Brexit Fears Raining on the Fed’s Interest Rate Parade

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Last Updated on: 29th December 2020, 12:21 am

The first weeks of June have proven it is too early to count gold out of its long term bull market. This week, gold prices continued their relentless recovery and reached as high as $1,287 per ounce. The reasons for this rebound in the yellow metal include factors that are influencing the Fed towards delaying interest rates. Continued and worsening Brexit fears have started a still contained but small panic in European markets. All of this is once again leading major hedge fund figures like George Soros back into gold.

Brexit Possibilities Are Growing

Monday afternoon gold prices ended their trading session with a new four week high on the charts. This continued appreciation in gold prices is heavily based on safe haven demand buying. Over the weekend and Monday, it became more clear that the Brexit – exit from the European Union referendum that is next week has shifted significantly in favor of a leave vote. This started with an ORB poll that was published by the Independent newspaper late Friday. It revealed that the leave the EU cause has gained a 10 point advantage over the remain in the EU camp. With under two weeks from the date of this poll to the referendum this announcement has shaken up confidence in financial markets. The news became more unsettling to the status quo on Monday with another three polls showing that the leave campaign has overtaken the remain one. A final blow to the risk markets emerged as the best selling newspaper in Britain the Sun used its full first page to write a major article endorsing the leave the EU cause. All of these polls and endorsement combined to scare investors into the idea that Britain really is on track to leave the European Union once and for all. Both European stocks and the British Pound plummeted Tuesday on the possibilities.

Britain withdrawing from the EU would have massive implications for not only the U.K. but also for the EU's overall economic stability. London is the world banking center. A number of banks have threatened to relocate their headquarters and regional offices to other EU countries if the nation withdraws. The EU is a major beneficiary of funds from Britain as the U.K. proves to be among the largest absolute contributors to the block's budget. Needless to say these rising financial threats to one of the largest economic and trading blocks in the world and the fifth largest global economy and leading international banking center have given investors plenty to be uncertain about.

Brexit Threat and Weak Economic Indicators Have Fed on Hold for Interest Rate Increases

Across the pond these fears are influencing the Fed Chair Janet Yellen and the Federal Reserve as well. The Fed finishes its two day policy meeting with a rate decision and announcement on Wednesday. Yellen does not want to raise rates potentially a week before the financial world in Europe comes unhinged. She has highlighted herself the uncertainty risk that a potential Brexit poses. Add this to the dismally weak jobs report from May revealed less than two weeks ago which presented the weakest monthly job gains for five years, and suddenly the Fed is left with only a message that there are still too many uncertainties to make a clear cut decision on when they will raise rates further.

It was not only the May job report that looked poor. The last three months' job growth at an average of 116,000 has proven to be half of what the average was for the prior 12 months that finished in April. Additional economic indicators have also given the Fed pause for thought. Consumer spending and business investment have been lackluster, workers' productivity has slowed, and China and other big economies are showing signs of stress. Most Fed watchers now feel that the Fed will not be able to raise interest rates until the fall. These observers believe that the U.S. central bank will not have a clear enough view of the strength of the economy until then to be able to increase the interest rates. This wait and see tone that is anticipated from Janet Yellen and company has also helped to strengthen gold's hand this week.

George Soros and Other Investors Buying Gold and Shorting S&P 500

A third boost to gold this week came from the announcement that mega billionaire investor George Soros has put huge bets on gold prices rising and the S&P 500 falling. He has shorted the S&P and gone long on gold. Soros has joined fellow hedge fund managers and investors like Ray Dalio and Stanley Druckenmiller in buying both gold and gold mining stocks.

Why Is The Fed So Concerned About Raising Rates Anyway?

The Fed wants to raise interest rates because of their worries about inflating assets with artificially cheap borrowing prices. They fear investors pumping up stock prices and the values of other assets under the idea that these historically low interest rates will remain forever or for at least a long time in the future. It is because of their burning need to thwart this type of dangerous risk taking that the Fed will still look to raise rates later this year at least once. Meanwhile with all the instability and uncertainty in the world today, investing in gold looks more sensible than ever.