Brexit & Gold

What impact will GB's exit have on the gold price? © Matt Milton / Unsplash

What impact will GB's exit have on the gold price?

Great Britain is leaving the EU at the end of January. But even if the British finally do agree with the European Union on a scenario for the Brexit: How the future cooperation should look like is still largely unclear. Gold lovers are asking themselves above all what impact the Brexit and its consequences will have on the price of gold.

Great Britain leaves the EU with 31.1.2020

After long negotiations, two postponements of the exit date, almost 160 billion in costs, new elections, personnel disputes and heated debates in the House of Commons, it is now finally certain that the United Kingdom will leave the EU on January 31, 2020.
This is to be followed by a transitional phase of only 11 months, during which initially nothing is to change and which is to be used primarily to negotiate the future relationship between the EU and the UK. Whether the latter can really be achieved in just eleven months, however, is highly doubtful after the tough exit negotiations.

Because gold is generally regarded as a "safe haven" with which to hedge assets, demand for gold and thus the price of gold increases, especially during political crises and in times of economic uncertainty.

The question will therefore be how quickly the EU and the UK come out of crisis mode?

Probably no disorderly Brexit

Thanks to the agreement finally ratified by the House of Commons, investors' greatest fear, a no-deal Brexit, is off the table for the time being. There should be no chaos, at least immediately after the formal exit.
However, because there is still no certainty about future relations beyond the transition phase, investors and companies could remain unsettled, continue to hold back investments and thus put a brake on the British - and also the European - economy.

Prime Minister Boris Johnson is already insisting that the transition period should not be extended under any circumstances. If no trade agreement is negotiated by the end of 2020, there could still be a delayed hard Brexit. In such a case, the pound would probably come under strong pressure and the gold price would benefit.

However, the sooner the British manage to conclude trade agreements with the EU and other third countries, the more secure long-term planning will be from an investor's perspective. Investors who have held back strongly in recent years because of the uncertainty are likely to invest more strongly in the UK again. This would strengthen the pound and, in turn, weaken the gold price.

The Bank of England, which expects a swiftly negotiated and comprehensive free trade agreement, has already announced that it will cut the bank rate, i.e. the key interest rate, from 0.75% to 0.5% after the exit.

Scottish independence & some Ireland

Even if Brussels and London manage to reach an agreement on future relations in the near future, the British could face an existential crisis after Brexit.

As is well known, Brexit has led to a renewed strengthening of the separatist national movement in Scotland. The SNP is already fighting for a second independence referendum in order to return to EU membership as an independent state. And in Northern Ireland, whose open border with the Republic was one of the main points of contention in the "deal," the supporters of Irish reunification are also sensing morning air.

Such a disintegration of the UK would naturally lead to extreme uncertainty again, which would be reflected in the economic outlook and should cause investors to shift their capital toward gold. The gold price would benefit.

If the U.K. manages to provide investors with medium- and long-term securities, they will then increasingly invest their money in the U.K. stock market again, where faster returns are tempting, and gold will therefore probably become rather uninteresting again.

Brexit - really the choice of the majority?

The depressed mood among the population and various bans on celebrations demonstrate the division of the country into two camps on the subject.
While the election results of the survey of the population were clear, there are more and more critical voices about the election advertising, which should rather be seen as influencing the election.

While the data company Cambridge Analytica was caught in the crossfire of criticism and the media for having massively influenced the American presidential elections by matching millions of Facebook profiles, Boris Johnson hired the Canadian company AggregateIQ, which probably acted similarly to CA, for 40% of the campaign budget in the course of the Brexit referendum. This raises the suspicion of voter influence.

Influence of Great Britain on the European Economic Area and Euro

With Great Britain, the largest net contributor after Germany (21%), Great Britain is leaving the Union with 16%. Any milkmaid can figure out that such a weakening of the European budget cannot be without consequences for the citizens, who are the only source of income for the states.

Through the ESM bailout fund, which has been forgotten in the meantime, a large number of EU states, above all Germany, are liable for the partner states that have got into difficulties. The loss of the EU's second-largest source of revenue can only lead to the remaining states having to compensate for the additional costs (especially since the EU apparatus will not voluntarily downsize itself). As an additional drop of bitterness, one must also take into account that not all budgets of the remaining countries can afford the additional burden, which is why the well-known net payers will be asked to pay more - or rather their citizens.

This will increase the pressure on national treasuries and governments on how to raise the required funds. There will certainly be no way around the cash restrictions advocated by the current head of the ECB, Christine Lagarde, who already made a name for herself in her days as head of the IMF with her visions of a cashless European society.

A decline in the euro will have a stronger impact than Brexit. With the financial weakening of the EU, the overall credit rating of the EU could turn out to be more negative, which in turn could lead to a weakening of the euro. This in turn will lead to higher prices for all those commodities traded in US dollars, such as oil or precious metals.

Influence of Great Britain on the Gold Price

Of course, it should be noted that London's exit is only one of many factors affecting the gold price. Since gold is traded globally, the supply of gold and the demand for the precious metal is based on many things. The situation in the leading markets in the USA, the EU and Asia as well as the exchange rate of the euro to the dollar are the most important factors.

Since gold is traded in U.S. dollars and the U.S. remains the largest economy, the state of the economy in the United States and monetary policy of the FED continues to set the tone, but thanks to the integrated global economy, the fate of the United Kingdom as the fifth largest economy and the entire European Economic Area naturally also has a strong impact. Above all, the impact of Brexit on the euro exchange rate still remains as a big question mark in the room.
You too can profit from the increased gold price! If you have old gold like jewelry or dental gold, now is the time to turn your gold into cash. But also investments in gold coins or bars make sense now - because the rate will most likely continue to rise.

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