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What does BREXIT mean for gold and the economy?

So, we’ve woken up this morning to the shock Brexit result that the UK will leave the European Union. The kids still needed to go to school, the sun was out, the birds were still chirping and the world carried on. Realistically, will we see much change to our daily lives, or will leaving the EU have less impact than we think?

Panic from the shock

The campaign saw opinion polls swing one way, then the other, over the past few months, suggesting a lack of certainty in the result. However, over the past few days, polls suggested a win for the remain campaign. The Pound strengthened, equity markets stabilised and gold fell. The fact that this result is a shock to the expectation of the markets will intensify its impact.


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The immediate impact of Brexit

It’s impossible to predict the medium to long-term repercussions of Brexit, but we can, at least, see the immediate impact. The Pound has fallen to its lowest level since 1985 and the FTSE has suffered losses of over £100bilion overnight. Significantly, the Prime Minister has announced his resignation, which leaves the country in political uncertainty. The gold price has acted as a useful barometer of expectations and reactions over the past few months, and overnight it rose by 15% for UK buyers.
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Longer-term volatility

Outside of electing a new prime minister, we may not feel much has changed. We are still members of the EU; it is the process of leaving which has begun. The claim is that this process can take 2 years. However, Professor Michael Dougan, one of the UK’s leading EU law experts, predicts the withdrawal and negotiation could take many years. Switzerland is still discussing certain points, after signing an agreement in 1972. This protracted process will cause an extended period of uncertainty in the UK, and globally. We may also see changes politically as the anti-establishment vote gains confidence, causing further instability.

Financial impact

Without a crystal ball, we don’t know if Brexit will have a negative or positive impact on our cost of living and prosperity. Both sides have claimed we would be better off. The worry is that most business leaders, including those outside of the UK, think leaving will harm our finances. Certainly, the reaction of the markets supports this view.

The worst part?

However, it’s the prolonged uncertainty we now face, which may have the greatest effect. Financial institutions have already put the deals, which oil the wheels of our economy, on hold. The economy will likely feel a reduction in liquidity, as banks retreat into their shells. Over the coming months and years, it will be interesting to see the reaction of global institutions, who may decide to leave the UK at the cost of thousands of jobs. The UK has the 5th largest economy in the world, so this overnight change will send ripples across the globe. This isn’t something that can be swept under the carpet.

Gold’s role

Instability and uncertainty are the driving motivations for people to buy gold. It acts as a hedge and portfolio insurance when markets suffer huge events. The fact that the gold price has spiked so dramatically overnight is reassuring that it’s fulfilling its role as a ‘safe haven’.

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Those who like the security of owning a tangible asset – like property – may now be concerned house prices could fall. We’ve compared gold investment to property to analyse where the markets may be heading.

As we’re likely to have years of uncertainty, gold should continue to act as a long-term balance to your wealth. And in the UK, we should benefit two-fold:
– First, the underlying gold price has moved up sharply.
– Secondly, the value of the Pound has fallen dramatically. Once you convert the $ price into Sterling, gold holdings have risen 15% overnight and, incredibly, more than 35% this year alone.

The economic impact of Brexit

As the Brexit saga moves into 2018, gold should continue to perform well. British industry has had yet another dismal year and the current GDP growth rate is inching along at a snail’s pace of 0.4%. As we move into 2018, there doesn’t seem to be an amazing economic recovery in sight. Brexit may close the gates across the border, but the actual impact that it will have on EU industrial relations with Britain is still unclear. However, analysts have projected a grim view of 2018. Expected profit from Britain’s largest companies is now expected to grow only by 7.2%, dashing hopes of a 19% growth projected earlier. Many companies have put their plans on hold and some are contemplating moving operations to other parts of the EU.

That’s not all….

Meanwhile, the Financial Conduct Authority chief has warned that unless there is clarity on the exact impact of Brexit by the end of the year, several companies may ship out of London next year to rival EU cities. Certainly, Berlin comes to mind as a hot favourite. The German capital is vibrant, young and home to several start-ups. The city champions innovation and is fast becoming a centre of economic growth. Goldman Sachs has already taken up 8 floors of a new office in Frankfurt, and the BBC earlier reported that the Bank of England has predicted that up to 75,000 financial services jobs in London could be at risk.

Invest in gold

When it comes to gold, however, pundits believe that Brexit fears are inconsequential. Investors will probably hedge their risk by investing in gold to hedge against their European woes. The spot price of gold appears to be currently hovering around the $1250 mark, with December still left in the balance. There is hope that the precious metal may rally a bit further on the back of Christmas demand. However, the real rally for gold may come in 2018. This will depend on the performance of greenbacks against the Euro, demand from India and China and of course, Brexit is likely to play a role in the mix as well. Another factor that can impact the US dollar is the rise of cryptocurrencies like Bitcoin. With more and more people investing in crypto-currencies, some investors may turn to gold to hedge, if the going gets too tough for them in 2018. All in all, it should be an interesting year ahead for gold.

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If you don’t already own gold, but feel concerned about the diminishing value of the Pound and falling equity markets, then it’s never too late. We discussed the bigger picture in our blog last month: Are Gold and Silver still good value?.

It’s simply a case of heeding the view of the experts and allocating some of your wealth into physical gold so that whatever the future holds, you’ve spread your eggs into different baskets. If you’d like to find out more about this type of investment, why not Download our free guide to investing in gold and silver or give us a call today to discuss your options.

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Blog

Escalating tensions in Korea push gold price higher

Recent days have seen the gold price rise to 2-month highs as markets desperately seek a safe haven from mounting geopolitical tensions.

Be Prepared

Only a couple of weeks ago, the summer holidays were in full swing and the gold market settling into a slumber, ready to awaken for Autumn. However, in a matter of days, the market has sparked back into life. Initially moving up on the back of downgraded UK growth forecasts, then propelled further as gesturing from the Korean peninsula and President Trump reached new highs (or lows, depending on your view!).  This is a classic example of how it’s never easy to anticipate such market events. Even in the depths of a summer slumber, the world can change overnight. This supports our notion that you should look to add gold to your portfolio ASAP as part of an overall balanced strategy, and then you’re prepared for any outcome. Reacting to a huge event by adding gold afterwards is usually too late.


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North Korea Sanctions

In a response to North Korea’s nuclear weapons program, the UN Security Council passed a new series of sanctions on Pyongyang last weekend. This followed the latest intercontinental missile tests from Kim Jong Un. The idea behind the new tougher sanctions is to cut off up to a third of the country’s export business, strangulating the funding for the nuclear project. However, the nature of North Korea’s leader has meant previous sanctions have failed to bring North Korea to the negotiating table, and if anything has made them more determined to push ahead with the program. China and Russia, two major trade partners with North Korea have supported the new sanctions.

A War of Words

With President Trump now firmly in his new seat, his muscle-flexing is surpassing anyone’s expectations.

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Trump’s bullish promise of releasing ‘fire and fury like the world has never seen’ if North Korea continue to threaten the US only provided encouragement for Kim Jong-un to retaliate. Recent US intelligence confirmed the regime had been successful in creating nuclear warheads small enough to fit into ballistic missiles. After denouncing Trump’s comments, North Korea revealed plans to fire missiles towards the US Pacific territory of Guam, where they have 6,000 service personnel at a base in the north as soon as the middle of August.

This threat has put the world on red alert. The US responded by warning this would spell the end of the current regime in North Korea, with US Defence Secretary Jim Mattis suggesting North Korea would be ‘grossly overmatched’ in any conflict.

Expectations

While most of us don’t want to contemplate financial affairs during the holiday season, it seems that macro events may well force our hand. Infact, we’ve seen more first time buyers this year than ever before as the realisation of a brave new world hits home.

As well as the political tensions in Korea, economic instability over the medium term seems likely to further support gold and undermine stocks. Coverage of Brexit has managed to push some of the real concerns under the radar. The Pound weakened last week when the UK’s Monetary Policy Committee announced lower growth forecasts and poor a wage outlook. Concerns increase about a growing debt bubble in the UK with car leasing debt at all-time highs and credit card debt coming under pressure from maturing zero-interest offers. With interest rates on the rise in the US, that may put pressure on others to follow. With rates at historical lows, it doesn’t take too much of a rise to increasing mortgage payments by a high percentage. This all combines with continental hardship which hasn’t recovered much from the financial crisis of the past decade, and recently we’ve seen both French and German banks requiring Government support.

All this uncertainty and instability could push the gold price higher, especially if the Pound comes under further pressure.

With UK coins being completely tax-free, buying Sovereigns and Britannias can act as a hedge against political and economic unrest. Adding gold bullion to your SIPP can provide balance and peace of mind to your long-term savings plans.

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Industry News

Revealed for the first time: just how much gold is in London’s vaults

London has long been acknowledged as the biggest gold trading centre in the world, but no one has ever been able to say for sure how much gold is stored in the capital – until now.

New data has revealed that around 7,500 tonnes of gold was held in London in March of this year – the equivalent of 596,000 gold bars, or £227bn-worth of gold.

The data was published by the London Bullion Market Association (LBMA) Insider's Guide to gold and silveras part of a new drive to provide greater transparency around the gold market and encourage investors to buy into the precious metal.

Around 68pc of London’s physical store of gold is held at the Bank of England, which has around 5,100 tonnes in its vaults. The Bank looks after the UK’s gold reserves and also holds the metal for other central banks.

The rest of the gold, or around 2,500 tonnes, is held for use by investors, and traded through banks and other clearing houses that are members of the LBMA.

By comparison, there are an estimated 187,200 tonnes of gold above ground in the world, according to Thomson Reuters’ annual gold survey. This means that London’s total accounts for just 4pc of global stocks – although the LBMA data does not include jewellery or holdings by private individuals.

The Bank of England’s gold pile is slightly smaller than that of the US Federal Reserve, which holds around 6,700 tonnes of gold.

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Just how much gold is held in London? 7,500 tonnes, according the LBMA

The LBMA data will be published with a three-month delay, and encompasses all gold holdings within the M25.

Apart from the Bank of England, there are just seven custodians of gold in London: security firms Brinks, G4S Cash Solutions, Malca-Amit and Loomis International; and banks HSBC, ICBC Standard Bank and JP Morgan.

Around £13.8bn worth of gold is traded each day in London, according the LBMA.

The data also revealed that London’s vaults held 32,078 tonnes of silver in March, worth £14.5bn.

Ruth Crowell, chief executive of the association, said: “‘How much gold and silver is there in the London vaults?’ It’s a question that I’ve been asked since I joined the market a decade ago and one I’m sure that was asked many years before.

“Today, I’m delighted not only to give a meaningful answer, but also to announce that these numbers will be available monthly from now on.”

Joni Teves, an analyst at UBS, said: “The more detail and information about the market, the better chance of understanding market dynamics and putting the various pieces of the puzzle together.

“Maybe it will even be of interest to those outside the industry to finally have some idea of how many gold bars – like the ones in the movies – are actually sitting in vaults in one of the world’s busiest cities.”

Bank of England 
The Bank of England still holds most of the gold in London

According to Ms Teves’ analysis, around 1,485 tonnes of gold in London, worth about £45.7bn, are used to underpin so-called Exchange Traded Funds.

Gold ETFs are financial products that allow investors to track the prices of the metal without owning the underlying commodity itself. However the funds are usually – though not always – backed up by physical gold, which can sometimes be stored in a different country. ETFs are listed and can be bought and sold in the same way as ordinary shares.

Gold is currently trading around $1,267 an ounce, up 10.44pc this year. Some investors have been put off buying gold because the US Federal Reserve is widely expected to raise interest rates again this year, which is likely to knock the value of the metal.

However Ms Teves said demand for physical gold had been “stable” so far this year.