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LAWRIE WILLIAMS: Brexit: Crunch day for gold and sterling at hand

By the time many of you are reading this, we Brits will be on our way to the polling stations to decide on the country’s future path.  Will we go for supposed economic safety and vote to remain a member of the European Union?  Or will we vote to separate from the EU (the Brexit option) with the uncertainty that suggests and try to stand on our own two feet again and regain our sovereignty from a supra-national European Commission, Parliament and Court of Justice?

To be honest there has been so much claptrap spouted by both sides of the political argument that the person in the street will be having a horrendously hard time in deciding which way to vote.  In the end it may boil down to which proponents of which side appeal most.  And the answer here is trust is lacking in all parties to have provided any concrete arguments as to which way to vote.  Quoted statistics from both sides appear to have been drawn out of thin air and are widely distrusted and seldom have major politicians opened themselves up to such scrutiny with their almost increasingly dubious one-sided statements.  One suspects the only major politician who may come out on top at the end is Labour leader Jeremy Corbyn who seems to have kept a deliberately low profile during the debate and thus won’t have been charged with the ‘liar’ tag bestowed now on most of the major proponents of both the Remain and Brexit options.  Indeed Corbyn has appeared pretty ambivalent about the whole exercise.  While officially toeing his party’s Remain line, he is perhaps a Eurosceptic at heart so a result which goes against the party’s official line will not really tar him with a ‘defeated’ brush should Brexit prevail.

But will Brexit prevail?  The volatility in the opinion polls has tended to emphasise the huge polarisations within British society.  The similarities with the Scottish independence referendum of 2 years ago in this respect are an interesting parallel.  Here the result was a vote for ‘safety’  in terms of retaining the status quo, rather than the uncertainty of a break.  But this went down to the wire and might have gone either way.  The odds probably are that the same will happen in Thursday’s vote, but the polls, and the bookmakers, may be underestimating the strength of the groundswell of anti-EU feeling among the general populace.  Whether this will become apparent in a Brexit vote, or whether presumed safety and the status quo will prevail here in anyone’s guess.  One doubts if either side will be confident of a positive result.

Certainly there is almost unanimous acceptance by economists that a Brexit will be damaging long-term to the UK economy and be a prelude to several more years of austerity.  However the Leave campaigners will argue that these same economists are often wholly wrong in their forecasts and tend to play for so-called safety in their assessments.  The economists will argue that the UK has done better than virtually any other European nation in terms of GDP rise since joining the EU, although sceptics may argue that this was due more to Thatcherite reforms than to EU membership.

So what will the result mean for gold?  The global financial world has somewhat belatedly come to realise the implications of a vote to leave the EU will likely have huge adverse financial and geopolitical implications.  This is not only within the UK, but also throughout Europe where many countries have been losing trust in the EU.  And through the global interlinking of financial institutions, a Brexit vote could well have an even broader impact.  In the extreme it could even be a trigger pushing the world into a global recession.  But that’s a very pessimistic viewpoint and probably unlikely – at least on its own.

Undoubtedly there’d be a knee-jerk reaction depressing the pound sterling, but would there be much more than that?  There’s been considerable play made by the Remain camp that the UK would have to renegotiate all its trade deals with other EU nations given over 40% of UK exports are to the EU.  They conveniently forget to mention that over 50% of UK imports come in from other EU countries. So it would be very much in the interests of these same EU nations to compromise here and compromise quickly.  Indeed a Brexit could, over time, be good for the UK economy, and balance of payments, given more freedom to negotiate trade deals with non-EU nations unfettered by EU red tape!  But then would UK red tape be any better!

Immigration has been the big ‘selling point’ for the Brexit campaigners, but again there are lots of misleading data quoted.  Yes it would give the UK perhaps more powers to restrict ‘unlimited’ access to other EU nationals which has become significant because of the increase in EU membership to encompass a number of much poorer nations.  (In theory the UK has the world’s 5th largest economy on its own despite the country’s small geographical footprint so is an attractive, if overcrowded, destination for immigrants).  However to restrict the flow of immigrants is far easier said than done.  Many fill vital positions in sectors of the UK economy.

Sovereignty is another big issue here with EU institutions being able to override British domestic ones – but many of these have been for the good.  It’s all a question of perception here.

So back to gold.  It does tend to be a bellwether for economic uncertainty, and as such a Brexit vote would almost certainly drive the price higher – particularly so for the UK resident who would likely see the pound drop in value – George Soros reckons by 15-20% - thus increasing the pound sterling price of gold very substantially.  (By all accounts gold demand has been very strong in the UK over the past month or two as high-worth individuals are seeing it as wealth insurance.)  But beyond that it would be a case of seeing how quickly things settle down.  One gets the impression, whether accurate or not, that the UK government has made few, if any, contingency plans for a UK exit so there could be slow progress here!  In the U.S. the re-commencement of interest rate increases might be further put off which would also be gold-positive.

On the other hand a decision to Remain a member of the EU will likely bring a collected sigh of relief, certainly throughout Europe, and probably further afield.  It could make a U.S. interest rate rise decision nearer, and less uncertainty, and the earlier commencement of interest rate increases, would likely dent the gold price – at least in the short term.  But our views of the longer term prospects for gold remain positive.  We see physical supplies tightening further and there appears to be continuing gold investment interest in the West countering weakness in Asia.  (Gold ETF investment has risen hugely this year and has been continuing to do so even as recent opinion polls see the UK remaining part of the EU as the most likely outcome.)  The fly in the ointment is perhaps the apparent fall-off in central bank purchasing, but it remains to be seen whether this is just a temporary hiatus or a longer term pattern.

22 Jun 2016 | Categories: Gold

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