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Britain: Is All That Glitters Gold?

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Britain: Is All That Glitters Gold?

If Britain leaves the European Union on June 23rd, two things will increase.

Firstly, Britain’s welfare bill will go up, with Britain’s 73 MEP’s (Members of the European Parliament) having to come to terms with joblessness. Secondly, and more significantly, gold could see a surge in value.

Read on to find out why.

Bedrock of Stability, with Short-Term Volatility

In a constantly changing world, gold has proven to be a remarkably stable asset for investors.

While certainly price volatile, it has remained a popular medium of exchange, thanks to its prestige and its non-corrosive nature, meaning it lasts practically forever.

Below is a timeline of the price of gold in the 20th century.

While fluctuating markedly over time, we can see that it has remained a valuable asset.

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It peaked in 2011 after the financial crisis, seeing a high of $2000 an ounce: the crisis stripped assets and funds of their values, leading to trillions of dollars’ worth of losses.

Since then, it has seen a steady decline, especially in the last three years, with a trough of $1,050 an ounce in November last year.

Uncertainty is Gold’s Best Friend

Financial markets work on security.

If there is a guarantee of economic growth, job creation, and wage rises, investors will continue to pour money into economies with the expectations that the economic climate will be favorable, and they will see a return.

In the eyes of shareholders and investors, events like Brexit throw a spanner in the works.

The IMF has predicted a shrinking of the UK economy in the region of 1-9%, a claim which has been largely ratified by the following important institutions and individuals:

  • The World Bank
  • The European Central Bank
  • The Institute for Fiscal Studies
  • President Obama

Since Britain is the fifth-largest economy and fifth-largest manufacturer, the state of its economy is integral to the world market.

If Britain feels an economic blow, everyone feels the pinch.

Thus, financial assets, investments, mortgages, and bonds could lose value, so investors will turn to gold.

With demand for gold going up, the price increases accordingly.

Casey Research’s graph (below) shows that since governments started selling off gold in the early 2000s, the price of gold has gone up during recessions:

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It’s not just Brexit

Two things affecting global financial market stability right now are the weakness of the Chinese and American economies, and subsequent stock market turmoil.

Chinese economic growth has consistently slowed over the last few years, with exports decreasing.

Chinese business news outlets stated today that a full recovery was a long way off, and global as well as Asian stock markets are reacting cautiously.

News of bad job creation in the US economy has also added to a very vigilant climate amongst investors, with the Federal Reserve’s hiking of interest rates last year not giving the confidence boost that many hoped it would.

The report was followed by a hike in gold prices to $1,257 an ounce.

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The Importance of European Unity

The EU is in the midst of a political and economic crisis.

There is a talk of a third bailout for Greece on the way, weak economic growth everywhere except Britain and Germany, and a migrant crisis threatening to rip the union apart.

The departure of one of the EU’s net contributors could spark off a chain reaction, leading to the disintegration of the world’s biggest single market: the EU has a combined nominal GDP value of $18.5 trillion, more than the United States’ $17.4 trillion.

Were this single market to unravel or even simply be weakened by Brexit, the ramifications would be huge.

The governor of the Bank of England, Mark Carney, recently claimed it could even lead to another recession.

And when did gold last enjoy huge growth in its value? That’s right, the 2008 financial crisis and subsequent recession.

Surely Not?

For a while, most polls have put remain in the lead in the UK’s EU referendum.

A graphic of the following poll of polls shows that Remain has usually held a few-point lead over Leave, with several periods of a reversal or equaling of percentages occurring sporadically, with the most recent showing Leave ahead:

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While polls should be taken as indications at best, the bottom line is, it is an incredibly close race.

One pivotal moment could change everything.

Another Islamist terrorist attack on European soil will undoubtedly increase anti-immigration sentiment while an announcement by a significant employer could sway those with more economic and job security-focused predispositions.

In Conclusion: Expect Panic, But Not Disaster

Last year, the Greek financial crisis was believed by some to threaten the very integrity of the Eurozone.

While full meltdown didn’t happen thanks to a deal being struck, ripples were felt and for a while, the situation looked apocalyptic.

The Eurozone is worth about $14 trillion while Greece is around a quarter of a trillion.

That means Greece represents about 1.7% of the Eurozone.

Now the single EU market as a whole is $18.5 trillion, with Britain’s GDP totaling $2.7 trillion.

That means, Britain almost represents one-sixth of its total, 14.5% to be precise.

If Greece’s future was integral to the Eurozone, imagine how integral Britain’s is to the single market.

However, Britain will almost certainly gain access to the single market.

It trades too much with the EU for both sides to blow this one.

However, with initial uncertainty in between Brexit and the subsequent renegotiations’ completion (which could take anywhere from months to years), expect paranoid investors and shareholders to fear the worst.

And what do people do when they fear the worst?

They buy gold.

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Bank of America Warns: ‘Deepest Recession on Record’ Headed Our Way

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stock market graph representing negative economic outlook

Bank of America released its latest economic outlook, and it’s absolutely frightening.

The bank predicts that the US economy stands at the beginning of three straight quarterly declines. It expects Q1 to shrink by 7%, followed by a 30% decline in Q2 and a 1% drop in Q3.

The bank says Q4 will see the return of a growing economy. They, however, said that this will only come after overcoming unimaginable pain. “We forecast the cumulative decline in GDP to be 10.4% and this will be the deepest recession on record, nearly five times more severe than the post-war average,” the bank’s analysts wrote. The report goes on to say that although they expect consumer spending to perk up in Q3, the effects of the coronavirus outbreak will linger as consumers “face job cuts and a significant negative wealth shock.”

Unfortunately for many of us hoping for a quick recovery, Bank of America isn’t alone in their pessimism.

Lowering Expectations

The Congressional Budget Office also lowered its expectations for economic growth through the end of the year. Revised figures now show second-quarter GDP declining 7% with a 10% unemployment rate compared to our current 3.5% unemployment rate.

“CBO expects that the economy will contract sharply during the second quarter of 2020 as a result of the continued disruption of commerce stemming from the spread of the novel coronavirus,” CBO Director Phil Swagel said in a post on the agency’s site.

Fitch Ratings also has a troubling economic outlook for the rest of the year. In its latest research report, the company states “A deep global recession in 2020 is now Fitch Ratings’ baseline forecast according to its latest update of its Global Economic Outlook (GEO) forecasts.”

In just 10 days since its last report, the company has revised its global GDP estimates for the year. It went from a modest 1.3% growth to a 1.9% decline. “The speed with which the coronavirus pandemic is evolving has necessitated another round of huge cuts to our [gross domestic product] forecasts,” the company added.

Here in the US, Fitch says the shutting down of the economy to slow the spread of the coronavirus will result in an “unprecedented peacetime” GDP decline of 7% to 8% in Q2. Alternatively, it may also result in a 28% to 30% decline on an annualized basis.

Negative Economic Outlook

Investors should also prepare for another drop in the market, says a hedge-fund manager. He correctly predicted the impact the coronavirus would have on the stock market and the economy in the US.

“If you go back and look at history, there are nine times that the market has sold off about 30% or so since the 1920s,” said Dan Niles, who runs the Satori Fund. “You get one of these every 10 years or so and if you look at every one of them, you always get these bear market rallies.”

Niles says that he sees another major drop headed our way. He says that valuations are still well above historical norms, even after the recent pullback.

“Just to get to average, you would have to have the market go down 30%,” he said. “It is very easy to figure out the market probably goes down 30% before we’re even near fair valuation.”

And he says don’t expect a quick recovery, either.

“I sort of laugh when I hear people talking about a V-shaped recovery because we are going to have at least 10% unemployment, my guess is closer to 20% before all of this is said and done.”

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Stocks Rally as Oil, Jobless Claims Rocket Higher

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Stocks Rally as Oil, Jobless Claims Rocket Higher

The stock market rally continued yesterday with the Dow Jones Industrial Average jumping 2.24%, the S&P 500 gaining 2.28% and the Nasdaq up 1.72%.

Investors felt optimistic after President Trump tweeted that he had spoken with Saudi Arabian Crown Prince Mohammed bin Salman. Many were hoping that both Saudi Arabia and Russia were willing to end the price war and mutually agree to cut production by at least 10 million barrels per day.

“Just spoke to my friend MBS (Crown Prince) of Saudi Arabia, who spoke with President Putin of Russia, & I expect & hope that they will be cutting back approximately 10 Million Barrels, and maybe substantially more which, if it happens, will be GREAT for the oil & gas industry!” Trump tweeted.

However, some experts are doubting the reality of cutting production by such a significant amount.

Edward Marshall, a commodities trader at Global Risk, told The Wall Street Journal, “It’s physically impossible for Saudi Arabia and Russia to get 10 million barrels a day off the market—they’d burst their onshore storage and fill every ship in sight.”

News also broke that Saudi Arabia called for an emergency meeting of OPEC and other oil-producing countries. The country called for a meeting to talk about how they can stabilize the oil market. Prices have been in freefall since the last meeting ended without a production agreement beyond April 1.

This was enough to send oil prices rocketing higher. West Texas Intermediate crude gained as much as 34% intraday before settling at $25.32 per barrel, a 24.7% jump. This is its largest single-day percentage gain in history.

Even with prices moving higher, it may not be enough to prevent bankruptcies in the oil and gas sector. This wave of bankruptcies was kicked off by shale driller Whiting Petroleum Corp. on Wednesday.

Jobless Claims Set Record

The market’s rally yesterday came in spite of some very bad news early in the day. Initial jobless claims for the week ending March 28 came in at 6.6 million. This figure is nearly double the previous week’s then-record of 3.2 million.

To put this number in a historical perspective, prior to the last two weeks, the previous record number of claims in a single week sat at 665,000 in March 2009 during the Great Recession.

To put it simply, this week’s initial jobless claims number was equal to the total claims filed during the entire Great Recession.

Chris Rupkey, chief financial economist for MUFG Banks, wrote in an email, “We knew that massive job losses were coming because of reports that many workers were unable to file a claim for benefits even after waiting on line for hours. Everywhere you look Washington and state governments were not prepared for the rapid spread of the virus and the devastating damage that would be done to the economy if businesses were shut down and workers sent home.”

He added “In a normal recession, job layoffs build over the many months of recession until they peak. In this pandemic-based recession, the job losses are immediate where the economy’s weakest hour is right now.”

Why was the market able to rally despite historically bad jobless claims?

JJ Kinahan, chief market strategist at TD Ameritrade, says it’s possible that the market knows it’s going to get worse. He also mentioned that this number won’t seem as bad in the coming weeks.

“Overall this is a little bit of a victory in and of the fact that it was such a bad number and the market did kind of shake it off. It is also the market preparing for a lot more bad numbers.”

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American Airlines Seeks $12B in Coronavirus Rescue Funding

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American Airlines seeks $12B in coronavirus rescue funding

American Airlines is seeking $12 billion in loans and grants from the U.S. government, and says it won’t furlough employees for the next six months during the coronavirus health crisis.

In a memo sent to employees from CEO Doug Parker and President Robert Isom, the U.S. carrier said it will seek the funding as part of the $50 billion pot set aside for airline industry bailouts that’s included with the $2.2 trillion economic relief bill passed by Congress and signed by President Donald Trump last week.

Parker and Isom said, with the government help, they’re confident American will “fly through even the worst of potential future scenarios.”

To receive the rescue funding, carriers must not furlough workers or cut their pay rates through Sept. 30. It allows for equity stakes for the federal government and requires carriers to maintain certain air routes.

American is the world’s largest airline by fleet size, passenger traffic and revenue passenger miles. It and other airlines are offering partially paid, voluntary leaves of absence to workers as traveler demand has evaporated due to the pandemic. Three out of every four Americans are presently subject to municipally ordered lockdowns.

Monday, American said it’s extending no-fee travel changes for flyers who bought fares through April 30.

Also Monday, low-cost carrier Spirit Airlines said it’s canceling all flights to and from New York, New Jersey and Connecticut after the Centers for Disease Control and Prevention warned against all non-essential travel in the region.

Spirit said it’s suspending service to New York City’s LaGuardia Airport, Newark, N.J., Hartford, Conn., and Plattsburgh, N.Y., through at least May 4.

Copyright 2020 United Press International, Inc. (UPI). Any reproduction, republication, redistribution and/or modification of any UPI content is expressly prohibited without UPI’s prior written consent.

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