The potential exit of Britain from the European Union, more simply known as Brexit will have big impacts on the political, financial and social environment of citizens. Concerns have already shifted financial markets, even before a single “Leave” vote was cast. One of the biggest beneficiaries, however, of the so-called Brexit is gold.
Gold future pricing is set to rise as high as 8.5% above current levels, according to James Butterfill, head of research and investment strategy at ETF Securities according to Marketwatch. He recently said at the Inside ETFs European conference in Amsterdam:
“Brexit would be very beneficial for shorting sterling and we will probably see a big pick up in gold. In that scenario we think gold could hit $1,400 [an ounce].”
“We’ve looked at previous risk events and for instance when Greece nearly left the Eurozone [in the summer of 2015] we saw really elevated futures positioning. We are making the assumption that we would see net longs for quite an extended period of time in gold in a Brexit scenario.”
Although, Butterfill doesn’t think that a Brexit is very likely.
To Brexit or not? That is the question
Early polls suggest that next week’s vote will be very close. The recent results from a Pew Research Centre survey indicate that more than half (52 percent) of Britons feel that the UK should focus on their own internal challenges, while other nations should be left to deal with their problems the best they can.
Statisticians are still holding strong on a narrow lead for the “Stay” side, however.
The effect of Brexit on financial markets
The uncertainty of Britain’s future in the EU is causing anxiety in financial markets. Gold’s story is quite different. Since the beginning of this year, the yellow metal’s value has rallied a stunning 22%. This month alone it has increased by 5.9%. At the same time, stocks are slumping.
And as the rising price is an indicator of, the demand for gold is ever increasing. Butterfill says that ETF Securities has seen an influx of $2.6 billion into gold this year alone, with a total share of 14% of the company’s assets.
Butterfill: The reasons for the gold rally is threefold
“I think it has happened for various reasons. One is Brexit, another is a non-establishment presidential candidate in the U.S.,” says Butterfill, referring to presumptive Republican presidential nominee Donald Trump. Thirdly, he says another concern is the Federal Reserve’s interest-rate policy, which is not expected to change in the near future, a factor supportive of gold prices.
“These are three quite significant risk events, so that’s why we are seeing popularity with gold,” Butterfill said.
He even thinks it’s quite plausible for gold to rise to $1,400 an ounce. The August contract for gold traded at just shy of $1,300 an ounce at the middle of this month.