Today is a historic day in World financial history, which will be recorded in our memory forever! And it was a long and sleepless night all over the world as financial markets were frozen in agonizing suspense.
We should admit that Britons are firm and consecutive in pursuing their goal of independence. Almost a quarter century ago, they decided to withdraw their currency from the European Exchange Rate Mechanism (ERM) and they didn’t turn off their road yesterday on the final referendum.
Bookies and analysts got it all wrong as they forecasted the win of the "STAY” option, but more and more we have witnessed that all efforts to calculate human emotions and perceptions fail. The economic consequences for Brexit are harmful to the UK in a short term, but they still voted to leave. People are irrational in their behavior and the realization of this fact would bring the dramatic changes in the economic science in the future.
This “Black Swan” event gives all of us, first the once-in-a-lifetime experience of real time observance and secondly, it is the rare case for the analytical study of such events.
It’s good for educational purposes to see how risk aversion works at such events. It’s in human nature to avoid risk. Below are two charts with the performance snapshot just 1 hour after the official results were out representing opposite camps. In the first chart, there are so-called ‘safe havens’ and in the second chart, I gathered risky assets. The charts are observing only a short period of this week for a close look.
Chart 1. Safe Havens: Gold Is Unrivaled
Chart courtesy of tradingview.com
On the chart above, there are 5 instruments: 2 precious metals – gold and silver; 2 currencies – Japanese yen and Swiss franc – both are represented as inverse pairs for comfortable comparison and the currency index – dollar index (DXY).
Gold attracted the most demand in safety pursuit, although it wasn’t obvious yesterday when the metal showed the most negative dynamics during this week. And if we measure the surplus from yesterday’s low gold gained more than 6% at the top remaining the ultimate safe haven again and again!
The Swiss currency is the disappointment of the week at the safety brink. Yesterday it was a leader with almost a 1% gain for this week, but the new day has singed the wings of luck for the franc. Later on, the Swiss National Bank confirmed that it had made an intervention to curb the soaring Swissy. And this explains everything – investors still rely on the franc, but they can’t compete with the central bank.
The dollar (DXY) and the yen shared the second place among safe havens with the minimal superiority of the dollar. The Bank of Japan made a verbal intervention to soothe the nervous market but didn’t act and that kept the yen gains.
The third is silver, the ‘two-headed dragon’ – one head is precious and the other one is industrial and it mixed the metal’s performance, which earlier could manage to beat gold in the second quarter this year.
Chart 2. Risky instruments
Chart courtesy of tradingview.com
On the second chart, I put a comparison of the following 5 instruments: British pound, euro, copper, S&P 500 index and the crude oil (WTI).
The risk appetite wasn’t at the expected reflux at all during the week. Both copper and oil were at the top with 4-5% gain before the vote. The S&P 500 was also gaining at a more moderate pace. Among currencies, the birthday currency (GBP) was on a roll before the vote and it didn’t give a sign of the following collapse. The euro was almost flat these days.
And then there was thunder. And we lost the pound so quickly, more than a 1500 pips loss, minus 8% for the week and minus 11% during a few hours after the preliminary results showed the winning of ‘leave’ option. Yes, the $1.30 margin was predicted in case if Brexit comes true and we almost reached there at 1.3226 low. Mr. Soros, who once made his fortune on such an event in 1992 predicted the $1.15 level for the pound in case of Brexit. Let’s see!
The losers made the following ranking: 2) S&P 500, 3) euro, 4) crude oil. And we have one survival – the industrial metal, the core of the world infrastructure, which was supposed to lose, despite all kept its 1% gain for this week. It’s amazing as copper can be placed among safe havens right after the silver in the first chart according to performance.
Both charts show how human emotions if they are united and strong, can move markets dramatically. People still tend to avoid risks. We also witness that gold is again the top safe haven. Our perceptions despite being true can be spoiled by central banks’ actions like in the Swiss franc case. Copper also showed surprising stability; maybe it was just forgotten by speculators.
Anyway, one thing is for sure; such strong moves can be used for profit only with the large margin of safety. Even exchanges lifted their margin requirements at least for 200%.
In the end, I would like to remind you of some old market wisdom – Buy Rumors, Sell Facts! And it’s quite possible that we will see a sell-off in safe havens and a buy-back in risky assets soon.
INO.com Contributor, Metals
Disclosure: This contributor has no positions in any stocks mentioned in this article. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.