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LAWRIE WILLIAMS: Brexit loses momentum. Gold drops. But it ain’t over yet!

Gold surged again last week as the world suddenly came to the realisation that the British public might actually vote to leave the European Union (EU) – the Brexit option.  The polls seemed to be moving in the Brexit direction and the momentum seemed to be all with the ‘Leave the EU’ option.  And then came the tragic murder of well liked and respected Labour Party MP, Jo Cox, an ardent Remain supporter, apparently by a perhaps mentally unstable follower of some of the right wing fringe parties in the Leave camp.  He is alleged to have shouted ‘Britain First’ as he shot and stabbed the small of stature female MP, which somehow made the event even more appalling.

There followed a 2-day suspension of campaigning on the referendum and when that was over the Brexit movement appeared to have lost its momentum and most subsequent polls put Remain back in the lead.  The markets breathed a sigh of relief, the pound recovered several points, and when they re-opened on Monday – or rather on Sunday evening U.S. time - the gold price dropped like a stone falling around $20 in a matter of minutes, although this had something of the pattern we have seen before with massive sales to depress the market at a time when markets are extremely thin.  (On this occasion at 6pm Sunday New York time right at the opening of the New York Globex market and even before opening of trading in China.)  Gold subsequently picked up a few dollars back to above $1,290 before drifting down again last night.

But, ‘it ain’t over ‘til the fat lady sings’ as the saying goes, and even after the Remain poll recoveries the referendum vote remains too close to call.  It could even boil down to which faction is most motivated to vote, or even the weather which could affect the number of people who will venture out to the polling stations. One suspects the pro-Brexit faction may be the more motivated as the appeal here is for the heart, rather than for the country's economic future.  The Remain camp has largely condusted a ‘fear’ campaign which has concentrated on coming up with all kinds of mostly unsupported data as to why Britons should stay in the EU. But much of this is seen as highly exaggerated by the Brexit camp and may well be being ignored.   Indeed the poll recovery by the Remain faction could even motivate a higher turnout by those who wish to leave.  Staying in the EU is certainly not a foregone conclusion yet.

But the odds do seem to favour the Remain camp.  Indeed the bookmakers who usually get it right have suggested this all along.  The pound sterling has recovered strongly on the seeming increasing likelihood of a Remain vote prevailing.  Fears about a sharp fall in parity with the dollar should Brexit come out on top are almost a foregone conclusion – George Soros has come out with a prediction of a fall of 15-20% for example.  And also in the U.S. the Brexit possibility has been one of the key factors in the Fed. continuing to delay any decision for another interest rate rise given the uncertainties such an outcome might have on the European, British and global economies.  There is real worry here.

While the opinion polls suggesting a Remain vote are in the majority, they are basically too close to call and with a couple of days remaining before the vote, politicians and economists are nervously awaiting the outcome.  One key factor that could affect the U.K. should Brexit be the decision of the people is that government ministers appear to have made no contingency plans for an exit.  It would take at least two years for the withdrawal process to be negotiated so there should be no direct immediate impact except perhaps in the markets themselves, but one doubts that would be long enough to renegotiate all the necessary trade deals that would result, while hostile EU politicians might want to make this difficult lest the U.K might actually be seen to be benefiting from a Brexit decision.  Anti-EU feeling is running high in some other EU nations – notably France – which has a presidential election looming, due in April/May next year, with likely right wing anti-EU candidate Marine Le Pen perhaps even ahead in early polls.

Gold would undoubtedly resume an upwards path should the U.K. vote for Brexit.  How it would perform following a Remain vote is less certain.  One suspects it would stutter before resuming the status quo ante and continue its recent rise on the fundamentals which have seen it perform so well since the start of the year.

Interesting times in the U.K., Europe and globally!

21 Jun 2016 | Categories: Gold

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