Brexit Could Cause Gold Price to Soar

The surge in gold prices since the beginning of this year following three years of decline could gain further momentum if U.K. citizens vote in favor of the Brexit, which is looking increasingly more likely. The price of gold, a metal perceived to be a safe haven for investors in times of economic stress, could “explode,” according to some analysts, if the nation votes to leave the EU in the upcoming referendum that is now only weeks away.

Gold Price Movements

Driven by the economic turmoil of the global financial crisis, the price of gold soared to record highs before peaking at around $1,900 an ounce in September of 2011. As uncertainties over the financial crisis subsided, gold’s price declined reaching to as low as around $1,050 in November of last year in anticipation of the Fed beginning a new tightening cycle.

Yet, despite the Fed raising rates in December for the first time since 2006, the new year brought continued news of economic weakness in China and stock market turmoil that helped gold prices rise at their fastest rate since the financial crisis.

Following a dismal U.S. jobs report last Friday that has raised doubts over the health of the U.S. economy and lowered the odds that the Fed will raise rates later this month, gold prices made their biggest jump in 11 weeks and are currently sitting around $1,247 an ounce. But, the potential negative economic impacts of a Brexit could send the price of gold soaring past $1,400 an ounce according to some analysts. (To read more, see: Gold is Glittering in 2016: Here are 4 Reasons Why.)

Warnings of Brexit Risks

Numerous warnings over the negative economic impacts of the Brexit have been made in recent months. The IMF warned that if the U.K. left the EU, its economy could shrink by 1% to 9% over the long term. Other warnings have come from the Bank of England, World Bank and U.S. President Barack Obama.

But it is not just the U.K. economy that may face negative risks as Haruhiko Kuroda, governor of the Bank of Japan, recently argued that the Brexit poses the most serious risk to the global economy.

If Britain votes to leave the EU, the very future of a united Europe will look even more uncertain, and with the global economy already in a fragile state, financial markets are likely to become increasingly volatile. Investors will be looking to gold to provide that necessary safe haven. (To read more, see: Brexit Is Gaining Momentum.)

The Bottom Line

The most recent polls have the “leave” campaign leading at 43% against the “remain” camp at 40%. Just last year, with the prospect of a Grexit looming, some economists estimated that a “messy euro break-up scenario” could drive gold to as high as $2,000 an ounce. If you think Britian is more integral to the EU than Greece, perhaps $2,000 is a modest estimation.

By Matthew Johnston
Investopedia
June 7, 2016