The United Kingdom formally triggered their departure from the European Union yesterday and it its wake, demand for gold bars from UK investors remained robust and ongoing. In fact, many UK investors are diversifying into physical gold in order to hedge the considerable uncertainty and volatility that the coming months and years will bring.
Here’s a graph of sales of gold bars from January:
The legal mechanism triggered yesterday is called Article 50 and it kicks off negotiations between the UK and EU on how the UK will leave the EU. The British voted 52% to 48% to leave the EU last June.
Why Leaving The EU Might Be Bad For The UK
As you can imagine, since no other nation has left the EU, the event has created considerable uncertainty. There have been dire prognostications on the UK’s fate from some quarters.
The Scottish Parliament just voted to run a second referendum on Scottish independence and if it passes (no date for it has been set yet), it could trigger the breakup of the United Kingdom. The Scots voted overwhelmingly to remain in the EU and are very unhappy at being forcibly removed from it.
Likewise, in Northern Ireland, the consensus was to remain in the EU. And it is there that the prospect of a hard border between it and the Republic of Ireland is causing some consternation. That border area is the only physical one between the UK and another country. Neither Southern nor Northern Ireland wants to return to the bad old days of border crossings and security checks.
Then there are suggestions that by leaving the EU, the UK has severely diminished its political weight in the world. It can no longer influence the direction of the EU. It is now an outlier on the edge of Europe, perhaps with diminishing relevance in world affairs.
The youth in the UK who overwhelmingly voted to stay in the EU are very upset that what they saw as a bright future has been thrown on the bonfire by an older generation who outvoted them and are trying to recapture the glory of the former British Empire.
How Sterling will fare over the coming years is anyone’s guess. London is a financial hub and, indeed, was the financial hub of Europe. Many financial institutions still want to engage with Europe and to continue to do so may entail them moving out of the UK and into the Eurozone.
Why Leaving The EU Might Be Good For The UK
On the other hand, those pundits in favour of Brexit see the UK having a very bright future, after some initial teething problems as the divorce from Europe is finalized. They see the UK regaining its full sovereignty, no longer being dictated to by the whims of Brussels.
They see better trade deals for the UK in its future, more control over immigration and a United Kingdom which remains whole and strong, and one that retains its power and influence on the world stage.
Nothing Is Certain
But everything is in flux. There are no certainties either way.
That Brexit would happen has been known for ten months now, since that vote in June 2016. It has created considerable uncertainty and concerns about the political and economic outlook – both for the UK and for the EU itself.
And it appears that a lot of British citizens are hedging their investments, based on that uncertainty.
As reported by the WSJ:.
|The resulting political and economic uncertainty helped drive a 39% rise in U.K. gold bar hoarding in 2016, according to Ross Strachan from GFMS, part of media group Thomson Reuters.
“Macroeconomic fears are conducive to increased investment demand in gold,” Mr. Strachan said. During and after the global financial crisis, he pointed out, global gold bar investment increased from 237.7 metric tons in 2007 to 1246.9 metric tons in 2011.
Robust gold demand is expected to continue in the UK.
The UK’s departure has rattled the EU’s cage. If Marine Le Pen is elected as President in France, she has said that she will call for a referendum on France to leave the EU – a Frexit.
The UK’s decision to leave could spark contagion, with other nations seeing that it is in fact possible to leave the EU, and as a result, gold demand in the EU should also remain robust. Ireland and the Irish economy is particularly vulnerable as the UK is their largest trading partner.
As you’ve probably noticed, gold has edged up in price in recent days and appears to be consolidating at the $1,250 level. In sterling terms, the pound has fallen against gold, and gold in sterling terms is back above the important psychological level of £1,000 per ounce.
The pound fluctuated wildly yesterday against other currencies after Prime Minister Theresa May triggered Article 50. A period of intense uncertainty for financial markets, both UK and EU markets and for Sterling and indeed the Euro awaits.
This will not be an amicable divorce and the negotiations are likely to be fractious and divisive. This uncertainty for UK companies, business in general and for the already indebted UK economy does not bode well for Sterling.
Uncertainty about the Brexit talks isn’t the only thing that will likely support gold. The French elections are now just three weeks away (April 23 and May 7) and the mess that is politics in the U.S. should lead to further safe-haven diversification in the coming weeks.
The ‘Trumpflation’ meme has run its course in markets and stocks and the dollar looks vulnerable to weakness which, in turn, should support gold.
The failure last week to overturn ‘Obamacare’ and the ‘Civil War’ style politics in the U.S. should also support, and those seeking to allocate to gold should continue to do so on price weakness.
Now may be a very, very good time to add gold to your retirement plan or 401k.