Gold Is Providing Investors with Financial Insurance Against Currency Weakness - Sharps Pixley

Release Date: 
Friday, June 24, 2016

Gold and Silver Prices
Gold prices exploded as the world learned that the UK voted to leave the EU.

"Gold delivered and more gains may be on the cards. As global financial markets were cast into turmoil by Britain's decision to quit the European Union, the commodity that's known above all else for its role as an investment refuge rewarded backers with the biggest surge since the global financial crisis in 2008...

"'Gold is doing what an asset like gold should do, " said Dominic Schnider, head of commodities and Asia-Pacific foreign exchange of the wealth-management unit at UBS Group AG. 'Gold has delivered what it promised: doing extremely well in adverse times. The question is, is there a longer-lasting effect?...

"Societe Generale SA predicted before the vote that a decision to leave may spur a rally in gold to as much as $1,400 an ounce amid heightened volatility. The long trade was expected to be particularly effective even following the announcement of a Brexit, the bank said, flagging the potential for further gains beyond Friday.

"'The heightened market uncertainty will prompt investors to seek safe-haven assets, benefiting gold and the rest of the precious metals,' Mark Keenan, head of commodities research for Asia at SocGen, told Bloomberg on Friday. 'While, arguably, some of this uncertainty has already been priced in, there is likely much more to come....'" ("Gold Delivers on Day of Tumult as Brexit Supports Bull Case," 6/24/16.)

Gold ended the week up $42.30, closing at $1,316.60. Silver prices closed at $17.82, up $0.44.

Gold Is Providing Investors with Financial Insurance Against Currency Weakness - Sharps Pixley
Ross Norman, CEO of London bullion dealer Sharps Pixley and one of the top forecasters for the London Bullion Market, explained why gold rose to two year highs following the Brexit vote.

"Gold rocketed this morning as the shock UK referendum result saw carnage in financial markets, prompting a rush to safe haven assets like gold... Speaking of the gold rush Ross Norman, CEO at Sharps Pixley said 'gold has done what it does best and that is to provide investors with protection against currency weakness and political uncertainty- it is a safe haven asset with wealth preservation properties - the prescient investor has been well rewarded by his caution. We have always cautioned against betting on gold for short term outcomes, but over the long term it does what it should and that is to provide people with financial insurance....'" ("SHARPS PIXLEY : Gold Rockets 20 Pct," 6/24/16.)

Demand for Physical Gold Surges After Brexit Vote
Demand for physical gold surged as investors sought a safe have asset following the Brexit vote to leave the EU.

"Gold dealers in London reported surging demand for coins and bars on Friday, with some saying stocks were tight, after a shock vote for Britain to leave the European Union sent financial markets into meltdown and drove the pound lower...

"Gold delivered double-digit percentage gains in sterling terms on Friday, topping 1,000 pounds an ounce for the first time in over three years, and soared as much as 8 percent in dollars. Volatility in the wider markets has left some retail investors scrambling to stock up on gold, dealers say...

"Physical gold demand among consumers is also expected to rise in the remainder of the EU, on fears that other countries could also seek referendums on exiting the bloc. Gold priced in euros hit a three-year high on Friday as the single currency dropped sharply versus the dollar. 'We've already seen quite a surge in online demand,' German bullion retailer Degussa's chief executive Wolfgang Wrzesniok-Rossbach said. 'We've had double the number of purchases compared to a normal day....'" ("London gold dealers report surge in coin, bar demand on Brexit vote," Reuters, 6/24/16.)

Why Brexit Matters in the U.S. - CNBC
CNBC explained how the UK's decision to leave the EU could have a devastating effect on the U.S. economy.

"Nearly every market move over the last two weeks has been attributed to the upcoming British referendum on whether the United Kingdom should remain with or leave the European Union... And it's not just trading desks who cared about Thursday's referendum. Federal Reserve Chair Janet Yellen said earlier this month that a British exit from the EU 'could have consequences in turn for the U.S. economic outlook...'

"The general thinking is that many international corporations, notably those based in the U.S. and China, invest in U.K. operations partly so they can readily access the free-trade corridors the U.K. enjoys with the rest of the European Union. So since the leave camp won, many of those companies could see drastically reduced profits.

The sudden need to reset tons of global investment channels — against the background of the ambiguous and extended period of the U.K.'s exit negotiations — could have a freezing effect on the whole region...

"Depending on how you measure it, the EU as a whole ranges from the first to the third largest economy in the world. And in terms of trade, the bloc easily topped the U.S. and China in both imports and exports. So a slowdown there would mean a global slowdown. One that could last months — if not years...

"In the U.S., billions, if not trillions, of dollars could be called into question by a British exit: In 2014, American direct investment into the EU totaled about 1.81 trillion euros, and about 1.99 trillion euros flowed in the opposite direction, according to the European Commission. If even a small percentage of that is disrupted, it could reverberate across the globe...." ("Brexit 101: What just happened, and why it's important for Americans," CNBC, 6/24/16.)

Central Banks Prepare for Brexit with New Currency Liquidity Plans
As world markets roil over news that the UK will leave the EU, central banks are rolling out coordinated plans to support the markets including possibly flooding the markets with currency.

"Central banks have said that they are monitoring financial markets and remain in close contact with one another as the full impact of a 'leave' victory in yesterday's U.K. referendum on whether to stay in the European Union. Markets in Europe and Asia dropped dramatically on news of the exit...

"It is clear that the markets will be tumultuous for some time. So how are central banks responding? Starting with the Bank of England. Governor Mark Carney said the bank would not hesitate to take additional measures as required as 'markets adjust and the U.K. economy moves forward...'
"The bank said it would make £250 billion ($347.73 billion) additional funds available to support the functioning of markets and would provide substantial liquidity in foreign currency if required...

"'The ECB stands ready to provide additional liquidity, if needed, in euro and foreign currencies,' the central bank said in a statement. 'The ECB has prepared for this contingency in close contact with the banks that it supervises and considers that the euro area banking system is resilient in terms of capital and liquidity...'

"Governor of the Bank of Japan Haruhiko Kuroda also commented on the matter, saying he was in close contact with relevant authorities in Japan and abroad. Kuroda said, 'We will make efforts to stabilize the financial market by making use of the swap rule whereby the central banks of Japan, America, Canada, the Eurozone, Switzerland, and the U.K. accommodate currencies for one another, while at the same time take all possible measures to ensure liquidity....'" ("Central Banks Unleash Contingency Plans in Response to 'Brexit'," TheStreet, 6/24/16.)

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