I decided to come up with this little after-the-fact report about Brexit and gold or the role of gold in the lives of people during economic roller coasters.
Almost two months ago, on June 23, a historic event took place in United Kingdom – people voted to remain or not to remain in the European Union.
It seems like more people wanted some change as 51.9% voted to “leave” and other 48.1% to “remain”. Among those who voted, two major patterns were observed. First, the majority of those voting to leave were from England and Wales (look at the map on the left). Second, young didn’t want to leave, middle-aged and elderly wanted. For me, it’s hard to guess the reason behind the first one. As for the second, perhaps, the older generation could trace back and see that European Union didn’t bring a lot to their country.
On June 24, the next day after Britain’s exit or so called Brexit, was Friday and it turned out to be Black Friday for some. Why? British pound fell to the lowest point it ever did in the last 30 years. Canadian dollar shrank by more than a cent – not a huge difference but still a loss. Stocks around the world slided downwards. Most commodities experienced a decrease as well. There was a sharp drop in the price of oil and copper, for instance.
Douglas Porter, chief economist at BMO Capital, shedded some light on the reason behind such radical reactions “The initial financial market reaction was especially sour, mostly because the market had become so convinced that Remain would win and not so much because it’s a massive negative for the outlook”.
Who benefited from Brexit then?
Well, those that had euros and US dollars. For example, tourists found Brexit useful. Due to a smaller pound many flocked to London immediately for some time-off. Also, retailers and small businesses in watch and jewellery industries. On that Friday, their sales went by almost 17%. And finally those who deal with gold, mostly gold retails.
By Friday morning gold price jumped by 5%, landing around $1,330 mark. You can see this jump on the graph below – it is almost a perfect vertical line! This was the highest price since the 2008 financial crisis! The price spiked because of two reasons. First, the weakened pound forced people to swap their pounds for safer alternatives and it looks like some chose gold. Second, Brexit didn’t just affect the United Kingdom, it made a tiny hole in the global economy with nobody knowing how it will turn out, which created uncertainty, again, making many turn to gold. Because all of sudden many wanted gold, its demand sharply increased. However, mining companies were not getting more gold out of the ground, so supply stayed the same. If demand rises above supply, there is an increase in price. That holds true for all products and services, not just gold. On that day, for example, gold bullion rose by 20%. Investors and those who never invested at all were frantically buying gold bars. Some gold bar retailers, were caught out of stock even, like the Sharps Pixley in London. As the a matter of fact, the company had no choice but to ship their emergency reserves from Germany ASAP!
What did Brexit show?
I think Brexit is a perfect real-world example of people’s reaction to instability caused by a major economic event. It showed that in such times people immediately look for relatively safe ways to preserve the value of their hard-earned money. And many choose precious metals, mostly gold. In other words, Brexit showed that gold as a safe haven is indeed quite popular.
Since UK’s dramatic exit, gold has been holding strong. Some predict that because of the exit the price will remain high at least until the end of 2016. It might not be solely due to Brexit though. The event simply added more uncertainty to already slippery position that the global economy is in.
If you liked this summary, toss it to others! Also, leave your opinion on Brexit! Thanks for your attention!