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Brexit Will Cause Gold To Skyrocket

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Brexit Will Cause Gold To Skyrocket

HSBC, the world’s fourth-largest bank, has asserted that gold could see as much as a 10% rise if Britons vote to leave the European Union on Thursday.

This article explains their reasoning.

The classic safe haven for investors

The first thing you need to know to understand why this would be the case is that gold is widely accepted as a safe bet for investors.

It doesn’t pay dividends, doesn’t accrue interest, but it’s prestige and history as a currency means it is always sought after.

This goes back to the middle ages when the economic dogma was mercantilism.

The idea was that trade was a zero-sum game and that it was in a nation’s best interests to accrue as many precious metals as possible.

While the world has moved on from this archaic mode of thought and adopted more laissez-faire and mutually beneficial free trade policies, gold has remained a sought after asset.

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Its physical properties, being non-corrosive and sturdy, mean that it is valuable for its longevity too.

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HSBC lay it down for you

Chief precious metals analyst at HSBC, James Steel, explains that market turmoil in the wake of a Leave vote in Britain’s EU referendum will allow the metal to take off in price.

This could be as high as 10%, to around $1,400 an ounce, James explains.

It’s currently hovering around $1,280 an ounce, as shown in the graph below.

This could go even higher, depending on the political climate following the election result.

The possibility of it going higher is compounded by the reluctance to move into sterling or the Euro, as both will be unstable following a Brexit.

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Politics of old, future price of gold

Regarding political climate, it depends on what happens after.

After all, the UK parliament wouldn’t be under any legal obligation to secede from the EU if there was a Brexit vote.

There could be any number of outcomes.

Should Cameron manage to remain Prime Minister, and were the pro-Remain camp to put up a strong fight along with him, Britain could see itself joining the EEA (European Economic Area) as Norway and Switzerland currently do.

Of course, this would be most displeasing to Nigel Farage and much of the out voters, who campaigned against free movement of people, an integral part of being in both the EU and EEA.

However, if it turns out that most Brexiters voted simply as a big middle finger to the European Union bureaucrats or just for a renegotiation of terms, rather than a desire to leave the European Union entirely and forgo free movement, the likelihood of this should not be underestimated.

Were this to become clear after the election, Britain’s place in the world’s largest trading bloc would be secure, and this would negate the effect on gold.

However, were they to go the whole hog and ditch the institution altogether; the sky is the limit to how high the price of gold could soar.

The brains explain exactly why this is

HSBC went on to explain why gold price movements occur like this.

Gold is what investors call a risk-off asset.

This means it is bought during a time when investors are more risk averse, rather than willing to take more risk.

Brexit would fuel uncertainty, and this would spur enough purchasing activity to cause the price to surge.

The Gold market is linked to the wider financial markets and is one of the few liquid assets that is perceived as a safe haven no matter the circumstances.

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Why is this so important all of a sudden?

HSBC has made similar predictions previously, back in April.

It advised gold as a good hedge against financial effects of a Brexit vote, but this was at a time that the polls were giving Remain a very comfortable lead and no one took the possibility of Brexit seriously.

That has all changed now as the graph below shows collated polls since December, courtesy of Number Cruncher Politics.

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It is important for you to know that the opposite isn’t necessarily true.

That is if there is a Remain, don’t expect a proportionally negative change in the price of gold.

There would not be a major sell-off of gold if there were a vote to remain.

There are many other causes for concern in the world economy, and gold is deemed to be able to withstand the result of a Remain vote.

Although, Sterling will have a field day should Britain vote to Remain.

HSBC predicts a modest loss of perhaps 5% for the price of gold in that event.

Final Word

Gold has been growing steadily this year amongst a turbulent market, and there is a general pessimism pervasive in political and media circles.

With a 20% gain on its price at the end of the year already, it’s one of the most successfully performing assets of 2016.

 

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