Even if you don’t pay much attention to politics on the other side of the Atlantic, just about everyone has heard about the United Kingdom’s decision to quit the European Union, termed “Brexit.” The decision means a lot to Britain, Europe, and the world itself, with repercussions in politics, economics, and security.
While there’s no shortage of debate about whether the UK “won” or “lost” the decision to leave the EU, nobody can debate that perhaps the biggest winner in the decision has been gold. The price of gold has gotten a major boost thanks to the decision, pushing it even further upwards and growing on the year’s solid gains.
British Pound Sinks
The immediate aftermath of the Brexit vote, where a margin of some half a million votes was enough to push “Leave” to victory, saw the pound take it on the chin in rather drastic fashion. The lack of confidence shown by investors in the UK’s economy sent shockwaves through their currency (while the UK was in the EU, it did not use the Euro).
Before January, the pound traded comfortably against the dollar at about a 1.5 to 1 margin; the current ratio stands at just 1.33 to 1. 1 That makes it a fantastic time to go on vacation, but also a fantastic time for hedges against currency. And the oldest rule in the investment book is that gold makes the best hedge against currency on the market.
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Gold as Safe Haven
The Friday vote sent the gold price upwards by about five percent, solid gains given the late outcome of the referendum and the time needed to cross the Atlantic. Gold positively took off on the Monday after the Brexit decision, however, gaining five percent on the day, soaring to gain 25% growth through 2016, and rising to over $1,300 per ounce for the first time in nearly two years. 2
The good times spread further for those in the industry: Miner Newmont’s stock rose as well and has now doubled in the past month. Investors seeking refuge from a flailing pound went for gold and other precious metals. In fact, silver did even better than gold, gaining no less than ten percent in a single day. 3 Meanwhile, European shares indices dropped by six percent, while the dollar had a modest growth of about one percent.
Future Exits from the EU?
The skepticism over the British pound and the Euro is good news for gold investors. More might be on the horizon. The Brexit vote is believed to be a headwater vote for similar referendum policies in the Netherlands and France, as more and more Europeans grow wary of the bureaucracy of Brussels. Further exit votes will act as a growth mechanism for gold and precious metals as investors look at safe, non-volatile investments that are withstanding the might of political anger across the ocean.
2 – http://money.cnn.com/2016/06/27/investing/gold-brexit/
3 – http://www.bloomberg.com/news/articles/2016-07-01/three-charts-show-how-precious-brexit-is-for-gold-and-silver