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How Brexit Will Impact Gold And Silver Prices

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How Brexit Will Impact Gold And Silver Prices

With Britain’s EU referendum happening tomorrow, the pressure is ratcheting up within political and economic circles.

Up until a few weeks, most polls were giving Remain a few point lead, but that has all changed in June.

Now, recent polls indicate the nation is 55% in favor of ditching Brussels.

Of course, polls need to be taken with a pinch of salt, but the recent swing is significant nonetheless.

Read on for more details on the referendum and how the outcome will affect Gold and Silver trading.

The Relationship Between Brexit And Gold

Gold is a classic safe haven for investors that tends to go up in value in periods of uncertainty.

This article will lay out the current polls and how we got here, the effect they are having, how a Brexit vote will impact Gold, and will finish with the wider significance of Brexit.


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A Game Of Polls: A Song Of Dice And Ire

Below is a timeline showing the aggregated poll results since October 2015.

As you can see, it’s been neck and neck for much of it, with Remain usually enjoying a lead, interspersed with brief moments of Brexit glory.

j16.15

What isn’t shown is that Brexit is now a ten-point lead, putting it at a similar leader to the sustained lead Remain held in January, visible in the middle of our line graph.

Polls Are Not Gospel 

Obviously, polls are not definitive, and there is a big issue with differing results of different polling methods.

For example, telephone polls tend to get more definitive results due to people being pressured to make a decision, but a large number of polls are online.

There are also disparities in results depending on whether the poll is over the telephone or online.

This is largely due to telephone polls reaching an older audience, a demographic much more likely to be voting Leave.

Online polls reach a much younger audience, and young people are 80-90% in favor of remaining.

Older people tend to be more nationalist as the young of the UK have been brought up in multiculturalism and pan-European ideas.

They also enjoy traveling and working abroad, visa-free, something leaving the EU could affect.

Where has this lead come from?

In the last few months, the Leave campaign has seized upon the immigration argument, and it has proved to be working.

What is noticeable is the immigration argument being used by those from whom you might not expect it.

Fears of immigration have historically been limited to the native lower-working-class demographic, who fear that immigrants will affect their ability to find jobs, obtain housing, and use public services.

However, now even the middle and upper class and even second generation immigrants are voicing their concerns.

This could prove to be significant: if people from immigrant backgrounds are opposed to current immigration policy, you know something is up.

Why the price of Gold and Silver will be affected

Mercantilism, as opposed to trade, used to be the dominant economic philosophy.

The belief was that true wealth lay in accumulating as many precious metals as possible, and trade was a zero-sum game, beneficial only to the side with more resources at the end.

While much more nuanced economic theorem and mutually beneficial trade policies have taken hold since then, the role of precious metals, notably Silver and Gold, have remained at the forefront of many traders’ and investors’ minds.

Gold has remained remarkably valuable over time, even if price volatility affects it as much as other resources, as shown in this graph.

j16.16

With a peak in 2011 of $2000 an ounce, after assets were stripped of value and people resorted to the safe-haven of gold, it has bounced back since a low in November of around $1000 an ounce.

An expert lays it out

But don’t take our word for it.

James Butterfill is research and investment strategy head at EFT Securities, an asset-management firm with some $30 billion under its management.

He explains that a Brexit would short sterling and see a significant pick-up in the price of Gold.

He predicts $1,400 an ounce as a realistic expectation in the event of Britain withdrawing from the European Union.

He bases this off the last time, a shock to the EU approached, when Greece nearly left the Eurozone in summer of last year.

It was during the peak of the Euro crisis, and Greece had voted for a party whose manifesto outlined a refusal to bow down to the European monetary institutions who were demanding austerity.

It all worked out in the end, with a deal being stuck.

But elevated futures positioning was symptomatic of the panic surrounding the crisis.

Gold now represents 14% of the ETF Securities’ asset management, after a $2.6 billion flow to the metal this year.

Butterfill cites:

  • Brexit
  • Possibility of a non-establishment president taking office
  • The Fed’s interest-rate policy, staying the course of raised interest rates

All three represent risk events, so gold surges in popularity.

The $1,400 would not just be a short-term blip, but rather a long-term movement.

Butterfill mentions that the speech from a top-ranking Fed executive mentioned Brexit, such is its significance.

ETF’s predictions ratified by TD

TD Securities, a firm with around a $1 Trillion of assets under management, has echoed these predictions. They assert that silver could reach $20 an ounce and gold $1,400, with swift corrections if Britain stays.

However, because of the possible long-term implications of Brexit, the sky is the limit for the precious metals as the future is so uncertain.

Interest rates will also be important.

CME FedWatch, a think-tank gauging market reactions to Fed announcements, has given a very little likelihood if an interest rate hike soon:

  • 2% for this month
  • 21% for July
  • 59% for any point before 2016 is up

Compared to the market’s certainty of one or two hikes earlier for the year a few months ago, this is significant.

Regardless, raising rates won’t mean lower gold or silver prices.

The current swell in value started after the increase in interest rates in the last quarter of 2015, the first since before the financial crisis of 2008.

Historical evidence shows rates and precious metal prices rise together.

Taking advantage as an investor

Our advice is to buy precious metals every time the Fed mentions raising interest rates, as people irrationally panic and sell these goods.

Some analysts see the price of gold going even further to $1600 an ounce, with silver at $27 an ounce.

Brexit really could change everything, and experts are refusing to rule out 2011-like surges in the price of Gold (when it reached $2000 an ounce).

Another piece of advice is to look to precious metal mining stocks as this is where there are big money-making opportunities to be had; some silver stocks have increased 270% this year, with a doubling of that needed to reach recession-level prices.

Other sources, and the effect on Sterling

The UK business insider recently spoke of a 10% hike in gold prices if Britain leaves.

It’s already gained 20% this year.

And the important thing is that there will be no opposite reaction if Britain votes to remain and keep trading as part of the European Customs Union.

James Steel of HSBC, argues that a vote to leave will result in a buying frenzy, a vote to remain will not result in an opposite selling frenzy.

Sterling would sharply rally if there were a vote to Remain, but gold would not lose out by more than a few percent.

With sterling currently 1.27 to the Euro, a remain vote could see it gain ten cents on the Euro.

Uncertainty is gold’s best friend

Everyone knows that investor’s most prized asset is security and stability.

If you can guarantee economic and wage growth and job creation, investors will continue to fuel economies, expecting favorable economic climate to allow a consistent return.

According to the following institutions, Brexit will lead to a reduction in the UK economy of 1-9%:

  • The World Bank
  • The European Central Bank
  • The Institute for Fiscal Studies
  • President Obama (he is as important as any institution)
  • THE IMF

j16.17

Anything that happens to Britain has a knock-on effect for the rest of the world, as it’s the fifth-largest economy.

So let’s talk about the likelihood of this.

How likely is a Brexit, and what will it mean for Europe?

It is not a great time for the EU.

A new 7.5 billion Euro bailout has been agreed upon for Greece.

There is weak economic growth everywhere except Britain and Germany.

A migrant crisis that is threatening to rip the union apart only seems to get worse.

If Britain leaves, it will be significant for many reasons.

Firstly, the EU will lose a net contributor, and the second biggest economy (or third, behind France, depending on how it’s measured).

The German Finance Minister recently ruled out the possibility of Britain having access to the single market if it voted to leave.

This alternate membership, as Switzerland and Norway have as members of the EEA but not the EU, has been touted by many on the Leave side as a real possibility, and to have it struck down now is significant.

However, it doesn’t seem to have had much of an effect on the polls.

In fact, the rather cynical and, offensive language used by the Germans, both by their politicians and their media, have convinced many of the need to leave the union which many see as being dominated by the Germans.

Some have claimed that Brexit could lead to another recession, such as Mark Carney, head honcho at the Bank of England.

And as previously mentioned, gold enjoyed its highest surge during the last recession, when investors swapped assets and liquid cash for the safe haven of precious metals.

If Greece was big, Britain is huge

The Greek crisis last year was seen by some as threatening the integrity of the Eurozone, with talk of them leaving and reverting to the drachma.

It didn’t happen, but even the talk of it sent ripples to the wider economy and things really looked apocalyptic for a while.

And Britain represents a much greater proportion of the EU than Greece does of the Eurozone, some five times that proportion.

Final word: recent movements as an indication of Brexit’s importance

Tragically, a very staunch Remain-supporting MP was murdered.

Jo Cox was a Labour Party politician who had strong views on the EU.

While mostly hot air, there are some rumors about a possible postponement of the vote because of this.

Following this news, we saw gold sell-offs, reducing its price by 1%.

So just the possibility of a postponed vote was enough to make some investors think Brexit was off the table, and thus the need for gold reserves was lessened.

This is mostly down to exuberance and excitement among traders in the lead up to the referendum, where big news of any sort that could be politicized will spark potentially irrational market activity.

It is a good example of how the vote might affect gold prices, however, while not being significant in itself.

 

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