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Brexitís Golden Moment?

Tuesday, March 12, 2019

As the US-China trade war rumbles on and Chinese economic growth continues to slow, Europe has its own matters to attend to, in the form of Brexit. The UK is scheduled to leave the EU on 29th March, but recent developments suggest that its departure will be far from smooth, if it even happens at all.

Political deadlock

Gold prices have kept up with the ongoing political deadlock, rising to around £988 at the time of writing (March 12th 2019), as the deadline looms nearer and the outcome becomes less clear. EU negotiators in Brussels have now warned that the UK must present new proposals regarding the so-called Irish backstop, a major sticking point for Mrs May and her critics from within her own party and the DUP.

The deadlock became clear, following the government’s defeat on a meaningful vote on Mrs May’s original Brexit deal in January 2019. It resulted in Mrs May losing the vote by 230 votes, delivering her government the worst parliamentary defeat in British political history.

Now she looks set to lose the vote on her revised deal, again with the DUP and a key group of Brexiteer Tories within her own party set to oppose the revisions, throwing the future of Britain’s relationship with the EU up in the air once again.

Gold’s time to shine?

The Brexit negotiations were always time-sensitive, but the closeness of the 29th March deadline increases the pressure on Mrs May’s government and raises the risk of failure, should the government prove unable to break the deadlock and get a deal through Parliament. This offers an opportunity for gold prices to break out of their two-year price range and potentially rise higher, if volatility returns to the markets.

The OECD made a warning to the UK over a possible no-deal Brexit scenario, in which the UK might leave the EU without any plans in place with regards to trade. In a new report, the organisation raised concerns that a no-deal Brexit could result in a recession, which has the potential to affect not just the UK but its trading partners as well.

Like any market, we cannot predict exactly how gold will respond. But we can say that gold prices have typically risen rapidly during instances of recession. Between 2007 and 2011, the precious metal quadrupled in value, as the UK weathered a credit crunch, a global financial crisis and a crisis in the neighbouring Eurozone. Between 2015 and 2016, it rose 50 per cent simply due to the global slowdown and the outcome of the EU referendum. This demonstrates gold’s ability to not only maintain its value but appreciate dramatically in times of crisis or following geopolitical shocks.

Increasing risks in the months ahead

The Brexit deadlock could be resolved in a number of ways, and each option carries its own risks. At the time of writing Mrs May is set to present an updated version of her Brexit proposals to MPs on 12th March, but headlines suggest that MPs may reject the proposal for different reasons.

If her own proposal is defeated, Mrs May’s government will suffer a great loss of control over the Brexit process, increasing risk in the markets. We expect to see a response in the gold price following these developments.

A no-deal Brexit may result in prolonged economic weakness. In the event that Mrs May’s deal is rejected, MPs shall return to Parliament for a vote on 13th March, where they shall either consent to or reject the no-deal Brexit option. MPs may decide to go for the no-deal option, but this would serve as something of a shock, as commentators generally agree that a majority of MPs are not in favour of the no-deal option.

Extending Article 50

In the more likely event that MPs reject the no-deal Brexit option, they will return for a final vote on 14th March. This third and final vote will revolve around voting on whether to extend Article 50 for a limited time, offering Mrs May some breathing space. It remains unclear how long the extension could be, and risk may grow if the extension proves insufficient for MPs to overcome the deadlock.

A no-deal Brexit could still occur despite the Article 50 extension, as it serves as the default position for the UK, unless a deal can be provided before the time runs out. Mrs May has a slim chance of being able to present a deal palatable to MPs if enough of them can forge a consensus during an extension period.

However, unless a sizable number MPs come forward with this new proposal, it remains unlikely. Other outcomes such as a second EU referendum are also possible under an extension period scenario, but this would require a clear majority in Parliament to make this a reality, and it could prove difficult to decide the terms of the vote.

A safe haven in turbulent times

As underlined, each conceivable outcome lacks the clarity so desired by the markets and investors. Each avenue is fraught with negative consequences for the economy, so volatility may increase no matter what happens in Westminster.

In turbulent times, investors have historically turned to gold and invested in the precious metal as an important area of a diverse portfolio. With no sign of a clear resolution on the horizon, three is potential for gold to shine once again.

If you’re thinking about diversifying your portfolio with gold, consider a selection of gold coins or bullion bars to build up your collection in the coming days and weeks. At The Gold Bullion Company, we have a number of special items available for collectors and investors.