Brexit, U.S. election risks mean precious metals have become the must-haves
Warnings about a possible Brexit are starting to come faster and more furiously as the June 23 referendum in the United Kingdom nears. And because of the looming uncertainty over the future of Great Britains participation in the European Union, gold is gaining some serious luster overseas.
Right now no one knows how the referendum will turn out. The message from opinion polls is simple: It is impossible to predict how Britons will vote, a Reuters analysis found.
The British Treasurys own study of a Brexit impact estimates that household wealth will decrease, tax receipts will shrink, and GDP will fall, among other repercussions.
Brexit raises recession risks: The Bank of England also weighed in last week, saying that a vote to leave the European Union could slam the brakes on growth in the UK, push up unemployment and stoke inflation. The UK also could face a major financing difficulty and a technical recession, according to The Wall Street Journal.
The International Monetary Fund said the impact would range from pretty bad to very, very bad. An exit would precipitate a protracted period of heightened uncertainty, leading to financial market volatility and a hit to output, it said. Such market reactions could sharply contract economic activity, further depressing asset prices in a self-reinforcing cycle.
And the Angel Gurria, secretary general of the Organisation for Economic Co-operation and Development, told Britons that they would face the equivalent of a Brexit tax equivalent to a months salary by 2020 if they leave the EU.
Shock waves through markets: A USA Today report warned that a possible Brexit may sendshock waves throughthe globaleconomy and affect four particular areas: stocks, economic growth, the currency markets, and trade.
Meanwhile, some major corporations also have voiced concerns about a Brexit, including Microsoft and Hewlett Packard. And U.S. banks too are worried about the effects of a Brexit, with Morgan Stanley CEO James Gorman saying that leaving the union could be damaging to the UK economy.
Thus, many investors are leaning toward a risk-off mode. Allocations to UK stocks have fallen to their lowest level since November 2008, MarketWatch reported. Brexit is seen as the biggest tail risk for global markets, supporting elevated investor cash levels, Bank of America Merrill Lynch noted.
Bank to double metals holdings: Some are seeking cash for safety, but HSBC is among the analysts who argue that a Brexit can boost gold. German bank Joh. Berenberg Gossler & Co. also like the metal.
Chief Investment Officer Manfred Schlumberger, who joined the Hamburg-based bank in January, expects gold, silver and platinum markets to rebound by as much as 40% in the next two yearsto a level last seen in October 2012, Bloomberg reported. For that reason, Berenberg plans to double the share of precious metals in its investment portfolio to about 10% in the weeks ahead.
What was gold trading at in October 2012? On Oct. 1 of that year, the yellow metal closed at more than $1,778. And on the same day in 2012, silver was commanding more than $34 an ounce.
The growing preponderance of negative interest rates is one reason why metals will gain, Schlumberger said. People used to go for 10-year German government bonds or treasuries, but as they dont offer any yield, more investors will consider buying bullion, he said. Major political question marks in Europe and the U.S. also will boost bullion. It will be a segment that will benefit from political uncertainties like Brexit or a possible Donald Trump election victory, he added.
Gold-bullish risks include U.S. election: Chief Saxo Bank commodity strategist Ole Hansen also factors the potential Brexit into his bullish gold forecast, which targets $1,400 this year. The outcome is by no means certain yet, said Hansen, who thinks resulting damage to the euro may leave gold in a good position.
However, he also thinks the U.S. presidential election is another likely catalyst for gold. Its not just one risk right now,he said. We have got several risks, so when you start adding them up, it could be that additional risks will sway some investors to add exposure to gold or maybe revisit gold. So these are all just adding to the reasons why precious metals have become the must-haves.