Is Gold the Safe Haven Answer to Brexit?

The UK is still in turmoil as Brexit negotiations continue with a no-deal outcome becoming more likely. Investors are yet again on track to cut investments as the uncertainty surrounding Brexit continues to drive this two-year slump. The sharp economic slowdown was worse than what speculators had initially feared, as reported by the Citi UK Economic Surprise Index. With the UK’s economic future in flux, many investors are looking at whether or not gold is a viable safe haven solution.

Gold prices on the rise

Gold prices rose dramatically last month in response to Theresa May’s resignation. The continuing uncertainties that are surrounding the seemingly endless Brexit negotiations have contributed to gold prices in GBP reaching an eight-year high last week. Shooting upwards within 35 pence of £1140, it was the highest since September 2011, and the UK gold price in GBP radically rose despite the pound’s depreciation.

With the UK having only months before the 31st October deadline, businesses and investors are fleeing away from the global financial centre. Companies like Goldman Sachs, Morgan Stanley, and Citigroup have moved $300 billion (£239.7 billion) in assets from London to Frankfurt. Barclays alone is responsible for shifting $215 billion (£171.8 billion) to Dublin, and BNP Paribas and Société Général are doubling down on Paris. This uncertainty is cutting into the pound’s value and precious metals are taking the spoils.

Gold as Brexit’s “safe haven”

Gold has always been considered a “safe haven” when currency markets are volatile and inflation is high. With the no-deal Brexit becoming more of a certainty than a possibility, many UK investors are turning to gold to protect their investments.

Consequently, gold price linked instruments, such as Gold Futures and Gold ETCs, are also climbing. Gold ETFs in Europe brought in $2.5 billion with three of the five most popular ETFs in terms of inflows based in the UK. Uncertainty around Brexit has resulted in UK-based holdings to be at an all-time high. Prices of gold and gold-linked instruments are indicators of the risk aversion and appetite of investors.

Following the 2008 financial meltdown, gold has become one of the most reliable markets in the past decade as it provides stability amid global financial ambiguity. During the first half of last year, however, Bloomberg reported on how gold hit its lowest value since 2009. August last year saw gold tumble to 9% after 13 long weeks of decline. The good news for investors is that this decline has been reversed, with FXCM’s gold price chart showing how 2019 has been a much stronger year for the precious metal. Gold ETFs in Europe have been consistently increasing in market value despite the volatility in global gold prices last year. It is this increase that will convince more investors that gold is a valid safe investment as the Brexit negotiations continue.

Upcoming trends that will affect the price of gold

No-deal Brexit. As the UK remains entangled in domestic political instability following consecutive deadlocks in the Brexit deal, and with Brexiteer and new Prime Minister Boris Johnson steering the ship, gold in GBP-terms will continue to attract investors as it provides stability.

Recovering US currency. Despite being traded all over the world, gold is often denominated in US dollars. So, any volatility or change in the US dollar’s valuation directly impacts gold prices. Already, the US dollar has started to recover despite trade tensions with China and high-profile exchanges with Iran, has slowed down the price increases.

Looming rise in interest rates. Ultra-low interest rates could lead to a surge in gold prices as investors see it as a better substitute compared to savings accounts and bonds with low revenues.