Brexit Vote and Gold

By: Arkadiusz Sieron | Sat, Jul 9, 2016
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In a historic referendum, Britain voted to leave the European Union. We covered this topic in our Gold News Monitors a few times, however it is worth analyzing in more detail, as the Brexit vote entails important implications for the global economy and the gold market.

Initially, the Brexit vote led to short financial shock with a plunging pound and equities. However, the markets soon recovered, and the shock was not as bad as many had feared. Similarly, there was a knee-jerk reaction in gold, which boosted its price up to the $1,350 level immediately after the vote's results were announced. As the chart below shows, the gold prices spiked in the U.S. dollar, in the Euro and, to a great extent, in the British pound.

Chart 1: The price of gold in the U.S. dollars (blue line), Euros (yellow line) and British pounds (red line)

Gold in US Dollars, Euros and British Pound

But quickly after that rise the shiny metal pared down some of its earlier gains. Gold probably did not continue its parabolic rally from Thursday's night because markets started to realize that it will take years for the UK to actually exit the EU. Although nothing has yet happened, smart investors should understand the economic effects of the Brexit vote. What are they?

However, so far the most important consequences of the Brexit vote have been political in their nature, as the UK's vote created massive uncertainty from a political standpoint. Why?

The key takeaway is that the Brexit vote may entail significant consequences, but none of them are immediate, as it will take years for the UK to part ways with the EU. So far, the most important effect is the rise in uncertainty, especially from the political standpoint. The price of gold so far was supported by fears about the future of the UK and the EU, and lower odds of the Fed's hike. However, the consequences of the Brexit vote could be rather small until we see an invocation of Article 50 or some steps undertaken by other countries to leave the EU. Therefore, the positive impact of the Brexit vote on the gold market may be overestimated by many people. When emotions are high, investors should be extremely cautious.

Thank you.

 


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Arkadiusz Sieron

Author: Arkadiusz Sieron

Arkadiusz Sieron
Sunshine Profits' Gold News Monitor and Market Overview Editor
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Arkadiusz Sieron

Arkadiusz Sieron is a certified Investment Adviser. He is a long-time precious metals market enthusiast, currently a Ph.D. candidate, dissertation on the redistributive effects of monetary inflation (Cantillon effects). Arkadiusz is a free market advocate who believes in the power of peaceful and voluntary cooperation of people. He is an economist and board member at the Polish Mises Institute think tank. He is also a Laureate of the 6th International Vernon Smith Prize. Arkadiusz is the author of Sunshine Profits' monthly Market Overview report, in which he keeps subscribers up-to-date regarding key fundamental developments affecting the gold market and helps them prepare for the major changes.

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