Watch out Gold, here comes Brexit

March 20, 2017 1:10 pm

A man looks at an anti-Brexit billboard in London, Britain, March 6, 2017. REUTERS/Stefan Wermuth

Brexit. The word that has turned financial markets on their heads. That has galvanised Gold’s price. That challenges even the Federal Reserve interest-rate policy’s influence on trading and investing.

British Prime Minister Theresa May made it clear that March is the month she intends to start exit negotiations with the European Union. So, what can we expect from the Gold price over the next few weeks as the economic and political thriller dominates the headlines?

 

March past?

March started badly for Gold’s value. Prices were pressured and fell by 2.8 percent in the first fortnight of the month.

The factors impacting Gold’s value negatively – at least in the bulls’ opinion – are many. US interest rates appear set to be raised three or more times in 2017. The tide of investment is flowing to USD-denominated assets, dulling Gold’s shine.

On March 10, the precious metal’s price fell to a low of $1195.89 per ounce under the pressure of a hawkish Federal Reserve.

But luckily for the bulls, Brexit’s influence on the Gold price is anything but negative.

 

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Looking back at what happened on June 23-24 during the referendum, there was an incredible one-day surge of 22 per cent in the Gold price. Nine months later, the yellow metal started to spike amid reports that PM May could trigger Article 50 even earlier than expected.

On March 13, the price skipped over $1,210 per ounce as a sign of things to come when the negotiations actually start.

Triggering Article 50 itself would have little impact on financial markets. I don’t believe it’ll have a material effect on Gold prices either, as traders have already priced it in.

It’s the events that follow Article 50 that are more likely to trigger volatility for Gold. The stakes are high and the sentiment between the negotiating sides is anything but positive.

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Exit strategies

So, for the financial markets, it’s mainly about how the exit talks go with the EU. The specifics of the Brexit deal will determine whether investors feel the need for safety, thus supporting Gold prices.

On the downside, the current political narrative is combative. Negotiations could get ugly, meaning negative economic impacts on the UK and EU economies.

If the four freedoms are tossed out early, high import and export tariffs and restrictions on commerce are in the UK’s immediate future.

This is a lose-lose situation for both jurisdictions and currencies, as the EU will lose easy access to the world’s fifth-largest economy; the UK. In this worst-case scenario, Gold will most likely have support as investors run to safe havens.

On the upside, the Brexit talks could move in a constructive direction, relieving investors’ fears. Practical solutions could be found to the issues of freedom of trade between the two jurisdictions.

As the two entities decouple and the relationship shifts to a purely economic one, investors are likely to minimise the Brexit as a risk to their portfolios.

 

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Strong stances

Both sides are taking strongly definitive positions at this point. It’s hard to say how much is posturing and how much is actually meant.

Consequently, the economic risks haven’t vanished and Gold is still ripe to be mined as a safe-haven bet for the rest of March.

The situation is unprecedented in modern economic history. The tight two-year Brexit schedule will almost certainly bring volatility to financial markets, benefiting Gold bulls.

However, the bigger risk is if other EU nations decide to follow the same path as the UK. If Nigel Farage is right and ’radical change’ is coming, then the Brexit and Donald Trump’s shock US presidential election were just the start. In this scenario, things will be much more challenging economically speaking. And Gold will become much more shiny to investors seeking safe havens.

 

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Chief Market Strategist for the Gulf and Middle East region at FXTM, and host of the popular evening business show on CNBC Arabia, Bursat  

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