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LAWRIE WILLIAMS: Ill wind boosts sterling gold price

In the words of the proverb – ‘It’s an ill wind that blows nobody any good’ and the pound sterling has had a couple of such in the last two months.  First there was the unexpected Brexit vote to leave the EU which sharply boosted the gold price in pound sterling terms – and this now appears to be a gift which keeps on giving for UK residents.  The pound not only weakened dramatically against the US dollar immediately following Brexit, but has also stayed weak since – and then there was the dramatic flash crash of the pound sterling on Asian Markets this morning which, at one time took sterling down around 6% against the dollar.  With the gold price set in dollars that effectively meant a balancing rise in the sterling price of gold.

The current sterling weakness is perhaps endemic in that EU leaders are taking it in turns to suggest the EU will penalise the UK for daring to leave and that no free trade agreements will be signed between the UK and member states without the UK a) having to pay into the EU and b) that the UK will also have to concede free access for EU citizens as part of that price.  The latter in particular may be impossible for an elected UK Government to contemplate given that fear of unlimited access from the now much broader EU was perhaps the principal driving force behind the vote to leave.

What all this means is that the likelihood of a Hard Brexit becomes ever more likely.  That would mean the UK not having tariff-free access to the UK marketplace (and vice versa of course which could cause economic problems for some EU members which rely heavily on selling goods and services to the UK).

What does not seem to be taken into account by the media is that the fall in the value of the pound may also make exports of goods from the UK to the EU very competitive, even if tariffs are applied, and EU goods being shipped into the UK prohibitively expensive.  This latter could be a particular blow to German, French, Spanish and Italian car manufacturers for example.  Maybe compromises will eventually be reached, but as the world’s sixth largest economy the UK does have a reasonable hand to play.

But back to the fall in the pound sterling against the dollar and its impact on the sterling price of gold.  Ahead of the Brexit vote we suggested UK investors buy gold as insurance against a possible ‘leave’ decision.  Those that did so have been well rewarded in local currency terms.  We might thus suggest a continuation of this policy against the possibility of further falls in the pound.  (Even after recovering part way from its flash crash this morning, the pound is still a couple of percent down on the dollar – and the gold price appears to be making something of a small recovery  even in dollar terms from its own flash crash on Tuesday.)

Gold and the pound sterling are both looking pretty volatile at the moment – and the Chinese will be back in the market on Monday after their week-long holiday.  It will be interesting to see whether Shanghai starts chasing the price up when the SGE re-opens – or whether it is content to see the market stabilise around current levels, or perhaps just a little higher.  We suspect the lower prices will see at least a small resurgence in Chinese and Indian buying too. 

So perhaps all should not be doom and gloom in the gold markets – and particularly so for those in the UK for whom the pound sterling gold price is the most important.

07 Oct 2016 | Categories: Gold

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