As the UK prepares to leave the EU, gold has the potential to become a form of ‘Brexit investment’, as the precious metal has been known to rise in value during times of financial and economic turbulence. It may prove to be the ideal time to buy gold coins or gold bars, as rising volatility may result in price changes to the upside – a Brexit gold bounce.
Much has changed since our last Brexit update on gold in 2017. In December 2017, the British economy was growing modestly. However, according to the latest Purchasing Managers Index (PMI) surveys for activity in early 2019, growth may have decelerated and the economy risks stagnating entirely, when the next tranche of economic data is published.
In late 2017, policy-makers had the luxury of more time to negotiate a deal, and the economic outlook was rosier. Now, the deadline is fast-approaching, with little concrete evidence of a definitive exit deal. To make matters more unsettling, the economy is at risk of stagnating. Gold prices tend to rise during times of economic uncertainty, something which has undeniably increased significantly in the past two years.
Is gold becoming an increasingly attractive investment?
Gold is priced at just over £988 per troy ounce (at the time of writing 12th March 2019), having settled close to the £1,000 price level since the EU referendum in June 2016. Gold prices have risen over 10 per cent since October 2018 alone, as investors grow increasingly concerned about the final outcome of the UK’s withdrawal process.
One metric of rising uncertainty is the value of Sterling, which is now lower than it was in December 2017, relative the Dollar. Currency depreciation and economic slowdown have the potential to make gold more attractive as an investment, relative to other assets, as it is reputed for its status as a safe-haven in times of crisis.
A meaningful vote on Prime Minister Theresa May’s proposed Brexit deal in mid-January resulted in the government losing by 230 votes, making it the most significant defeat in British parliamentary history. Consequently, Mrs May has attempted to revise her deal, in order to appease the numerous factions within her party, as well as Parliament at large.
However, one of the main factors that has led to increased uncertainty is dissatisfaction over the so-called Irish backstop. The backstop is a mechanism that ensures no hard border between Northern Ireland and the Republic of Ireland, in the event that the UK’s relationship with the EU remains unresolved by December 2020, when the transition period is scheduled to conclude.
Mrs May must convince the DUP and disaffected Eurosceptic MPs on the backbenches that the backstop is temporary, as they are concerned that it may become permanent. They are also concerned that it could potentially result in Northern Ireland holding a different status to the rest of the UK, with regards to the single market and the EU’s existing customs union.
The Prime Minister announced a series of votes to be presented to Parliament in mid-March, in order to resolve the matter and conclude proceedings. However, negotiations with the EU have reached an impasse in recent days, as news emerged that officials from Brussels were keen for the British government to present new proposals with regard to the Irish backstop, subsequently rejected by a key group of Tory MPs.
What could happen next?
There is great uncertainty about how these parliamentary votes may play out, giving space for the gold price to remain elevated, and potentially rise further, as a result of sudden shocks. For some investors, items such as gold coins and gold bars could prove to be an attractive investment ahead of possible price swings.
All signs suggest that the Prime Minister will fall short of gaining the majority she needs later today on her latest backstop deal. If MPs do indeed reject the latest proposal, a second vote follows the next day, in which MPs must vote on the subject of a so-called “no-deal” Brexit.
This no-deal scenario carries an undeniable level of risk to the British economy, as the Bank of England indicated in a report in November 2018. It argued that failure to put a deal in place combined with a lack of transition could result in severe disruption and the potential for a significant contraction in the economy, otherwise known as an economic recession.
Rising gold prices
Following the previous recession in 2008-09, gold was not only able to retain value for investors, but it actually quadrupled in price. If you held any gold during this period, you may have seen how it rose in value, from a low of over £300 per ounce in mid-2007 to a high of £1,200 per ounce in late 2011. This demonstrates the precious metal’s potential for a significant revaluation to the upside, in the event of a recession following Brexit.
If Parliament votes against the idea of a no-deal Brexit on 13th March, it will reconvene the following day, to hold a vote on a possible limited extension of Article 50, the process by which the UK negotiates its exit from the EU. The Prime Minister has repeatedly rejected calls for such a move, but the scenario is growing increasingly likely, and such an outcome would undermine her government’s credibility.
There are a number of possible outcomes that may arise, following the parliamentary votes in mid-March. Mrs May’s deal could potentially be accepted by MPs, allowing the UK to continue its departure from the EU on 29th March as planned. As noted, this scenario looks unlikely, due to parliamentary arithmetic.
This leaves the UK with two remaining options: a no-deal Brexit, which could result in greater economic weakness or an extension to Article 50. Both options present great uncertainty, both economically and politically. The latter option itself could ultimately result in a no-deal scenario, if MPs find themselves unable to agree on any deal before the extension period runs out. This is because it would be the default position, without any other kind of deal in place.
Also, through extending the departure process, there remains the potential for a fresh referendum on the UK’s membership of the EU, unless MPs agree to an alternative deal yet to be presented before Parliament.
Owing to the sheer number of potential outcomes, risk remains high and investors may seek to return to safe haven assets such as gold, to protect themselves, in the likelihood of a weaker economy or persistent political deadlock between Westminster and Brussels.