LAWRIE WILLIAMS: Brexit in the balance. Gold surges. Silver may begin to fly
With the Fed decision not to increase interest rates at its latest meeting, in part because of uncertainties over the possible effects of a UK Brexit vote on the global economy, and UK polling seeing Brexit as a more than distinct possibility, gold surged thought the $1,300 level overnight. At one point it reached $1,310 – its highest level for almost 2 years. And silver has begun to move again too – some would say not before time. It reached over $17.70 and while it has already exceeded that level earlier this year it tends to be much more volatile in its price movements than gold, and a continuing gold price increase could well see silver shoot up as the Gold: Silver ratio tends to come down when gold rises. It is currently at 73.75 (still a historically high level) and a fall below 70 and a gold price at $1,310 would see silver around a dollar higher which would certainly give some heart to the long suffering silver investor.
On the possibility of the UK electorate voting to leave the European Union, I would like to think I had been one of the earlier commentators noting the strong underswell of anti-European Union feeling in the country when all the polls were predicting a comfortable Remain vote. I had also been suggesting that UK investors in particular should look to investing in gold as a wealth protector given that if the UK referendum, now only a week away, should result in a Leave vote – the Brexit option – there would be a knee-jerk reaction knocking the pound sterling down sharply against the dollar (perhaps only temporarily so – these things tend to be overdone), while the gold price would likely rise on fears of considerable further economic disruption within the Eurozone and, perhaps, globally – a point now being made by Janet Yellen in her statement on the FOMC meeting deliberations this week.
So what are the chances of a Brexit vote next Thursday? The UK establishment, which is for maintaining the status quo has really been firing its big guns in a last ditch attempt to ward off separation. British Chancellor George Osborne has promised an emergency budget likely to raise taxes and cut public spending should a Brexit vote take place, although whether he would be able to get such measures through a divided Parliament is somewhat less certain. The whole Remain campaign has revolved around fears of the economic consequences of a Brexit vote, dismissed as scaremongering by those who want the UK to leave.
The Brexiteers on the other hand dismiss much of the presumed economic consequences put forward by the Remain camp as hugely over-exaggerated and have largely based their campaign on the perhaps more emotive issues of regained sovereignty and the cessation of uncontrolled immigration from EU member states which has become significant with poorer countries joining the EU, and more in the pipeline. It does seem that there may be a growing number of people prepared to put up with some adverse economic consequences in order to regain these controls.
In short it pretty well boils down to head versus heart. A trade-off between the economic argument 9 which mostly suggests remain and the sovereignty one which suggests leave. The latest polls suggest the Leave camp may be winning, but overall it is too close to call and could go either way.
A Brexit (Leave) vote would likely give a big boost to the gold price as it suggests a longish period of geopolitical uncertainty as Europe tries to get to grips with the decision, given it would give heart to the already growing anti-EU sentiment in countries like France, Spain and Italy in particular. A remain vote might cap the gold price for a time – even bring it down a few pegs – but in our view gold’s fundamentals remain strong and it would be unlikely to do lasting damage.