Why Brexit Is A Positive Development For Precious Metal Prices
The UK’s June 23 EU referendum resulting in a ‘leave’ outcome, is good news for precious metal prices this year, with an increase in macroeconomic uncertainty likely to translate into enhanced demand for safe haven assets such as gold and silver. London PM Fix gold prices and London Fix silver prices closed 4.2% and 4.3% higher respectively on June 24. [1]
Precious metals are largely considered safe haven assets from an investment point of view, with an increase in macroeconomic uncertainty driving investors towards this asset class. Whereas a British exit from the EU would result in a renegotiation of the geopolitical and trade relationships between the UK and the EU, a far greater risk spooking investors is that of Brexit triggering similar political upheavals in other member nations of the EU, resulting in the disintegration of the EU itself. Risk aversion among investors in the run up to the referendum had already propped up precious metal prices, with gold prices averaging around 5% higher so far in 2016 as compared to the full year 2015.
The increase in investment demand for gold is illustrated by the sharp increase in gold purchases by gold ETFs and similar products, as sourced from the World Gold Council website.
Though gold demand figures for Q2 are not yet available, we expect a similarly sharp year-over-year increase in investment demand for gold in the second quarter of 2016, as a result of the uncertainty and risk aversion in the run up to, and in the wake of, the June 23 referendum. With economic uncertainty prevailing in Europe, the Fed is also less likely to raise interest rates anytime soon, which would further prop up precious metal prices.
Though risk aversion caused by the outcome of the UK’s EU referendum would certainly boost precious metal prices in the short term, the extent of its impact in the longer term would depend on how promptly and amicably the EU and the UK are able to recalibrate their relations in the wake of the June 23 referendum. An extended period of uncertainty is likely to keep precious metal prices at elevated levels for a longer duration. Though the long term impact of Brexit on precious metal prices remains to be seen, these are likely to remain at elevated levels this year. We will be suitably modifying our estimates for gold and silver prices in order to reflect the new market situation.
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Notes:- Historical Gold Prices, Kitco [↩]