After months of the media talking about it, the much vaunted Brexit vote has finally arrived. One week from today on June 23rd the people of Britain will go to the polls to decide their collective future. With all of the latest polls showing that a leave vote leads the way, this financially destabilizing event could actually happen. Gold has already popped back up over $1,300 per ounce on the increasing possibility of this occurring. It is important for you to understand more about this possibility that could have ramifications for markets around the world and your portfolio. Geopolitical events such as this one are always out there.
What is Brexit?
Brexit refers to the historic decision that the British people have been given to vote on whether to stay in the European Union or whether to leave it. Prime Minister David Cameron promised that if he was reelected in the last election, he would give the citizens of the U.K. their say on their future. Cameron had suggested the referendum originally because the British harbored long term unhappiness with the direction of the European Union. Fears and worries about unchecked immigration have only made this worse in recent years and especially months. Cameron figured he could not ignore such strong sentiment. It had already threatened to split apart his own ruling conservative party. He decided his best opportunity to reduce the tensions was to renegotiate their deal with the European Union and then give the voters their chance to vote on the deal.
Instead what has happened is that the deal he brought back from the much heralded renegotiations turned out to be short on substance. Few people in the country are satisfied with the new terms and supposed changes to the EU that he had promised. The vote will come down to how many people are afraid of Cameron and other world leader’s threats and warnings about a potentially devastating recession if they leave the enormous economic and trading block.
Why Brexit Matters
Brexit matters to much more than just the people of Britain or even those of the overall European Union. There are several reasons for this. Britain is more than just the fifth largest economy in the world. It is the world banking and insurance center and forex and precious metals hub. Over 20% of global banking transactions begin, pass through, or end in London. London is the world’s largest Forex market center by far. British stock markets are among the biggest in the world as well. Instability in British financial markets means global financial instability. There could easily be contagion to European financial markets and potential chaos in other country’s markets as well. Federal Reserve Chair Janet Yellen emphasized this herself in her explanation Wednesday for not raising interest rates. As Senior Metals and Mining Analyst Ken Hoffman of Bloomberg Intelligence recently put it, a vote for Brexit would be a real shock to the financial system.
What Brexit Means for Gold
The latest polls have all shown that the British voters will choose to leave the European Union next week. The TNS Poll showed that 47% favored leave versus 40% for remain. Four other polls have demonstrated similar one to seven point leads for the leave camp. Gold prices have already taken notice as traders of the yellow metal are placing their bets on it being quite a bit more valuable at the end of next week. An actual vote to leave could move gold prices even higher according to recent investor surveys. Bloomberg asked 22 analysts and traders what a vote in favor of the Brexit will mean for gold prices. They responded that gold would reach at least $1,350 per ounce in less than a week of the vote. With gold prices above $1,300 already, this is now only three percent higher than recent levels. The same traders believe that if the majority opt to stay in the European Union block, prices could decline to $1,250. Either way, the vote is going to move the precious metal prices.
Gold price gains over the prior two weeks demonstrate the impacts that rising fervor for breaking up the EU are having so far. Gold backed exchange traded funds already reflect increased demand for gold as their assets have risen to the greatest levels since 2013. This is because if Britain leaves, it will create ongoing uncertainty about when the exit will occur and how it will transpire. The separation could take as long as two years to finish. There is more than just the uncertainty about what happens to Britain and their international markets at stake. If the British lead the way to the exit doors, other European countries whose citizens are also unhappy with the EU may vote to follow suit. One analyst Jeffrey Rhodes of Dubai’s Zee Gold DMCC has suggested that a Brexit could cause enough of a global financial market deterioration and panic that gold reaches upwards of $1,600 per ounce.
In Conclusion
Even if Brexit does not take Britain out of the EU next week, there will still be plenty of other geopolitical events in the world supporting gold. Interest rates remain negative in both Europe and Japan, Greece is again teetering on the verge of possible Grexit, and the most unpredictable U.S. presidential campaign in memory promises to be another destabilizing factor. This is why the world will always give you ample motivation to keep gold in your retirement portfolio and holdings.
W. D. Crowder is an American published author with decades of experience in financial writing. He specializes in many areas, including: investment, economics, international relations and more.
