On Thursday, June 23, the United Kingdom left an indelible mark in the history books when it voted to leave the European Union, forever changing the world for investors, politicians, and European residents. Although political commentators and central bankers may provide the image of confidence and security, no one knows for certain what the future now holds for the world, and specifically, the financial markets.
From Japan to the United States, equities, currencies, and virtually every other risky asset unanimously sold off throughout the reporting of the Brexit polls as the Leave campaign gained favor and appeared likely to win.
However, gold, the one asset that didnt have a stark intraday selloff, traded as high as $1362.60 an ounce, which is its highest level since 2013. In times of severe uncertainty, such as the UK leaving the EU for the first time in the history of the world (a.k.a. Brexit), investors from all over the world seek refuge in safe assets like gold.
Biggest one-day surge since Lehman: Gold futures trading on the CME for August delivery, which ultimately determine the value of any form of tangible gold (like a ring or necklace), gained almost 6% intraday after it was ascertained that the Remain group would mathematically have to win before the polls officially closed; this was a one-day surge in the price of gold not seen since the infamous collapse of Lehman Brothers in 2008.
Although it may sound histrionic, the sheer impact that Brexit has on the entire world, and specifically on the price of gold, cannot be underscored enough.
From a fundamentals standpoint, there is simply no reason not to own gold in a time of such turmoil. Besides the inherently limited supply of gold that provides a logical reason to buy, the current demand for gold in times of market turmoil and uncertainty is off the charts.
Aftershocks could last for years: Ned Schmidt, the renowned author of the Value View Gold Report, described how Brexit is a once-in-a-lifetime event that decimates any bearish assumptions about the price of gold. The case to buy gold becomes so much stronger when discussions about global markets now include the possibility of multiple recessions, currency devaluation, and inconceivably high volatility and fear.
The reasoning behind the belief that the price of gold will now continue to rise as a result of Britain leaving the EU is relatively straightforward. Besides the potential macroeconomic and political issues that Britains departure will create, there is, and likely will be, an extremely heightened sense of uncertainty for years. This uncertainty makes investors partake in a flight to quality, where they dump risky assets and purchase safe ones, like gold.
Safe-haven allure now undeniable: If an investor has money that they want to use, or are obligated to use (such as a multibillion dollar mutual fund that can influence market prices), they too are looking for safe investments, and this also makes the case for purchasing gold even more convincing.
Similarly, those who have a more pessimistic economic outlook, perhaps residents or banks in Britain whose currency has lost a whopping 10% in one day (the biggest drop in 30 years), would buy gold purely because holding cash in the local currency is just too risky.
At the end of a day filled with chaos, panic, and perplexity, history was unequivocally made with Brexit, and it is safe to say the scale utterly tipped in favor of buying gold.