Gold Price And Brexit

June 18, 2016

Gold is soaring. It should—and a lot—but in my view not for the reason it is.

Indeed gold is insurance for uncertain times, a time that Brexit seems to represent. But insurance is an administrative cost—one must minimize its use. Moreover, insuring against Brexit might be equivalent to ironically insuring against a good event. 

The market believes (based on its statist views, in which those running our institutions are omniscient, when they actually are quite naive, incompetent, and incapable of understanding the concept of complexity) that Brexit will lead to wealth-destruction.

Austrian Economics knows (“knows” because Austrian Economics is the only real economics) that Brexit will actually aid wealth-creation, by reducing the impact of European bureaucracy on the UK.

Brexit will also enable more control over migration into the UK. While in an ideal world, I would want free movement of people, migration of people who refuse to assimilate will irrevocably harm Europe. I recently spent a fair bit of time in Sweden, including visiting no-go areas of Malmo. Media headlines don’t bother me, and I don’t see migrants as security risks. My problem is that they import exactly the same social values and a culture of irrationality that they left behind. They end up voting in ways that replicates socialism and its associated tyranny on their adopted home. And a 15-minute talk with a guy on the street should tell you in clear terms that “reason” is not an antidote to “irrationality.”   

Apart from a possible short-term chaos, Brexit will be very good for the UK and the world economy. 

Why do I think Brexit is good? Over the last 400 years, societies and economies around the world have become increasingly very complex. This has created huge pressure on the state to decentralize. Quite to the contrary, driven by democracy, we have seen huge increase in centralization around the world, as has been the case with EU. The state as it stands is completely unsustainable and I see pressures everywhere that will lead to big entities breaking into smaller ones. Even more critical is the situation in what are called emerging markets, where almost nothing works and governments are merely bribe collection agencies.

Gold has one—and only one—thing that imparts it value in the long-term: when the economy becomes negative yielding. Naive governments around the world are repressing businesses. Democracy—tyranny of the unqualified masses—means that they vote for exactly more of what created the problems. This situation will not change until this totally anti-meritocratic system of running societies—democracy—has come to an end. And as you know it is hard to imagine that democracy will come to an end any time soon.

This pain of negative-yields and social chaos will be very long lasting and hence very good for gold.

So, gold must go up, but Brexit is not one of the reasons why it should. This tells me that in the short-term there will likely be a correction in gold price, hence an opportunity to trade. The market must take the price up for the right reasons, before one can be confident about the resilience of the price increase.

Courtesy of www.jayantbhandari.com

Jayant Bhandari is constantly traveling the world to look for investment opportunities, particularly in the natural resource sector. He advises institutional investors about his finds. Earlier, he worked for six years with US Global Investors (San Antonio, Texas), a boutique natural resource investment firm, and for one year with Casey Research. Before emigrating from India, he started and ran the Indian subsidiary operations of two European companies. He still travels multiple times a year to India.

Bhandari has written on political, economic and cultural issues for the Liberty magazine, the Mises Institute (USA), Mises Institute (Canada), Casey Research, International Man, Mining Journal, Zero Hedge, Lew Rockwell, the Dollar Vigilante, Fraser Institute, Le Québécois Libre, Mauldin Economics, Northern Miner, Mining Markets etc. He is a contributing editor of the Liberty magazine.

He is an MBA from Manchester Business School (UK) and B. Engineering from SGSITS (India).

In 1792 the U.S. Congress adopted a bimetallic standard (gold and silver) for the new nation's currency - with gold valued at $19.30 per troy ounce