Brits and Europeans may find Gold attractive as Brexit possibility looks stronger


Here’s a lightly edited version of an article I published on the website a day or so ago following the two Guardian opinion polls – one by telephone and one online – suggesting that a UK vote to leave the EU (the Brexit option) is a real possibility.  One suspects one result will be a redoubling of the Remain campaign in the 3 weeks up to the actual referendum and with most of the big guns supporting it, this may swing the final vote back to Remain.  But the Remain camp will now be much more nervous about the final result!

In recent weeks the majority of opinion polls in the U.K., and perhaps even more significantly the bookmakers, had been predicting that the U.K. electorate would be voting to Remain in the European Union by a comfortable margin rather than the Leave the EU option (Brexit).  Indeed some commentators had virtually written off the likelihood of Britain voting for Brexit.  The fear of the unknown in terms of the potential effects on the British economy, in particular, which has been highlighted by the Remain camp, almost ad nauseam, appeared to be winning the day.  True there had been the occasional outliers suggested by some online polls which were often disregarded as being less likely to be accurate than telephone polling which was consistently showing strong support for Remain.

But the latest polls for The Guardian newspaper by polling company ICM, which conducted simultaneous online and telephone polls, have really put the cat among the pigeons with both suggesting a 52%-48% Brexit lead, despite most of the country’s heavyweight politicians, including the leaders of the major political parties – Conservatives, Labour, Liberal Democrats and Scottish National Party – all being strongly in the Remain camp.  The only political party wholly in favour of a Brexit is UKIP, led by the charismatic Nigel Farage, which the mainstream supporters of a vote to leave have tried to sideline given the perceived make-up of  many of UKIP’s followers – seen in something of the same light as Marine Le Pen’s Front National in France.  The remain camp has been supported in its dire warnings of what an economic disaster it would be for the U.K. to leave the EU by such major global figures as U.S. President Barack Obama, German Chancellor Angela Merkel, IMF Head Christine Lagarde and a host of other global political and economic heavyweights.

The trouble is that a large sector of the British public is ever more distrustful of statements from major politicians and just doesn’t believe, or don’t care about, the figures being bandied about.  They are probably prepared to accept a limited downturn in the U.K. economy in exchange for winning on the arguments which may appeal most to the person-in-the-street.  These include regained Sovereignty (in other words getting away from U.K. laws being subject to override by EU ones, and the pre-eminence in the legal system of the European Court of Justice); fear of potential unlimited immigration by EU nationals (probably not a problem when the EU was much smaller only incorporating the most wealthy European nations, but now with a 28-nation EU, and the prospect of it being further enlarged as time goes, by including countries with some much poorer economies, it becomes a worry in terms of the nation finding it hard to cope with the demands of high immigration levels completely outside its control); and border security in terms of terrorists coming in via the EU open borders (which is an additional aspect of the same worry).

Perhaps the most interesting assessment of what would happen to the U.K. economy came from the well-respected Institute for Fiscal Studies (IFS), an independent think tank (if anyone in this argument can be truly seen as truly independent).  It assessed that leaving the EU would lead to two more years of austerity as the economy struggles to get back on track post a Brexit decision.  However it also suggested that some of the economic disaster figures being put about by the vote Leave campaign were somewhat exaggerated and the U.K economy would eventually recover, but that it could take some time.  It also assessed, on the other hand, that the economic predictions put out by the Brexit campaign were ‘absurd’.  No words minced there then!

Latest analysis from the OECD also confirms the opinion that the U.K.’s economy would be hit significantly in post Brexit years should there be a leave vote but that also there would be “substantial negative consequences for the United Kingdom, the European Union and the rest of the world”.

But it could be the sovereignty issue which wins the day.  The British, as an island nation, are inherently insular and while the populace largely accepts the country is part of Europe geographically, the idea of closer political union into a European Federal State – the avowed aim of many EU intellectuals – appals them.  And whatever the politicians say and promise, if Britain remains in the EU, there is a strong belief that there will indeed be an ultimate progression into absorption into a European mega-state – by then probably incorporating additional nations including the latest political football in this respect – Turkey.  Someone on the Brexit side gave an undoubtedly hugely exaggerated estimate that 12 million Turks would want to move to Britain if it became an EU member (and would have the right to do so through the EUs open borders policy).  This is undoubtedly a ludicrous figure, but such numbers stick in people’s minds.

So what does all this mean for gold?  The geo-economic uncertainty engendered by a Brexit vote would probably lead to a higher price.  However an immediate knee-jerk reaction would likely see a dive in the value of the pound sterling against the US dollar and a likely decline in the value of the euro too given the boost a Brexit would give to anti-EU sentiment in many other member states.  Given that the gold price is set in US dollars there would seem to be a strong logic for investors in the EU, and in the U.K. in particular, to add some gold to their portfolios as insurance – and an insurance which could well appreciate even more given that the yellow metal would likely react positively to a Brexit decision.

There is obviously a slight risk in this policy.  Should the Remain vote prevail – and believe me there will be a huge amount of effort by the big political guns and most of the media, which tends to be Remain supportive, to persuade the general public of doom and gloom should the electorate vote to leave – there would be a collective sigh of relief and the pound and euro would likely rise as a result and thus the gold price fall in the pound and euro.  But we feel any such surge would be shortlived and there would be a quick return to the status quo prevailing beforehand.  But the positive fundamental prospects for gold in the medium to long term would remain given doubts about physical gold supply availability in the light of still huge demand and some major global geopolitical uncertainties .  The downside risks are thus quite low, but the positive upside should Brexit happen would be strong.  Gold has always been a wealth protection insurance asset and this possible short term event, and its likely immediate effects, would seem to make this a very wise insurance policy to follow.  Indeed the positivity would likely be further advanced as there would be some significant destabilising global knock-on effects, as the OECD warns, which would also be likely gold price positive.

And looking only a few months further ahead there is also the possibility, growing by the day it seems, of a Trump Presidency in the USA.  Now what would that mean for gold?………..

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