Brexit and Gold

BGASC Metals
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Posted: Jun 14, 2016 12:01 AM
Brexit and Gold

Brexit Uncertainty Draws Attention To Gold

On June 23rd, Britons will go to the polls to vote as to whether the United Kingdom stays in the European Union. A leave vote would create global market turmoil. What would the aftermath look like if Britons chose to leave the European Union of which it has been a part (without a vote!) since January 1972?

New trade, military and economic agreements would have to be negotiated with uncertain outcomes. Whether the final outcome of a Brexit vote is net positive or negative for Britain, Europe and the world is not the immediate issue, but the uncertainty that a leave vote would create.

Markets hate uncertainties. Some uncertainties can be quantified and their potential outcomes modelled in order to hedge any risks that may arise from a variety of outcomes. There is, however, no historical basis from which to attempt to quantify the market, political and societal impacts that a Brexit might create.

No country has every left the European Union.

Gold’s Certainty Boosts Sales

In recent months the British Pound, usually associated with stability, has traded with the volatility of an emerging markets currency. During the same time period, retail gold dealers have reported higher sales this year, with sharper increases in Britain than elsewhere in Europe. The reason for the wild swings in the pound and higher gold sales (and prices): conflicting polls as to the potential success or failure of a “leave” the European Union vote.

A recent Reuter’s headline summed up the attraction of gold in times of uncertainty:

“London appetite for gold bars, coins rises on Brexit nerves”

Gold is certain as it carries no counterparty risk.
Gold is certain as its existence doesn’t depend on a vote or any policies.
Gold itself raises no questions.

Questions a ‘Leave” Vote Raises

A simple question: “in or out?” leads to a slew of many much harder to answer questions.
Here are just some of them:

Economic

What happens to the British Pound?
Does it go up or down?
What are the effects of a lower or higher pound on the U.K. economy? on its trading partners?

What happens to the Euro? The United States Dollar?

What type of new trade agreements would the United Kingdom enter into?
How long will they take to negotiate?
What happens to trade with the U.K. in the interim?

What happens to the Bank of England’s monetary policy?
What happens to the Bank of England’s quantitative easing program?
What happens if the Bank of England raises or lowers interest rates in reaction to Brexit?

What happens to the European Central Bank’s monetary policy?
What happens to the ECB’s QE program?

What happens to U.S. monetary policy?
Does it cause the Fed to call off planned interest rate hikes?

What actions would global central banks take if Brexit caused a large decline in the equity and/or bond markets?
What impact would central bank actions have on the global markets?
Would they be effective?

What happens if Britain is not subject to countless European Union regulations?
Will the U.K. replace those regulations with their own or allow a more laissez faire economy to develop?

What happens to the City of London?

What happens to home prices in the United Kingdom?

Would Brexit lead to internal European Union reforms intended to strengthen the remaining union?
or will it lead to reforms designed to give member states a greater say over EU policies?

Societal

What impact would Brexit have on other countries whose citizens may be thinking about leaving the European Union?
What impact would it have on other countries whose citizens and leaders are thinking about joining the European Union?
What impact would it have on Scots living in the United Kingdom about their own status?

What impact would it have on U.K. immigration policies?
What impact would it have on the migrant crisis in Europe?

What impact would it have on the meaning attached to “European”? “British”?

Would a trip across the British channel be viewed as a ‘trip abroad’?

What customs and passport controls would apply for travelers entering and leaving Britain from Europe?

Military

How would any disputes that arise between the UK and European member states be settled?
How would the United States treat a separate UK and European Union?
How would a new Clinton or Trump administration view the United Kingdom vs. Europe?

Other

What impact would the uncertainty of Brexit have when combined with other geo-political-economic uncertainties?

What are the unforeseen or unintended consequences of a Brexit- if we knew, we’d list them!

Questions A Stay Vote Raises

There are also a host of questions that a stay vote would raise, too numerous to list here.

Gold, Any Questions?

Gold doesn’t raise any questions.
Gold just is.
Gold is a rock.

Investors can take solace in gold in an uncertain world, whether that uncertainty is caused by a potential Brexit or anything else that could create uncertainty in an increasingly uncertain world.

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