As far as the market is concerned, Brexit is off the table, for today at least. In overnight trade, the Dow Jones index rallied 130 points, or 0.73%, while the S&P 500 rose 0.58%.
Europe partied hard, with the Euro Stoxx 50 index up more than 3%; commodities were generally strong too. Gold held steady, defying predictions of a sharp correction as the risk of Brexit fades.
That means our market should be in for another good session today, after surging 1.8% yesterday.
Although, if you’re bullish on gold, keep in mind that the latest Commitment of Traders report shows hedge funds are massively bullish too right now. The chart below shows the ‘net long’ position of speculators is as high as it’s been since at least 2008.
[Click to enlarge]
Speculative money is there for a good time — not a long time — so the gold price is at risk from a pullback as some of the Brexit fear unwinds. But if it continues to hold up in the event of a ‘remain’ vote, that will be very positive for gold’s longer term prospects.
It will tell you that gold is worried about more than just the slim near term chance of the European Union breaking up.
Maybe it’s the large and increasing amount of government bonds around the world that cost fund managers money to hold in their portfolios?
JP Morgan calculates that US$6.1 trillion in Japanese bonds trade on a negative yield. This is 78% of the outstanding Japanese bond market. In the Euro area, $2.4 trillion of government bonds trade on a negative yield — or 36% of all Euro area government bonds.
This disturbing trend has nothing to do with Brexit. It has everything to do with a broken financial system. That’s what gold is really worried about.
For The Daily Reckoning