The price of gold has been given a boost in the aftermath of the Brexit vote on June 23. Since that date, there has been uncertainty surrounding the process and the ti,e of when the UK will leave the European Union. Consequently, the prospects for gold as a safe haven asset are quite bright.
The significant increase in economic and political uncertainty in the UK has dampened business confidence there? Moreover, there are concerns of contagion to the rest of Europe. Populist parties in a number of other EU countries are already calling for referendums of their own.
Based on these factors, it is not surprising that the price of gold has performed strongly since the Brexit referendum, reflecting its traditional role as a safe haven asset. Also helping the precious metal is the further scaling back of expectations for a Fed rate hike anytime soon. Lower US interest rates are beneficial for gold, which is sensitive to rates.
However, a continued sharp increase in gold prices may be curbed for now as the initial panic in the wake of the surprise Brexit result has somewhat faded. Even UK equities have rebounded. In part this is because it has been recognised that the UK will not be leaving the EU immediately. There will be a negotiating period lasting a minimum of two years and perhaps longer, which should allow some of the uncertainties governing the UK’s relationship with the rest of Europe to be cleared up first. Indeed, it is possible that the outcome will be some form of ‘Brexit-lite’, where the UK leaves the political union but retains many of the current economic ties.
But it could be said that the downside for gold should be limited by a renewed focus on the risks of higher inflation after years of exceptionally loose monetary policy. In the meantime, demand for gold from central banks and households in key emerging markets, including China, is likely to remain strong.
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