The Federal Reserve, which kept interest rates unchanged at the end of its two-day policy meeting Wednesday, has played second fiddle this week to increasing Brexit fears, which sent gold priced in the British pound to highs unseen since 2013.
With Great Britains largest newspaper, The Sun, coming out in support of a Brexit, or split from the European Union, odds that UK citizens will vote Leave at the June 23 referendum are now at an all-time high.
Large clients lining up: Thus, gold priced in the British pound rocketed higher this week, soaring 8.5% as of June 14 and touching 911.05 pounds, the priciest level since August 2013. Great Britains largest online dealer is reporting some of its biggest sales ever.
We have a number of large clients waiting to place orders, BullionByPost founder Rob Halliday-Stein told Londons Telegraph. Everyone is waiting for the referendum outcome. Gold rises on volatility and we’ve never had a day as volatile as a Brexit day in the gold price market.
Another $1,400 gold forecast: And another investment firm has now joined the ANZ Banking Group in predicting $1,400 gold in the event of a Brexit. James Butterfill of ETF Securities sees as much as an 8.5% price rise if the UK votes to exit.
Brexit would be very beneficial for shorting sterling and we will probably see a big pick up in gold. In that scenario we think gold could hit $1,400, he said.
Butterfill also cited Donald Trumps unpredictable presence in the U.S. presidential elections as well as the Feds interest-rate policy as longer-term drivers for gold beyond the Brexit vote. These are three quite significant risk events, so thats why we are seeing popularity with gold, Butterfill said.
Brexit likened to Lehman collapse: Gold isnt the only place investors are heading for safety. In another sign of rising fear, the CBOE Market Volatility Index, or VIX, jumped the most in six months. Likewise, German 10-year bunds dipped below zero for the first time ever. It tells us that the markets don’t believe that the ECB is going to be able to reflate the European economy, Pimco global strategic advisor Richard Clarida told CNBC.
Regarding Brexit, Morgan Stanley just joined a host of firms outlining various negative aspects of a fracture in the EU, predicting a 15% plunge in stocks. And Hung Tan of the Institute of International Finance warned that a Brexit carries long-term risks akin to the Lehman Bros. collapse. It is not Lehman in the short term in terms of markets being in a panic or chaotic mood, because the central banks will try to pacify that, he said. But it is more significant than Lehman in its longer-term impact on global growth.
ECB could bail out banks: But Peter Boockvar of The Lindsey Group sees immediate painful aftershocks, telling CNBC Tuesday that a global recession will ensue. I dont think any of us really know how this plays out, he said.
And thats one reason why the European Central Bank has suggested that it will do whatever it takes to maintain adequate market liquidity, or backstop financial markets in the event of a Brexit.
Such an announcement from the ECB would come on June 24 if an early-morning result showed that British voters had chosen to leave the EU, Reuters reported. The aim is to underpin investor confidence across Europe and contain further market jitters.
Mushroom effect of a Brexit: And of course, its not just financial markets that are at risk with a Brexit approval; so is the future of the EU itself.
The issue is if the UK leaves, it will be the first country to leave, and that would seem to lower the barrier of exit for other countries, said Marc Chandler, chief currency strategist at Brown Brothers Harriman. Many people are afraid if the UK leaves, it will trigger a UK political and economic crisis. The government is campaigning to stay. It’s like a vote of no confidence in the government if they vote to leave. People are worried if the UK were to leave, it would trigger an EMU (European monetary union) crisis.
That sounds like a recipe for disaster a recipe that calls for sufficient gold to ride out the volatility ahead as the United Kingdom nears its history-making vote.