SPDR Gold Trust (ETF) (GLD): Brexit Preview and Gold
Today is the Brexit vote day. What can we expect for the gold market?
Well, the time since February has passed quickly. Back then David Cameron announced a referendum to decide whether the UK should remain in the European Union. Thank goodness we have it almost behind us, since everybody seems to be a bit tired of tracking polls and contradictory analyses.
Having said this, we provide the final, short preview of the British referendum. Firstly, let’s look at the odds of Brexit.
- The polls are close, but the latest surveys show a slight lead for the ‘Remain’ camp (up to two percentage points).
- However, the betting odds, which are often superior to polling (bookmakers often point out that undecided people usually vote for status quo), are much smaller for Brexit, around 20-25 percent.
- Markets also do not expect a vote to leave, at least looking at the pound’s behavior.
Therefore, our guess is that the UK will remain within the EU. What would such a scenario imply?
- Sterling would jump. The euro should also rise against the U.S. dollar, but to a lesser extent. The currency channel is positive for the gold market, as the shiny metal is negatively correlated with the greenback and positively with the euro.
- Risky assets would be again in favor. The save-haven bids for gold would be withdrawn. The price of yellow metal would drop.
- In the long-run, Bremain should not impair the prospects of gold, which is mainly a bet against the Fed and the U.S. economy.
- Moreover, Thursday’s referendum may negatively affect the European Union, no matter the outcome.
However, nobody can be confident of the results. What could we expect in the case of Brexit?
- Sterling would plunge, as well as the euro against the U.S. dollar. The appreciation of the greenback may limit gains in gold, but the more probable scenario is that both the U.S. dollar and gold would soar.
- There would be a financial shock. Risky assets would be sold off. There would be a major flight to safety. Gold should shine as a safe-haven.
- In the long-term, the uncertainty should decrease and the markets would stabilize. After all, the U.K. would not leave the EU immediately and there is life after divorce.
- Gold would gain, but the investors should not expect a very prolonged effect. The shiny metal’s fundamental factors are not limited to the risk premium and geopolitical concerns, but also include real interest rates and the U.S. dollar.
The key takeaway is that the UK is voting today in its historic referendum on whether to remain a member of the EU. The results will entail important consequences for the global economy and the gold market.
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