Brexit: Now The Real Work Begins
July 5, 2016
Dennis Gartman is editor and publisher of The Gartman Letter, and strategic advisor of the AdvisorShares Gartman Currency Hedged Gold ETFs (GEUR & GYEN). He regularly contributes to AlphaBaskets and lends his institutional insight to educate advisors and investors about commodities and the forex markets, including about trading gold in different currency terms.
The Yen, Euro and non-US dollars are firmer and all eyes are turned to the UK still despite the fact that it is a week and one half since the Referendum and still there are questions as to what the Referendum really means. Still there are questions as to how the UK shall divorce itself from the rest of the European Union and indeed if it shall actually go through with the actual “divorce” proceedings and further still how this shall affect the other “separatist” movements across Europe.
The British Tories are going to begin the rather involved process of electing a new party chair and thus, by extension, the next Prime Minister, with all of the Tory MP’s voting today for one of five candidates for the position. At the day’s end, the candidate with the least number of votes will be eliminated from further consideration and who that shall be is anyone’s guess. What is important is that in all likelihood the winnowing process shall soon be down to one of three candidates: Ms. Theresa May, the current Home Secretary: Ms. Andrea Leadsom, the current Minister of State Energy and one of the leading debaters in favor of “Leaving” the Union and Mr. Michael Gove, the Justice Minister, who was perhaps the leading voice amongst the ranking UK Cabinet members for “Leave.”
At this point, Ms. May seems the most likely candidate to come out of the process as the Party’s leader and as the next Prime Minister. Known as a “no-nonsense” administrator, Ms. May’s support for the “Remain” camp will likely serve her well in the discussions that shall follow later this autumn as the real process of “divorce” begins in earnest.
Regarding the precious metals again we shall surprise no one by stating that we remain bullish of gold. We turn to the data supplied by Credit Suisse whose analysts forecast that the gold market is in “deficit” production vs. demand and shall remain in deficit for the next five years. The bank, interestingly, sees this year’s demand as the high watermark for gold demand and forecasts annual double-digit declines in demand for the next several years. But… and this is a most interesting “but…” the bank also forecasts that the supply of gold will decline steadily over that same period with the market in deficit of 473 tonnes for 2017; 458 tonnes for 2018 and 205 tonnes for 2019.
Credit Suisse believes that there are several trends that support their forecast. First of all, since ‘12 capex for mining has been cut continually; secondly, the miners have been “high grading” their mines; that is, they’ve been mining their best and easiest sources of gold. Thirdly, the bank believes there is a short industry reserve life and finally exploration spending has been cut materially over the past decade and has reduced, almost by definition, the global gold production outlook. This drives the forecast for a 7% decline in mine supply by 2018.
Finally, according to the bank. at current consumption rates, mines currently only have 1 billion ounces of gold remaining or 10 years of life based on current consumption forecasts. Resources and undeveloped projects bring the total gold in the ground to 4 billion ounces or 40 years of supply. But projects need to attract capital to be brought on stream and unless gold prices move higher, it’s unlikely this capital will be put forward. Thus, theirs is a simple supply/demand argument. A lack of supply will, over time, force gold price higher.