How Could Brexit Affect Gold Prices?



Brexit and gold

Besides fear of an interest rate hike, another macroeconomic factor has gripped the precious metals, especially gold. The possibility of Brexit, or the United Kingdom’s exit from the European Union, has added uncertainties to global markets. Precious metals are famous for their safe-haven appeal and often bounce when risks in the markets rise. Thus, the volatility over Brexit is also helping gold rise.

The United Kingdom will vote on June 23, 2016, on whether the country should exit the European Union. The exit may undermine the prices of industrial commodities and add further turbulence to financial markets.

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Safe-haven bids for miners

Brexit would affect not only precious metals but also the funds that closely follow these metals. Funds like the VanEck Vectors Junior Gold Miners ETF (GDXJ) and the Global X Silver Miners ETF (SIL) have risen 111.3% and 108.9%, respectively, on a YTD (year-to-date) basis following the safe-haven bids for gold and silver.

The miners that rose include Yamana Gold (AUY), Pan American Silver (PAAS), and Coeur Mining (CDE). These three shares have risen 183.3%, 138.8%, and 252.4%, respectively, on a YTD basis. Together, these three miners make up 6.2% of the VanEck Vectors Gold Miners ETF (GDX).

Subdued physical demand

Meanwhile, physical demand has been low among the top Asian buyers, India and China. In particular, demand in India has been hurt by a strike by jewelers in reaction to import duties. Physical demand rose in Japan, where investors were stunned in January when the central bank implemented negative interest rates.

In the next part of this series, we’ll see how the precious metals have reacted to tumbling equities.


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