Gold News

Brexit Crisis: Gold in 5 Historic Shocks

Over £8m of gold and silver changed hands on BullionVault this Thursday as Brexit looms...
 
GOLD says the Brexit referendum is a genuine crisis, writes Adrian Ash at BullionVault.
 
Gold priced in Sterling has risen 28% so far in 2016, the fastest 6-monthly gain since the global financial meltdown peaked with summer 2011's US debt downgrade, Eurozone crisis, and English rioting.
 
But whichever way the referendum on Britain's membership of the European Union goes, this year's wider mess of geopolitical and financial risks has spurred a move back into holding bullion as insurance – most notably amongst UK investors and savers.
 
Half-way through June, new account openings at BullionVault by UK residents are 75% ahead of the last 12 months' average on a daily basis. That compares with a rise of 23% across BullionVault's next 9 largest markets (led by the US, France, Germany, Italy).
 
This month so far, cash deposits from UK residents to buy gold or silver have already matched May's total, and stand 35% ahead of the last 12 months' full monthly average.
 
All told, BullionVault users have now added well over three-quarters of a tonne (834kg) so far in 2016 to their gold holdings (vaulted in the user's choice of London, New York, Singapore, Toronto and the ever-favourite Zurich). That's worth £22.5m at today's near 3-year high price (US$34m).
 
Buying gold or silver to defend against a crisis also means standing ready to sell when crisis hits, of course. So it's not all one-way traffic on BullionVault amid the approach of June 2016's Brexit vote, with some existing owners taking a profit as new buyers build their holdings.
 
Indeed, since the start of the UK tax year in April, trading volumes on BullionVault have now seen more than £100m of gold and silver ($143m) change hands. That's a rise of 88% from the same 10-week period in 2015. Customers traded £8m ($11m) of gold and silver using BullionVault on Thursday alone.
 
Buying still dominates. Altogether, client gold holdings now totals a record 35.5 tonnes, more than most of the world's central banks keep in reserve, worth over £1 billion ($1.42bn).
 
Current investors amongst the 61,000 people across 183 countries worldwide who have used BullionVault since it launched in 2005 now also own nearly 600 tonnes of silver between them, worth a further £233m ($330m).
 
Will precious metals keep rising into the EU referendum? If the polls keep pointing to a victory for Leave, then most likely yes – even in US Dollar terms according to specialist analysts – because that's likely to keep denting shares worldwide, plus the City and Wall Street's outlook for growth.
 
Right or wrong, economists pretty much agree that Brexit would certainly hurt Britain's own GDP over the next few years. Even pro-Leave economists think there will be short-term pain. Greater than this consensus, however, is the unanimous view of analysts that Brexit will prove a shock to Sterling, as well as the FTSE. Right or wrong, the consensus also says a Leave vote will hurt UK asset prices much worse than a vote to remain would boost them.
 
( That doesn't make voting Leave the wrong thing to do, in our view, even if it will likely prove bad for our own self-interest.)
 
Eurozone assets face the same "asymmetric" shock according to analysts, because a British exit from the European Union risks sparking a scamble of referenda on membership, perhaps even by nations signed up to the single currency. Across the Pond, even the almighty US Dollar could come under pressure if traders get a foretaste of Donald Trump winning November's presidential election from an anti-establishment Brexit victory.
 
So where to turn? The most traditional safe port in a storm, the Swiss Franc, has been joined in recent years by the Japanese Yen. Both currencies have already risen sharply during this crisis phase of the Brexit debate, but both also pose a risk to would-be buyers in the form of the central banks running them.
 
The Swiss National Bank has actively fought to devalue its Franc since the global financial crisis began almost a decade ago, printing QE money and dumping it onto the currency market to buy other countries' money. Fresh intervention is now widely expected to stop the Franc attracting or rising on Brexit safe-haven demand, not least as the SNB on Thursday said it is already "significantly over-valued" – code for "hurting Swiss export companies".
 
The Yen's rise to September 2014 highs also puts intervention by the Bank of Japan back on the table. Already printing ¥6.7 trillion per month ($64bn) to make QE purchases of government bonds, corporate debt, equities, even real estate, the BoJ may well see ¥100 per Dollar as a red line according to FX analysts – a level below which Tokyo will rebuke Washington's call to stand aside, fighting the market and potentially rebuking would-be safe haven Yen buyers from abroad.
 
Gold, in contrast, faces no such handicap. Trading freely against all major currencies in a global market, it has leapt against all major currencies except the Japanese Yen. The shorter that the odds grow on a Brexit shock, the more that traders, investment funds and money managers worldwide are considering or moving to buy gold in advance.
 
The case for UK savers and investors looks strong if history offers any guide...
Table from BullionVault of gold's response for UK investors to 5 historic shocks
 
These 5 historic crises mark pretty much the biggest sudden shocks to financial markets of the modern era, at least as viewed from the UK.
 
Together, they saw the gold price in British Pounds rise on average 2.0% on the morning of the shock, and a further 1.4% after lunchtime in London.
 
The next week after the shock then saw gold rise a further 3.6% in Sterling terms on average, making up for at least some of the wipe-out in other assets such as the FTSE, corporate bonds and the Pound itself.
 
Uncertainty, of course, is what's feeding this growing crisis for UK and global financial assets ahead of the EU referendum. Nor is gold certain to gain further from what is already a historic surge so far in 2016. Nothing is guaranteed.
 
But this year's widening financial and geopolitical risks are finding a moment of concentration, a focused point for investment stress, in this high-risk event. And more than any of the 5 shocks above – including the UK's exit from the Exchange Rate Mechanism in 1992 – private savers have clear warning of when, and what, this coming shock could be.
 
A small but growing number of UK investors aren't waiting for the Brexit result – leave or stay – to buy some gold as insurance. For the rest, a vote to Remain may well fail to deliver the former status quo of rising Gilt prices, rising shares, and stable Sterling.

Adrian Ash is director of research at BullionVault, the physical gold and silver market for private investors online. Formerly head of editorial at London's top publisher of private-investment advice, he was City correspondent for The Daily Reckoning from 2003 to 2008, and is now a regular contributor to many leading analysis sites including Forbes and a regular guest on BBC national and international radio and television news. Adrian's views on the gold market have been sought by the Financial Times and Economist magazine in London; CNBC, Bloomberg and TheStreet.com in New York; Germany's Der Stern; Italy's Il Sole 24 Ore, and many other respected finance publications.

See the full archive of Adrian Ash articles on GoldNews.

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

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