What Would Brexit Mean For Gold?

The British referendum on the United Kingdom’s membership in the European Union is fast approaching. What does this vote imply for the gold market?

In 30 Days, the British People Will Decide the European Union’s Future

In a month from now, Britons will decide to leave or to remain within the European Union. Their decision will have a far-reaching impact for Europe as a whole. We have already written about the potential consequences of the UK’s exit from the EU (thereafter “Brexit) for the gold market. However, the extraordinary importance of the possible Brexit deserves the highest attention and we will probably come back from time to time to this issue as the referendum date approaches us.

What Are the Odds of Brexit?

Generally, polls on the UK referendum whether to leave the European Union have the race neck and neck. For example, the Financial Times’ Brexit Tracker claims that 46 percent voters support remaining in the EU, while 40 percent are in favor of a divorce (all numbers as of May 19). However, according to Bloomberg’s Brexit Tracker, chances are more balanced and “it’s too close to call”. Similarly, the Economist’s Brexit Tracker shows that only 41 percent of people want to remain in the EU, while 40 percent prefer to leave. The picture is complicated by discrepancies between phone and online polls – the former show higher odds of remaining within the EU, while the latter are more balanced. The phone polls are probably more reliable, however, some people may be reluctant to admit their real preferences via phone.

How Are Different Groups Likely to Vote?

Interestingly, this tracker enables to break the results down by age, gender, class, region and class. Shortly, supporters of remaining within the EU are: females, the young, the rich, Scotland, North and South, the Labour Party and Liberal Democrats. On the other hand, those in favor of leaving the EU are: males, the old, the poor, Wales, the Conservative Party and UK Independence Party. Now, the question is: which of these groups are more determined to vote? History says that the old are more likely to turn out to vote, while younger Britons are less passionate and less likely to vote.

Undecided Will Decide

Another important issue is related to undecided voters. There are still many people who simply do not know how they will vote (if at all). Given that the polls are head to head, the undecided Britons are likely to determine the outcome. General trends suggest that undecided voters may be leaning towards the Brexit, however, the odds of remaining within the EU have risen recently. It should not be surprising, since the British establishment presents the Brexit as potentially disastrous and supports the “Remain” campaign all out.

Who Does Time Work For?

We can risk a thesis that time works in favor of the “Remain” camp. On the other hand, a lot can happen in a month. Each EU crisis which could happen during this period (for example, further economic problems in Greece, the bankruptcy of Italian banks, the resumption of the refugee crisis or the next terrorist attack) should increase the odds of Britain leaving the EU.

Brexit and Gold

What would the effects of a Brexit on the yellow metal be? Well, it depends on the particular scenario after the exit (i.e. how the new agreements with the EU would like). However, generally speaking, the Brexit would make the sterling plunge. Therefore, for British investors it would wise to move some of their wealth into gold. As a result, the price of gold should rise due to more safe-haven bids. The yellow metal usually shines during economic and political turmoil. The Brexit would increase the uncertainty about the future of the UK and the European Union, which should be positive for gold. However, the gains may be capped by the appreciation of the US dollar, which is also considered by the Europeans as a safe-haven asset during intensified uncertainty.

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.