The Impact of Brexit on GoldJohnathan Douglas
It’s going to be at least a couple of months before negotiations for Britain’s exit from the European Union can begin. It will be probably another two years after that before they take full effect. Even so, though, Brexit has had a tremendous impact on the world economy, and will likely continue to do so for the foreseeable future. We’ve seen the affect it’s had on currency values and on the stock market. But what about precious metals? How is Brexit affecting the price of gold?
Hard Brexit or Soft Brexit?
One of the key issues in play is just how thoroughly the UK intends to sever their ties with the EU. A “soft Brexit” would dissolve their membership in the Union, but have them remain part of the EU single market, which allows people and goods to travel freely between countries.
However, Prime Minister Theresa May has expressed her desire for a “hard Brexit.” That would mean leaving the market as well. Her stated reason for this is to restrict immigration. But it would also have the effect of limiting trade between Britain and EU member countries, likely even leading to tariffs on imports, which would in turn raise prices for consumers.
May has stated that she does want the country to maintain a relationship with the customs union, in order to avoid such troubles and allow trade to remain easy. However, an entirely new trade agreement would have to be negotiated, voted on by Parliament, and agreed to by both Britain and the EU, in order for that to happen. The UK would also be required to negotiate new, independent trade deals with each of the 60 countries that they previously did business with through the EU.
The Effect on Gold
Prime Minister May covered many of these issues in a speech she gave in January. The economic uncertainty that it represents has caused a significant spike in the spot price of gold. Even before the speech itself, gold went up by 0.5%, in anticipation of what the PM was expected to say. In fact, the value of both gold and the U.S. dollar rose simultaneously, which is rare. However, given that it’s a reaction to turmoil in the UK economy, it’s understandable.
Even though Brexit is a matter for the UK and Europe, the United States stands to be affected significantly as well. When the results of the vote were first announced, the U.S. stock market dropped by about 5%. As the deal goes forward, American companies doing business with Britain (of which there are many) could suffer from the negative effects on the UK’s economy, causing a ripple that carries over into our economy.
It’s difficult to know exactly how our economy will be affected, but that uncertainty is one of the things that makes the situation so dangerous. Therefore, in order to protect themselves against whatever happens as the process continues, many investors are turning to gold as a safe haven, which will retain its value in the face of market turbulence. This increased interest is, in turn, helping to boost the price of gold.
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As previously mentioned, the UK’s process of severing ties with the European Union is going to be a rather long one, and regardless of the economic decisions that are ultimately made, we can expect further market volatility resulting from just about any new development that’s announced. Therefore, it’s reasonable to assume that gold will continue going up as well, in response. Plan your investments accordingly.