brexit-domino-effect

With financial media reporting on the impressive rise in gold and silver prices, many potential investors are asking if this is a good time to buy gold. Meanwhile, a host of long-term investors are smiling a bit smugly as they see their past assessment of market trends borne out by a better than 20 percent spike in the value of gold in 2016. While the Brexit referendum was the catalyst for the recent jump, a number of analysts predict that prices will ascend further in the next few months. 1

There are many complex factors behind this bullish view of gold and other precious metals. However, the overriding dynamic is increasing concern over the world economic and political situation and the desire for safe haven investments.

Why They’re Called “Safe Haven” Investments

The idea of a “safe haven” originates from early nautical terminology. Primitive ships were not able to ride out even moderate rough weather at sea, much less full-blown storms. Because of this, specific safe haven harbors were favored as the place to sit while the troubling weather passed. In the earliest times, seamen might halt their trips for months at a time while wintering in these protected areas. 2

Analogously, turbulent times cause experienced and wise investors to seek out investments that will protect the value and purchasing power of their assets. As one of history’s most popular safe haven investments, gold is increasingly the preferred harbor of concerned investors and financial managers. Savvy analysts and market observers are quick to point out that Brexit served as a trigger point for pent up concerns, not the sole cause of the current rush to gold. 3 In fact, a steady stream of alarming economic and political news regularly bombards the market these days.

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Shell-shocked investors have for nearly a decade simply hunkered down and endured this ongoing negative environment. However, Brexit seems to have marked a turning point concerning that continual market erosion, shaking a large number of investors out of their stupor.

Alarming events have repeatedly struck the market in recent years:

  • The 2008-2009 U.S. financial crisis and the Great Recession
  • Ongoing fears concerning the Grexit crisis and festering problems in Greece 4
  • Continuing slow to non-existent economic recovery globally 5
  • Growing problems in Portugal and other EU countries (the PIGS) 6
  • Unrelenting growth in total government debt and deficit spending in nearly every country
  • Increasingly serious concerns over the Italian financial system 7
  • Growing number of reports of significant problems in major financial institutions, such as Germany’s Deutsche Bank 8

As noted, this steady negative drumbeat has previously somewhat deadened the sensitivity to the seriousness of the situation, somewhat like the frog in the pot that is reaching the boiling point. Brexit changed that beat to a shrill alarm and call to action for investors seeking security and safety.

Serious Effects on Government Stability

With Brexit serving to shake many private and institutional investors out of an acceptance of increasing risk, they are now scrambling to address this real threat to their portfolios. In fact, for many the threat turned into reality with major market declines after the UK vote. It is that panic that is behind the concerns recently driving U.S. Treasuries to record lows. With the real possibility of another global recession an increasingly frequent topic of discussion and speculation, investors of all stripes see the gathering clouds turning into portfolio-destroying storms. This has them desperately seeking those safe havens, looking for any form of short-term protection, and even sacrificing long-term returns. 9

Few of today’s investors and traders can recall any period of time when yields on bonds and other interest-bearing instruments have remained so low. Even more, former “blue chip” bonds and other vehicles are now bearing negative yields, a concept many find very difficult to wrap their minds around. With more than $11.7 trillion of these bonds in the market, gold becomes an extremely attractive alternative for many short- and long-term investors.

While all of this speaks to a general concern and sense of doom within global financial markets, this is not a malaise that lacks substantial evidence. In fact, when investors take a serious look at the man behind the curtain of the global market, numerous specific points of serious concern are revealed. 10 It is worth looking further at several of these market conditions, especially U.S. and world politics, to understand why many see buying gold as a prudent and timely investment.

Elections Matter

One immediate impact of the Brexit referendum is the fact it is a reminder that elections can have major impacts on the financial markets. Two major elections are on the slate for later in 2016: The U.S. presidential vote and a major referendum and selection of a new government in Italy. 11

The reality of the potential consequences from the U.S. is unusually hard to predict. Analysts make arguments that either candidate could be a major setback for the nation or a breath of fresh air. Some have gone so far as to indicate a potential $500 upward bump in gold prices if Trump is elected, and others warn Clinton will cripple the economy. 12 13

Regardless of one’s political leanings and expectations, it is a simple fact that whoever is elected, the market will likely see no immediate economic savior or significant positive momentum. Likewise, the elections in Italy and other parts of the world will either show further support for protest candidates or the status quo; neither seen as remedies for the worrisome global economic woes.

Global Conflict Deals a Final Blow

Compounding global economic and political uncertainty is the ongoing strife and conflict in many parts of the world. All things considered, safe harbor investments become not only understandable but also wise. 14 Such logic brings the discussion of buying gold full circle. It stands apart as an increasingly attractive investment for waiting out what has the appearance of a global economic, political, and social hurricane season.

Additional Sources

1 – http://www.bloomberg.com/news/articles/2016-06-23/gold-declines-as-poll-indicates-u-k-to-remain-in-european-union
2 – http://www.worldwidewords.org/qa/qa-saf2.htm
3 – http://www.marketwatch.com/story/brexit-isnt-the-only-thing-european-investors-should-worry-about-2016-06-09
4 – http://www.bbc.com/news/world-europe-36629145
5 – http://www.wsj.com/articles/economic-uncertainty-muddles-election-prospects-1455667865
6 – http://www.businessinsider.com/portugal-and-spain-still-at-risk-despite-avoiding-eu-fines-2016-7
7 – http://www.telegraph.co.uk/business/2016/07/16/why-italys-banking-crisis-will-shake-the-eurozone-to-its-core/
8 – http://www.bloomberg.com/news/articles/2016-05-16/deutsche-bank-s-problems-may-be-insurmountable-berenberg-says
9 – http://www.cnbc.com/2016/06/29/there-are-now-117-trillion-dollars-worth-of-bonds-with-negative-yields.html
10 – http://www.worldbank.org/en/publication/global-economic-prospects
11 – http://www.bloomberg.com/news/articles/2016-07-04/a-prime-minister-a-referendum-and-italy-s-turn-to-get-worried
12 – http://www.kitco.com/news/2016-07-22/Trump-Could-Push-Gold-Prices-500-Higher-ABN-Amro.html?sitetype=fullsite
13 – http://time.com/money/page/2016-presidential-election-clinton-trump-affect-finances/
14 – http://www.economist.com/node/1795830