Brexit + Trump + U.S. Fed = perfect storm for gold

Voters in the United Kingdom have voted to leave the European Union. The U.S. Fed has signaled that U.S. interest rates will remain lower for longer, perhaps not rising until after the end of the year. And market observers everywhere speculate on the consequences to the U.S. economy in the first year of a Donald Trump presidency. It creates the perfect moment for everyone’s favourite fallback in times of uncertainty—gold bullion and gold stocks.

Voters in the United Kingdom decided they should leave the European Union. The rest of the world mulled the unknown consequences of this Brexit, but for the capital markets, the prospect of Brexit had already hit the only line that counts to investors, argues analyst Don Vialoux.

Mr. Vialoux is co-founder of timingthemarket.ca, a popular investing website that, true to its name, centres on how seasonal trends affect stocks. Along with his son, fellow analyst and website co-founder Jon, he also served as an adviser for a seasonality-oriented exchange traded fund, Horizons Seasonal Rotation ETF (TSX─HAC), from its creation in 2009 until August of last year.

The analyst says that “during at least the last eight summers”, an unexpected event has altered the direction of capital markets and essentially kicked off volatility until October.

“This year we got a few of them. We got Brexit, we got the Fed possibly raising the interest rates . . . but most important is the presidential election,” says Mr. Vialoux. Markets appeared to reach the seasonal turning point on Friday, June 10, when “equities virtually around the world” started falling, continuing to undo the impressive upward movement since the lows early in the year.

Election volatility trumps referendum volatility

In Mr. Vialoux’s view, the market has largely absorbed the potential cost of Brexit in current prices, thus, he argues that the U.S. presidential election will have a greater impact on price movements until autumn. Referring to market data in election years going back more than 80 years, the analyst says: “Historically, U.S. equity markets peak in mid-June and then drop again through mid-October.”  After that, markets grow more hopeful about the possibilities of a new president. Canadian markets generally follow the United States’ lead closely in presidential election years, he adds.

The analyst explains that volatile markets in that period are the result of uncertainty about economic policy under the next president. As the election approaches, the tone of speeches and advertising gradually becomes more negative, polarizing the candidates’ platforms and further adding to uncertainty until “we get down to the last couple of months, and the candidates are throwing lots of negative things at each other”. For example, he notes that Democrat Hillary Clinton has suggested that Republican Donald Trump would start a trade war if elected. In turn, Mr. Trump has argued that Mrs. Clinton would spend government funds recklessly.

Against this backdrop, Mr. Vialoux readily admits that his ‘best buys’ offer no surprises, representing an ancient hedge against instability: gold bullion and gold stocks.

Gold bullion and gold stocks flourish in uncertainty

The analyst says gold bullion usually gains ground in the run-up to a presidential election, adding there is a “pretty good chance that’s exactly what we’re going to see this year”.

Mr. Vialoux points out that gold briefly exceeded US$1,308 an ounce on June 16. Its recent path, including an “inverse head and shoulders” pattern, suggests the precious metal is on a bullish trajectory; the analyst sets a target of US$1,400 per ounce, “derived from the typical seasonality for gold bullion itself.”

To take advantage of rallying bullion, he recommends exchange traded funds SPDR Gold Shares (NYSEARCA─GLD) while in Canada, Horizons Comex Gold ETF (TSX─HUG) is just one of several possibilities. “The preferred period of seasonal strength for gold is from first week of July until the first week in October so it’s a three-month period,” says Mr. Vialoux.

The analyst’s second ‘best buy’ recommendation is gold stocks. For exposure to U.S. miners, he suggests picking up Market Vectors Gold Miners ETF (NYSE─GDX) for senior firms or Market Vectors Junior Gold Miners ETF (NYSEARCA─GDXJ) for their smaller brethren. Another worthy purchase, he says, is the iShares Global Gold Index (TSX─XGD), which trades domestically despite its international underlying portfolio.

Mr. Vialoux cites the Gold BUGS Index’s (NYSEARCA─HUI) breaking past its previous resistance level of US$236 in June and subsequent peaks as a sign of positive momentum. He expects the index to reach US$255 this summer. (Gold stocks’ historic strong period runs from the end of July to October’s first week.)

Should the UK ultimately leave the EU, it would further damage the pound and cause currency market turmoil in general, which should further benefit gold, he adds.

 

Investor’s Digest of Canada, MPL Communications Inc.
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