Gold Heartbeats: How will Brexit affect Gold prices?

Goldex Team

Editorial content

The Brexit situation remains in perpetual flux. Writing about it can be hazardous as so much can change so quickly. Yet while the basic destination options persist, it is only the uncertainty of the journey that oscillates: remain, no deal, or deal. Setting aside a deal, which would be fairly substantial and comprehensive (and a relatively “soft” Brexit) would have limited consequences for Gold in the short-term, so instead this article will focus on the two extremes. Of course, these scenarios are presented with all other things that affect capital markets and politics remaining equal.

Remain

If, via the revocation of Article 50, or by another means, the UK remained in the EU as a full member for the foreseeable future, then the perceived economic damage to the UK economy would diminish. Certainty and the ability to plan, budget and forecast would return, enabling a wave of investment into the UK. This would drive GBP far higher (remember, the 2016 referendum GBP was trading at around $1.50 compared to $1.20 now). On a purely safe-haven asset related to UK Brexit risks, there could be some selling of Gold by UK investors.

However, such an action – if manifested without a popular mandate from the electorate – could create a deep and divisive political crisis that would make the current political volatility seem benign. With 17.4 million votes in the referendum being “ignored” the social contract between govern and governed could break down. This would most certainly lead to a significant rise in more aggressive political rhetoric, direct action on the streets, as well as potentially industrial action and other forms of civil unrest. The political stability of the UK long-term could suffer further as both percentages of “leave” and “remain” are both as they were. This split, coupled with secessionist actions from Scotland, could once again threaten any long-term status quo that had been hoped for post the UK remaining. In such circumstances, GBP could weaken and uncertainty would return, helping Gold move up.

Leave

In the event of leaving without a deal, the significant amount of fear, uncertainty and indeed panic could help Gold. While there are apparently a succession of “mini-deals” in place to help with basic continuity processes (aircraft landing for example) it’s not beyond imagination to foresee hysteria from the media and clumsiness and unpreparedness from the government engendering a sense of foreboding and gloom. It is thus fairly likely that, initially at least, Gold would be sought while the uncertainty remained. Additionally, it also likely that the Bank of England would enact an emergency programme of liquidity to sure up the banking system, which would help Gold. Furthermore, the increased desire by all governments nowadays to become more interventionist means that any extreme policy action would be far more palatable in the days of a crisis. A move to MMT, infrastructure projects, universal basic income and negative taxes could all become more likely if there is a perception that a no deal Brexit could cause a severe recession, or even depression. All such actions would be supportive for Gold.

Ultimately, the current Brexit impasse, whatever the resolution, will not satisfy either side. Both remain and leave supporters remain deeply entrenched. Finding an outcome that suits all looks unlikely. Rather, the question regarding the UK’s degree of integration with the EU project will depend on what alliances and trade deals it goes into after Brexit, and indeed, more importantly, if the EU as an entity can survive itself through it’s own continuing economic malaise.

Therefore, unless a deal that is mutually acceptable to both sides can be found (Leave / Remain, UK / EU), uncertainty will persist. Add to that, to all other pro-Gold trends in the world and it is difficult to see what can bring the Gold price down, aside from a return to prudent monetary and fiscal policy around the world, neither of which looks likely given current global debt levels.

Indeed this week, Argentina defaulted (again) after being so praised on the last IMF bailout. The ECB look set to launch a new range of monetary stimulus measures (and this is before Christine Lagarde even joins and is expected to be even more “dovish” than her predecessor). The Bank of Japan has been called upon once again to become more interventionist. At the same time President XI of China has warned the whole country that there is now a long battle ahead as growth slows and the trade war bites the US, China and the rest of the world. Interventionism is here, and here to stay for the foreseeable future.

Important disclaimer: this document is not an official research report and the views expressed in it are those of the authors. The authors are not registered research analysts and there is no assurance the trends mentioned will continue or that the forecasts discussed will be realised. Gold as a commodity is not a specified investment for the purpose of giving advice under the Financial Services and Markets Act 2000, therefore, it does not give rise to rights to claim compensation under the Financial Services Compensation Scheme.

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