Brexit creates Insecurity, Investors seek Opportunities in Gold
– Momentum Public Relations –
Last Thursday, Britain voted to leave the European Union (EU) by a 52 percent to 48 percent margin. Although the long-term consequences of this surprising outcome are still uncertain, the short term effects are already being felt and are going to intensify and it didn’t take too long for Britain’s economy and relations with other European countries to take a big hit.
Brexit is already causing a domino effect. Northern Ireland and Scotland are already discussing about leaving the U.K. to stay in the EU. Meanwhile, countries like France, Italy and the Netherlands are contemplating the idea of following the U.K. and leaving the EU. A divided Europe could be really harmful for America since its economy relies heavily on the export sector. Already agonizing from the slowing growth in Europe, in addition to suffering from a strong dollar against the euro. Brexit is contributing to worsen those effects, particularly with the British pound now hitting its lowest point since 1985. Furthermore, Britain is America’s main channel when it comes to expressing its economic and political will in Europe.
The turbulence abroad has recently pushed the Fed to keep interest rate hikes on hold which could be highly problematic since the Bank of International Settlements mentioned in its annual report that the “persistence of exceptionally low interest rates” contributes to endangering global growth, additionally to low productivity levels and high debt.
All these potential consequences had the effect of creating a sense of panic among investors, which contributed to a disruption of the markets. Even though the panic eased on Monday, it is estimated that more than US$2.08 trillion have been wiped off global equity markets last Friday which represent the biggest daily lost ever recorded.
It is well known that the spot price of gold and the economy are inversely related. Indeed, the economy is based on currency which is “faith based”. When investors lose faith in the markets, they often re-allocate from perceived riskier assets to assets that have tangible value, such as commodities. Gold has always been recognized as the true standard of value across the globe. This could be explained by the fact that gold maintains its value from one country to another and is not subject to the same systematic risk the stock market is. Moreover, the supply of gold is limited which causes it to obey the law of supply and demand.
With the recent events concerning Brexit and the Fed maintaining low interest rates, institutional investors and pension funds are more and more interested in buying gold. This huge rise in the demand has the effect of not only increasing the price of gold but also gold mining companies’ share prices. These companies now benefit from gold prices well above their gross cost of production which could allow many of them to clear their debt and start making money. Although the Brexit had many harmful effects on the market in the past few days, it definitely has a rejuvenating effect on gold companies. These companies now represent a huge potential for investors not only because they act as safe haven investments but also because they could generate huge revenues.