Chat with us, powered by LiveChat
Menu

How Brexit Is Impacting Gold Prices

Brexit Concept - National Flag Gold Coin and English Words
Print Friendly, PDF & Email

The UK and the EU have agreed to continue to try and hammer out a trade deal. The effect is to kick Brexit painfully down the road. While the country waits to see whether an agreement can be made at short notice, the markets have already demonstrated their aversion to no deal.

The outcome of these latest talks is far from certain and many have suggested a hard Brexit is the most likely outcome, but even a last-minute agreement will have a lasting effect on many areas of the UK economy. Investors have been shoring up their portfolios with physical gold each time the possibility of a no-deal Brexit is mooted, and this flight to safety will continue down to the wire.

A History Of No-Deal Market Gloom

Since the unexpected Brexit vote wiped trillions off global stocks in 2016, markets have largely fallen if a no-deal Brexit is increased in likelihood, and recovered as no-deal concerns receded. This time two years ago, the markets slumped on trade war fears and the increasing probability of Theresa May’s Brexit deal being voted down. A year later the initial market relief of a Conservative election victory was reversed just days later as the specter of a no-deal exit became more likely. 

The UK-stock exposed FTSE 250 fell 1.4% on December 17 after the government ruled out an extension to the transition period raising the chances of a no-deal exit. In August 2019, the FTSE 100 fell 1.7% in response to a cut in growth forecasts from the Bank of England. This was a clear warning of the fallout of a hard Brexit, compounded by global trade tensions between the US and China.

3D illustration of United Kingdom and European Union flags on dice, black background.

In July 2016, the IMF released a report warning that "Brexit' marks the materialisation of an important downside risk to global growth."

This market decline - and subsequent recoveries - give a glimpse of the potential market route that could follow a final no-deal decision. Before the announcement of continued negotiations, markets were braced for a plunging pound and falling stock prices if a hard Brexit was triggered.

Morgan Stanley warned that the FTSE 250 could lose up to 10% of its value if this outcome came to pass through US stimulus. The reprieve of continued negotiations will be short-lived. Any agreement needs to be made with enough time for EU countries to vote on any deal.

Protecting Your Gold Assets And Investments

Many investors have already taken to safe-haven assets in the wake of the Brexit vote by Prime Minister Boris Johnson, US election, trade war volatility, UK election uncertainty, and of course the COVID-19 pandemic shutdowns and economic crisis. Each consecutive stress on sensitive global markets with trade agreements has urged more people to hedge their investments with physical gold. Gold is an asset that has a proven track record of riding out and often exceeding market shocks as well as palladium rose with impacts.

The advantages of investing in physical gold are not limited to its safe-haven status. Since 2000 gold has been VAT-free to harmonize the tax treatment of gold with the rest of the EU. In addition, certain types of gold, including bullion coins like the Gold Britannia and Gold Sovereign are capital gains tax-free because they are legal tender in the UK. Owning physical gold also removes counterparty risk from the investment equation in the Euro, a fact which becomes more pertinent considering the stresses on banks from the pandemic fallout.

A hard Brexit will inevitably hit the stock market and investors should be prudent to diversify their portfolio with safe-haven assets like physical gold to manage this risk. But even an agreement won’t solve all the UK’s economic problems, so the strategy is just as valid whether it’s a deal or no deal.

Gold prices increase during times of uncertainty. With Brexit, we’re not sure how this will affect the British economy: will businesses prefer going elsewhere? Will the stock market take a hit? Will the prices of goods massively increase? Brexit won’t just impact the EU and the UK - it will impact the entire world. Just look at the coronavirus pandemic to see a real-life example; the pandemic causes a lot of uncertainty as businesses had to shut down, countries had to close borders and employees were working from home. Throughout the year 2020, gold has increased more than 30% and reached $2,000 per troy ounce for the very first time.

During times of uncertainty, investors prefer putting their money into safe-haven investments, and gold is one of the best places to keep your money safe. The stock market does not represent the economy, which is why it can be unpredictable. However, there is no denying Brexit will impact all businesses across the UK.

Companies may change headquarters and move elsewhere, and an increase in regulations and visa restrictions could cause cash flow and hiring issues. This could cause a stock market crash or a prolonged recession. When the stock market decreases in value and causes a bear market, investors like to sell their investments and put their money into less volatile investments such as gold. This increases demand, which in turn increases the price of gold.

One of the main reasons to invest in gold is because it acts as a fantastic hedge against currency risk: gold speaks everyone’s language and is a valuable asset in every country in the world. With Brexit, the pound might decrease in value, causing higher inflation or even deflation. People who want to keep their money in liquid assets that aren’t inflationary will head towards gold. This increases demand and further increases the price of gold.

The price of gold will increase in nearly all Brexit scenarios. That may not always be a good thing: gold is a safe haven and long-term investment - most gold investors don’t buy gold to sell it at a profit, and therefore don’t focus on the price. However, an increase in price does mean that gold is beating inflation and maintains its value over time.

Brexit Gold Movements

The price of gold - a metal that has been thought to be a wise investment in times of economic turmoil, could literally explode following the Brexit vote. Driven by the economic turmoil of the worldwide fiscal crisis, the cost of gold soared to record highs prior to peaking at about USD $1,900 an ounce in September of 2011. As uncertainties of the fiscal crisis subsided, gold’s value declined to reach to as little as all-around USD $1,050. However, now given the fact that Britain has left the European Union, those fiscal uncertainties have again, risen, and that has resulted in a serious increase in the value of gold with the biggest annual gain.

The decision to leave the European Union has caused a serious shift in economic, financial, and political power away from the United Kingdom. The remainder of the European Union, the United States, and China will gain economically from this decision. That said, gold prices have been on the rise since the vote to leave the EU has been made, and yes, people are benefiting from that decision. The true impact of Brexit will unfold over the coming months and even years, and if things go as expected, the price of gold will continue to rise.

Asian market shares were also impacted as a result of the current instability in the European Union, and they returned with a vengeance. The result of this? The value of the pound dropped to the lowest it has been in over three decades.

The yields on US Treasuries, which are the benchmark for bonds throughout the world, reached a record low in 30 years according to COMEX. However, spot gold reached its highest level since March of 2014 and was trading up, at .8 percent at US dollar $1,366.86 an ounce. In fact, it surpassed the $1,369.20 mark that was hit on June 24 immediately following the post-Brexit trade deal vote. In the United States, US gold futures were also up .8 percent, at $1,369.60. Additionally, gold that was priced in Stirling rose to its highest period in more than 3 years, reaching a point of $1,069.36 an ounce.

In the short term, the Bank of England has taken steps to ensure that the British banks continue to lend, despite the financial consequences of the country’s decision to leave the European Union.

Gold is usually favored as a hedge against economic and financial uncertainty, and this certainly remains true in the current economic uncertainty around the globe following the Brexit decision. William Dudley, the President of the New York Federal Reserve, said that the central bank can be patient with raising interest rates because of the low inflation and the uncertainties amidst the US economic prospects. While central bank rhetoric can calm markets in the short run, as Great Britain extracts itself from the rest of the European Union it will certainly create instability and turmoil, the exact situation lends itself to rising gold prices.

Investors will continue to watch for signs on the US Federal Reserve’s outlook on rates from the minutes of the meetings that were held on June 14 and 15. The UBS increased its gold price forecasts from 2016 through 2020, stating that bullion had very likely gone into the beginning stages of the next bull-run.

Gold is in a win-win scenario with central banks right now. If central banks keep interest rates low, it will create increased inflation over time. Gold is a hedge against inflation and will rise if the value of the currency drops. If central banks raise rates the economy is unstable and it will cause turmoil, this will cause people to run to gold as a hedge and it will also increase the price of gold. After Brexit, it is an excellent time to invest in gold.

The holdings in the SPDR Gold Trust, the largest gold-backed exchange-traded fund in the world, skyrocketed by 3.02 percent to 982.72 tonnes, which is the highest it has been since June of 2013. Gold isn’t the only precious metal that is projected to increase in value as a result of the Brexit vote; other precious metals, like platinum, have been trading at significant highs. Given the increase in the value of gold following Brexit, it is safe to say that investing in this commodity is currently a wise economic decision.

Brexit British referendum UK concept with golded sign and Union Jack and EU flag

Brexit-induced market volatility will likely cause increased demand for gold and other precious metals.

Brexit Highlights The Value Of Gold

By voting to exit the European Union, the United Kingdom is gambling with global finance in unprecedented ways. British withdrawal from the EU sent stock markets falling fast, saw the Sterling Pound drop to a new thirty-year low, and caused the resignation of Prime Minister David Cameron, all basically overnight.

This type of political and economic fallout is the new model for regime change in a quickly globalizing market. The volatility reflected in the marketplace as a result of this single referendum is indicative of how simultaneously fragile and powerful first-world economies truly are. Brexit comes as a surprise to many worldwide, even though it was clearly a real possibility since it was up for referendum. One estimate put the likelihood for withdrawal at just 1:3.

Nonetheless, it happened. As published by Bloomberg, “the Bank of England could pump billions of pounds into the financial system, while the European Central Bank said it will give banks all the funding they require.” This is a foreshadowing of things to come in this rather scary global market. Many higher-risk assets drew significant losses in spite of the assurance from central bankers that policymakers were prepared to intervene.

And so as market liquidity evaporates in the blink of an eye like this, it’s hard to deny that investments into hard assets such as gold start to look pretty, well, golden. And indeed they are. While markets tumbled in the hours following the referendum, the price of god prominently rose.

Gold had its greatest surge since the peak of the 2008 global financial crisis. Bullion shot up over 8 percent and the volume of futures trading was three times its normal average for the time of day at which everything began to tumble downward.

The uniqueness and strength of gold are evidenced by the plummet in prices for so many other high-end commodities. When disruptions like this happen in the global market, gold flexes its true muscle as a protector of wealth and a sure bet.

Another new phenomenon we are witnessing with this whole new real-time occurrence of global volatility is to see the calm come creeping back in after only one day of craziness. But even still, investors are a little bit warier, and a little bit wiser. This equals a surge in gold buying, hoarding, and real value. It’s again, the best bet when facing such unpredictable losses.

Some even speculate that the whole scenario presents a double positive for gold. With prices of pretty much everything other than precious metals on the decline, the Fed is less likely to raise rates. So gold is not only worth more but more likely to stably grow.

Ever since the Britons voted for leaving the European Union, there has been a lot of doubt and uncertainty. Four years later, the deal still hasn’t been finalized, and the concerns have grown even bigger. Leaving the European Union is a major development that will trigger a financial shock of sorts. One such shock pushed the pound and equities to very low levels already. While the market recovered, there is no indication that this will not happen again.

Fast forward to today, and there are still many questions. The EU and the UK seemingly cannot agree on a favorable trade deal. The European Union wants to enforce EU rules if Britons want to trade in this region. At the same time, the UK wants free access to the market without playing by specific rules. It is evident there is no common ground between the two, and that both parties will need to come closer in one way or another. Until that happens, there will be further market instability.

As financial instability ensures, investors are often driven to alternative markets. This can be beneficial to gold, silver, and other precious metals accordingly. Gold could do with a boost, after its most recent market’s setback. At the same time, the leading precious metal has not given up that much ground compared to stocks and other assets. The final few months of 2020 was interesting either way.

Conclusion

One may want to believe Brexit only affects the UK and European Union. That is far from the case, as these events have global repercussions. Brexit can pave the way for breaking up the entire European Union. At the same time, the EU has to keep its foot down without risking losing a key trading market. It is a very tough balancing act, all things considered, and one that will remain in place for a while to come.

Gold is still widely considered to be an indicator of wealth. In recent years, it has become a traditional safe-haven asset. Brexit is a catalyst driving demand for safe-haven assets, and the longer this lasts, the stronger that demand will become. Ultimately, it will create a global tidal wave that will move the gold market either up or down.

Considering how the Brexit negotiations have been going on for a time now, it is unlikely that anything changes in the near term. More uncertainty is likely to fuel demand for gold and other precious metals. Even if an agreement would be found all of a sudden, it will likely trigger a higher bullion price.

Bank Failure Scenario Kit - sm2

GET YOUR FREE

BANK FAILURE SCENARIO KIT

  • This field is for validation purposes and should be left unchanged.

All articles are provided as a third party analysis and do not necessarily reflect the explicit views of GSI Exchange and should not be construed as financial advice.

Precious Metals and Currency Data Powered by nFusion Solutions