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LAWRIE WILLIAMS: UK’s post-Brexit gold surge to near record highs emphasises safe haven status

How the UK’s Brexit vote has changed one’s perception of the safe haven value of gold.  For the past year one has commented from afar on the strength of the gold price in the domestic currencies of countries like Russia, Argentina, Canada, Australia and South Africa – major gold miners all - and where the local gold price has either exceeded or neared a new record, despite it remaining far off such lofty heights in the US dollar in which the yellow metal is universally priced.  For a producer point of view with revenues in US dollars but most costs in the domestic currency that has been a huge bonus for the gold mining industry and a significant contributor towards global gold production not falling, as many pundits had expected, throughout the four years plus of declining gold prices.

But now it has been the pound sterling which has dived against the US dollar in the wake of the UK’s referendum vote to leave the EU and, as a result of this and the better gold prices seen of late, the gold price in pound sterling terms has once again been approaching its all-time high of £1,113 achieved in November 2011.  It would only take a relatively small dollar gold price increase, or a further drop in the sterling/dollar parity, which many analysts are predicting, to achieve a new record sterling gold price high.  See chart below of the £sterling dollar price for gold over the past five years.

Screenshot from www.bullionvault.com

For a UK gold investor, pre-Brexit there was not a huge variation in the sterling dollar parity, but on the referendum vote the parity dropped from a pre-vote £1=$1.49 (admittedly perhaps a temporary high in the strong expectation of a ‘Bremain’ vote) to a post vote £1=$1.29 over the following  two weeks – a drop of over 13%.  Over the same period of time the dollar gold price rose from $1,267 an ounce to peak at $1,372 by July 6th – a rise of a little over 8%.  In combination this meant that in £sterling terms the gold price rose from around £850 an ounce to a little over £1,050 an ounce over the two week post-Brexit period – an enormous increase of 23.5%.  UK investors who climbed into gold ahead of the referendum will have thus really appreciated the safe haven power of gold working its magic in relation to currency parity shock.  Those who also may have invested in gold stocks would almost certainly have done even better.  Just as a guide an investment in the Blackrock Gold and General fund, which had had a pretty torrid time through the declining gold price years, gained around 35% over the same 2 week period, and has since further outperformed the gold price rise.

The lower sterling parity is almost certain to lead to price inflation as the UK imports most of its raw materials and much of its food and clothing, so while the initial impact of the Brexit vote will not have been seen in prices yet, it will most certainly filter through over the next few months and a gold investment pre-Brexit will help mitigate the effects.  Furthermore a precautionary cut in the Bank of England’s base rate will adversely affect already paltry investment returns – again countered by a gold investment.  It has certainly been doing its job as a wealth protector in this respect.

18 Aug 2016 | Categories: Gold, Dollar

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