total is long-term debt and $3.1 trillion is short-term debt.

ECB is creating euros to buy junk debt

14 countries now have negative yields including Germany, whose bonds went negative this week. German 10 year bund yields went below zero on ‘Brexit’ fears and due to ultra-loose monetary policies. The ECB’s ongoing QE became even more radical last week and now involves creating euros to buy European junk debt.

This is a radical monetary experiment that will in time almost certainly lead to a collapse in the “safe haven” government bond market and see all major currencies devalued internationally and a reset of gold and silver to much higher levels.