Metal Prices Post Brexit

With Britain voting by a narrow margin to leave the European Union on Thursday, we are truly witnessing a historical moment.

If it stays the course, the ramifications for the global economy and the future of Britain will be truly fundamental in nature.

If its politicians backtrack and the movement fizzles out, it will be a watershed moment in the future of democracy as the guiding principle of national decision-making.

In this article, we go through its effects on the price of metal, in both the present and near future, but first a few words on the referendum itself.

It actually happened

While it remains the most cherished political system in most developed countries, and is put forward as the epitome of human political development and most virtuous and efficient political system, democracy has fundamental problems, pointed out by many of its most arduous proponents.

Churchill famously mused of the biggest argument against it being a short conversation with the average voter.

People often vote against their best interests, and many political commentators and citizens have said that the referendum should be ignored or re-run, as the result was based on lies and misinformation.

Notwithstanding that, the result happened.

Whether it was the belief that immigrants were leading to a reduction in the living standards of the working class, the European Union being an undemocratic and opaque governing body imposing unnecessary or excessive regulation, or the need for Britain to switch its focus from Europe to the Commonwealth and the rest of the world, people voted to leave an institution it had been part of for 40 years, in some way, shape, or form.

Should we have even had a vote?

Many people, both before and after the referendum, have pointed out the madness of leaving such a monumental and complex decision to the electorate.

Even if you were to ignore the media and conduct your own research (during which you will still struggle to come across a source without bias), it would be difficult to make a decision.

Most people voted on either feelings, personal interest, or as a middle finger to the establishment:

• Significant feelings for the Leave side included nationalism, patriotism, and sovereignty: the Remain side sentiment was one of Pan-Europeanism, compassion, and solidarity
• Personal interest for the Leavers would include issues such as a desire to see less non-English people in their own towns or less regulation for their business; Leave self-interest could include a desire to be able to travel and work freely in the European Union, or have a wide labor pool for their business (this contradiction shows itself in the split in the business world between Leave and Remain)
• The middle-finger-to-the-establishment line of thinking is obvious: ‘politicians are in it purely for themselves and don’t care the little people; they’re telling me to do one thing, so I’ll do the other’

These factors, coupled with believing whatever their corresponding leaders told them, whether it was economic apocalypse by the Remainers or stampedes of Turks in future (as they gain EU membership, a contentious topic, but a frivolous one as it’s unlikely) by the Brexiters, probably make up the majority of voters’ reasons for their decisions.

However, saying that they shouldn’t be given a vote on this because they couldn’t make as calculated and rational a decision as politicians is a dismissal of the principle of direct democracy, and a criticism of democracy as a whole.

Shouldn’t all decisions be left to the experts then, including during a general election?

Shouldn’t a technocracy, more like Singapore, be the best system if decisions should be taken by those with adequate knowledge, regardless of how finely their views correlate to the wider public?

Questions for another article perhaps.

Now on to the more important stuff.

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What’s the price of democracy? Short term

While Gold has seen its price skyrocket, industrial metals have seen a fall in price, for two simple reasons: the dollar has gained on the pound, and economic uncertainty is now rife globally.

Below is a graph showing the US dollar index since the beginning of the year:

We’ve circled the rise at the end of the graph in red.

You could abseil down that no problem.

Sterling has fallen sharply since the vote as has the Euro.

So holidaying in Europe won’t be the financial disaster many Brits expected, at least in the short term, but crossing the Atlantic will see them poorer than they would have been at any point the last 30 years.

As such, with a strong dollar bearish for the prices of industrial metals, base metals fell all of Friday.

Whilst not definitive, the pound and the euro will continue to fall as long as there is such uncertainty around Britain’s political and economic future.

The worst case scenario, Britain cutting ties and trading with Europe on WTO (World Trade Organization) rules, where there would be tariffs, would be disastrous, and it is this risk that is scaring investors.

Such was their fear, a huge selloff in global stocks was kick-started by the Brexit vote, including in the US.

With certainty already rampant as corporate profits decline, job growth stalls in the US and China, and doubts about the Fed’s capabilities regarding growth encouragement, that has compounded the effect.

This is in addition to some countries seeing recessions. We are now eight years since the 2008 financial crash, and in terms of the cyclical cycle, it would not be surprising for another one to afflict large parts of the world.

An already weak market is being hurt further by Britain’s decision to leave the EU.

Stock markets and metal prices don’t correlate on a month by month basis, but the latter cannot be expected to rise at a time when the former is in such turmoil.

How about the medium to long term?

In short, we predict that as the dollar falls after its currently monumental rise, and producers cut their supplies, metal prices will actually rise.

The idea is that with continuing falling stock markets, the Federal Reserve will backtrack on its September show of confidence by potentially decreasing interest rates or perhaps even put them into negative territory as some central banks have done recently.

These include the European Central Bank and the Bank of Japan, who together represent a sizeable portion of the world economy.

This wouldn’t be great news for those investors looking for strong dividend yields, and it would put further pressure on the dollar.

However, it might prove necessary as markets continue to take a battering, and no one wants another 2008 slump.

Currencies will stabilize after the EU and Britain decide what their future relationship will be (more on this later).

These are just theorizations, and you metal investors need better than that.

Our advice is to monitor the markets continuously and keep up to date with the latest in political and economic developments from the USA, Europe, and China.

Volatility is certain, so batten down the hatches and prepare to weather this storm.

What about Gold?

Gold, however, has had a field day and any smart investors who followed our advice would have seen their investment grow thanks to Thursday’s vote.

The following graph shows the sharp growth in price upon the news that Britain had voted out in the early hours of June 24th: 

We’ve spoken about gold’s role as a safe haven for investors thanks to its prestige and non-corrosive qualities.

Over the last 100 years, it has held a remarkably constant price, even if it suffers turbulence from time to time.

One person who shrewdly gained from Brexit was George Soros.

You may remember him as the man who committed treason and bet against the pound in 1992 when it was withdrawn from the Exchange Rate Mechanism that had proved to be nothing short of a disaster.

He reportedly gained £1.5 billion from this move.

Prior to Thursday’s vote, he purchased some $200 million worth of gold, and you can calculate his gains yourself by looking at the increase in its price in the graph above.

Final Word

Cameron initially promised the referendum as a manifesto pledge in order to stifle the monumental rise of the UK Independence Party, commonly known as Ukip.

He also attempted to appease Eurosceptic members of his own party, almost half of which declared they would be voting to Leave.

Cameron expected a re-run of the Scottish referendum, where economic arguments prove to win the day in the face of fervent patriotism and emotional campaigning about sovereignty and independence.

This backfired drastically.

The Financial Times predicted that while the base price of industrial metals would hardly be affected by a vote to leave, metals like copper, aluminum and zinc closely track the US dollar’s movements, with copper being the most strongly affected by this.

Meanwhile, Metal Bulletin pointed out that Britain as an export target represents around 1% of world metals, and so any recession it experiences because of a loss of single market access won’t affect the wider metals market drastically.