Gold and the Italian vote

Background

Gold prices are getting pummeled on a daily basis and appear to be coming down as fast as they went up.

First we had Brexit which resulted in both the Euro and the British Pound getting sold off hard. When these two currencies lose value the US Dollar is forced to go higher as per The US Dollar Index. As gold has an inverse relationship to the dollar then gold’s value tends to fall in dollar terms.

The election of Donald Trump also appears to good for the dollar as the expectation is that the re-building of the infrastructure, in all its forms, will give the economy a boost and so investment funds start to flow into the US.

Referendum in Italy

This brings us to next week’s vote in Italy where they are worried about the possibility of a defeat for Prime Minister Matteo Renzi’s constitutional reform referendum not going the Prime Ministers way. He has said that he would resign if he loses this referendum and if he does then an election would follow swiftly. According to the polls the populist Five Star Movement, led by Beppe Grillo, a famous comic, could win and become the new governing body.

If this happens then we can expect high level discussions on the Euro and its suitability for Italy and indeed membership of European Union. These things won’t happen in an instant as we have seen with Brexit, having voted to leave the European Union what looks like a long and tricky process needs to be negotiated. And as we all know it’s not in the politician’s interest to break up the Union so they won’t treat it as a priority.

Regardless of how long it takes a NO vote will herald uncertainty and there is nothing worse for the financial markets than not knowing what the future holds for them. This uncertainty will see investors reallocating funds from the Euro and possibly Europe and into an area that offers more in the way of stability. Should the Prime Minister, Matteo Renzi be successful then our attention will be focused on France where the Front National have similar ambitions, but that is the subject for another article.

Gold compared with the Dollar

A quick look at the chart below depicts gold has lost some of its differential with the dollar in the latter part of 2016.



Conclusion

It is well known that the banking system in general is having a tough time. The Italian banks in particular are in poor shape so the ramifications of this vote are enormous.

The US Dollar springs to mind as a possible beneficiary of these uncertain times, along with US Stocks and the precious metals sector as a new home for these funds. Uncertainty and turmoil brings fear and fear usually drives gold to higher ground, however, funds can travel across borders at the push of a button these days so currencies other than the Euro may be preferred.

As for gold it has had a battering as investors dumped their holdings and fled. It is hard to tell if this is indeed a final capitulation or there is more selling still to come. As capitulations go it has been vicious hitting stops on the way down which jangles the nerves of gold bugs.

Our position for what it’s worth is that we will not be disposing of either physical gold or silver as they are long term investments and may be invaluable cometh a rainy day.

Ourmining stocks are available for trading purposes and it is always a difficult decision as to whether we buy, hold or fold. As it stands we have 70% of our funds in mining stocks with the other 30% in dollars. Given that our view remains bullish for the producer’s medium term, we would like to increase our exposure to them; however, there could be more downside so patience is our watch word. In summary we will hold for now.

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As always, go gently and only deploy small amounts of capital into each trade as these are treacherous waters which demand very careful consideration before you put your hard earned cash at risk.

Got a comment, then please fire it in whether you agree with us or not, as the more diverse comments we get the more balance we will have in this debate and hopefully our trading decisions will be better informed and more profitable.

Take good care.

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