What does BREXIT mean for gold and the economy?

Brexit

So, we’ve woken up this morning to the shock Brexit result that the UK will leave the European Union. The kids still needed to go to school, the sun was out, the birds were still chirping and the world carried on. Realistically, will we see much change to our daily lives, or will leaving the EU have less impact than we think?

Panic from the shock

The campaign saw opinion polls swing one way, then the other, over the past few months, suggesting a lack of certainty in the result. However, over the past few days, polls suggested a win for the remain campaign. The Pound strengthened, equity markets stabilised and gold fell. The fact that this result is a shock to the expectation of the markets will intensify its impact.

Immediate impact of Brexit

It’s impossible to predict the medium to long-term repercussions of Brexit, but we can, at least, see the immediate impact. The Pound has fallen to its lowest level since 1985 and the FTSE has suffered losses of over £100bilion overnight. Significantly, the Prime Minister has announced his resignation, which leaves the country in political uncertainty. The gold price has acted as a useful barometer of expectations and reactions over the past few months, and overnight it rose by 15% for UK buyers.

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Longer term volatility

Outside of electing a new prime minister, we may not feel much has changed. We are still members of the EU; it is the process of leaving which has begun. The claim is that this process can take 2 years. However, Professor Michael Dougan, one of the UK’s leading EU law experts, predicts the withdrawal and negotiation could take many years. In fact, Switzerland is still discussing certain points, after signing an agreement in 1972. This protracted process will cause an extended period of uncertainty in the UK, and globally. We may also see changes politically as the anti-establishment vote gains confidence, causing further instability.

Financial impact

Without a crystal ball, we don’t know if Brexit will have a negative or positive impact on our cost of living and prosperity. Both sides have claimed we would be better off. The worry is that most business leaders, including those outside of the UK, think leaving will have a negative impact on our finances. Certainly the reaction of the markets supports this view.
However, it’s the prolonged uncertainty we now face, which may have the greatest effect. Financial institutions have already put the deals, which oil the wheels of our economy, on hold. The economy will likely feel a reduction in liquidity, as banks retreat into their shells. Over the coming months and years, it will be interesting to see the reaction of global institutions, who may decide to leave the UK at the cost of thousands of jobs. The UK has the 5th largest economy in the world, so this overnight change will send ripples across the globe. This isn’t something that can be swept under the carpet.

Gold’s role

Instability and uncertainty are the driving motivations for people to buy gold. It acts as a hedge and portfolio insurance when markets suffer huge events. The fact that the gold price has spiked so dramatically overnight is reassuring that it’s fulfilling its role as a ‘safe haven’.PHYS01_Animated_Gif_1_MPU

Those who like the security of owning a tangible asset – like property – may now be concerned house prices could fall. We’ve compared gold investment to property to analyse where the markets may be heading.

As we’re likely to have years of uncertainty, gold should continue to act as a long-term balance to your wealth. And in the UK, we should benefit two fold:
– First, the underlying gold price has moved up sharply.
– Secondly, the value of the Pound has fallen dramatically. Once you convert the $ price into Sterling, gold holdings have risen 15% overnight and, incredibly, more than 35% this year alone.

Invest in gold

If you don’t already own gold, but feel concerned about the diminishing value of the Pound and falling equity markets, then it’s never too late. We discussed the bigger picture in our blog last month: Are Gold and Silver still good value?.

It’s simply a case of heeding the view of the experts, and allocating some of your wealth into physical gold, so that whatever the future holds, you’ve spread your eggs into different baskets. If you’d like to find out more about this type of investment, why not Download our free guide to investing in gold and silver or give us a call today to discuss your options.

Daniel Fisher

Daniel Fisher formed physical Gold in 2008, after working in the financial industry for 20 years. He spent much of that time working within the new issue fixed income business at a top tier US bank. In this role, he traded a large book of fixed income securities, raised capital for some of the largest government, financial, and corporate institutions in the world and advised the leading global institutional investors. Daniel is CeFA registered and is a member of the Institute of Financial Planning.

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