Last June, the citizens of the United Kingdom sent a seismic shock through the political and economic worlds when they voted to leave the European Union, a move known as Brexit. The event initially caused much market volatility and analysts predict more is one the away as the country begins the process. Questions about the fate of the EU and fears of potential geopolitical risks are likely to support investment in safe haven assets until the repercussions of Brexit are fully known.
Opponents of Brexit invested considerable effort in overturning the vote, including the proposal to hold another election. However, the referendum has withstood those challenges, and, with the triggering of Article 50 on March 29, the process has begun.
Under the rules of the EU constitution, Brexit will occur by April of 2019. Article 50 addresses a detailed process for ending membership in the EU. The country leaving the organization is given a two-year period to negotiate the terms of its withdrawal, covering all legal, financial, trade, and other issues.
In reality, the process of leaving the EU could take more than the designated two years. Some involved with the process have indicated the final actions may take
five years to implement. However, as of the triggering of Article 50, none of the existing treaties governing EU membership now apply to Britain.
Since no country has ever exercised this right, both UK and EU officials will be breaking new ground in the process. In light of the critical nature of many of the decisions to be made, UK Prime Minister Theresa May recently called for a snap election.
While May initially rejected the idea of early elections, she now feels she needs a strong backing to effectively negotiate with EU nations during the Article 50 period. If she gets a stronger conservative coalition, it will make the process smoother. At the same time, she risks seeing control pass to a different government, possibly led by Labour. Negotiations would take another track if that where to occur.
Adding to the potential confusion during this period, each of the 27 remaining EU members can veto any part of the negotiated agreements when presented. Since these deal with all aspects of trade, tariffs, and numerous financial elements, the ongoing uncertainty will ensure differing levels of market volatility during the process.
Impact on Gold Prices
Due to the many unknowns, analysts are unsure of how the Brexit process will affect gold prices. Moreover, there are even more questions about the long-term impact after the exit is finally completed. If the UK’s departure weakens the European Union, there will be even more safe-haven buying—a bullish situation for gold and precious metals.
Another major unknown will be the role of the reestablished British pound. This currency was a major world financial factor before the euro came on the scene. Since the referendum the pound has weakened, but the UK economy has surged at a 2016 rate of 1.8 percent. If the UK does experience the hoped for ongoing economic vitality, that could diminish the role of the U.S. dollar, another positive factor in forecasting gold prices. Such economic growth could elevate inflation, spurring more interest in gold as a proven hedge.
While there is no consensus for the immediate impact on gold prices, the ongoing negotiations and sure-to-come conflicts will add to the volatility of the marketplace. However, the long-term factors influencing demand for gold will continue to support strong gold prices. 1