The Brexit vote sent more bond yields into negative territory. What does it mean for the gold market?
Although the Brexit vote does not automatically imply a withdrawal from the EU, its repercussions are far from over. Brexit fears pushed negative-yielding government debt to a record $11.7 trillion as of June 27, according to Fitch Ratings. Surely, the insanity of negative yields started much earlier than the British referendum, but the surprising results certainly added fuel to fire. The worth of government bonds with negative yields has increased by $1.3 trillion since the end of May and at least $400 billion since the very vote. Negative-yielding bonds are most common in Japan, Germany and Switzerland. Japanese government bonds represent about two-thirds of the global total, and bonds with maturities out to 17 years are negative. In Germany, government bonds with maturities out to 10 years are negative, while the entire stock of Swiss government debt is now trading at negative yields, even 50-year bonds. For example, Swiss 10-year bonds are trading at minus 0.66 percent – it is madness!
But do not panic, madness is good for gold. Negative yields signal that investors desperately seek safety after the Brexit results. The rise in uncertainty and flight to safety should support the price of gold, a traditional safe haven asset, especially if negative yields wreak havoc one day, as many analysts argue. Indeed, the yellow metal rallied ahead of the weekend and on Monday, as investors seek sanctuary in gold. As we pointed out yesterday, negative yields lower the opportunity costs of holding gold. Thus, gold should shine as long as we see bond yields being driven down below zero.
The bottom line is that the Brexit vote triggered a rise in uncertainty and flight to safety. In consequence, investors rushed to high-quality government bonds, which pushed their yields even more into negative territory, and to gold, another safe haven asset. Therefore, the uncertainty over Brexit should support gold, but when it dissipates, the price of the shiny metal may correct.
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Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our trading alerts.
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Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor
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