Gold After Brexit

Monday, June 27, 2016

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The British referendum on the United Kingdom’s membership in the European Union is behind us. Britons decided to leave the European Union. What can we expect now for the gold market, after an initial spike?

Brexit Vote Is Not Brexit

First of all, it must be clarified that the Brexit vote does not automatically imply a withdrawal from the EU. The referendum does not have any legal force, either in the UK or in the EU’s legislation. There has not been Brexit yet. So far, we have only witnessed a very costly and dramatic public opinion poll, as the referendum result creates a democratic, but no legal imperative for the UK to depart from the EU. To initiate the exit procedure from the EU, the British government would have to invoke Article 50 of the Lisbon treaty, which represents a formal notification of a decision to leave the EU and the only practical way to divorce with the EU. However, David Cameron decided not to trigger Article 50 after the referendum. To be clear: until the Article 50 process is initiated and completed, the UK will stay within the EU. In short, no Article 50, no Brexit.

Will The UK Exit From The EU?

Well, it is, of course, possible that the new British government (Cameron has already declared that he will resign by October) will unilaterally terminate the EU treaties. However, it would be so costly for anyone to invoke Article 50 (for example because Brexit could lead to Scottish independence and the collapse of the United Kingdom), that no one will risk it, at least not immediately. Thus, the British government could continuously put off the decision under the guise of preparing the best strategy of negotiations and exit procedure.

It goes without saying that the longer the use of Article 50 is postponed, the greater the chance it will never be triggered. Why? The longer the delay, the more likely that some important events will occur that will change the political environment in the UK. For example, there may be some concessions made to the UK by the EU justifying the organization of another referendum to obtain the “correct” result. It was exactly the case of the Irish referendum on the Lisbon treaty. After the Irish people rejected a treaty in the first referendum, Ireland’s position within the EU was renegotiated and a second referendum was held.

Implications for Gold

Now, it should be clear why gold did not remain at elevated levels after the Brexit vote. Initially, there was a knee-jerk reaction which pushed the shiny metal above $1,350, but very soon the price of gold fell back to around $1,320, i.e. the level already seen this year. This reaction may suggest that investors started to realize that the Brexit vote does not automatically imply a withdrawal from the EU. Indeed, the second key event alongside the victory of the “Leave” camp was Cameron’s decision not to invoke Article 50 of the Lisbon Treaty. If the Prime Minister had done it, the price of gold could have remained at higher levels or even rallied a bit further. However, Cameron’s inaction implies that the British political class does not want to leave the EU, at least not immediately. It means that Brexit may not happen at all, or that the process of withdrawal could take years.

Therefore, the negative impact of the divorce on markets will be muted by the slow process of the exit. And there is a chance that during this process the British (and European) political class will find a way to keep Britain within the EU despite the result of the referendum. Therefore, the impact of Brexit on the gold market may be weaker than initially thought by many analysts. However, we could witness many emotional reactions in the markets in the nearest future. A lot depends on the actions and remarks of prominent EU and British officials suggesting a prompt exit – in such a case, the price of gold may be supported. Otherwise, the fears about Brexit may dissipate and the gold market may stabilize at lower levels.

Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium-term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our trading alerts.

Arkadiusz Sieroń is the author of Sunshine Profits’ monthly Gold Market Overview report, in which he keeps subscribers up-to-date regarding key fundamental developments affecting the gold market and helps them prepare for the major changes. Arkadiusz is a certified Investment Adviser, a long-time precious metals market enthusiast, and a Ph.D. candidate. He is also a Laureate of the 6th International Vernon Smith Prize.  You can reach Arkadiusz at Sunshine Profits’ contact page.

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