Gold Benefits From Brexit Panic

Financial markets are complicated places. For most of last week, the increasing fears of a U.K. exit from the European Union fueled investment in gold and the yen, and left equity prices generally lower. On June 14, higher Brexit voting indications sent the U.K.'s currency and stocks to their lowest levels in months. Then, on June 16, the murder in the north of England of a female Member of Parliament moved local markets higher. The Labour Party MP Jo Cox was shot three times and, amid profound shock, sterling was marked up.

The U.K. goes to the polls this Thursday, June 23, and Cox was an ardent campaigner to remain in the European Union. Her alleged killer is an advocate of right-wing causes, and of "independence," media outlets reported. Although campaigning was immediately halted as a mark of respect, analysts saw the tragedy as likely to cause damage to the Brexit campaign.

The Oddschecker website culls betting sites to predict results, and June 15 the odds of the U.K. leaving the EU had risen to 45% from only 20% three weeks earlier. Two days on, the odds for a U.K. exit had fallen back to 36%. The slightly reduced danger of a split in the EU pushed sterling higher, and bond yields improved — international bond prices fell because stable markets favor an increase in interest rates.

The International Monetary Fund weighed in again last week. In a statement, the IMF said a decision by the U.K. to leave the EU would result in a "negative and substantial" hit on the economy, and harm the economies of other European states. Finland's outgoing finance minister, Alexander Stubb, told the Financial Timeshe feared this could be "the Lehman Brothers moment of Europe."

There were other significant developments last week.

After awful U.S. jobs figures in May, the Federal Reserve's Open Market Committee kept interest rates unchanged. Also, the Fed's chair, Janet Yellen, made little attempt to persuade investors that a rate rise might come at next month's meeting. Indeed, most analysts are now factoring in only one rate increase for the remainder of this year, and U.S. 10-year Treasury yields are now at their lowest level since August 2012.

Markets remain in panic mode, with gold up 25% in six months, and the other safe-haven refuges, the U.S. dollar and Japanese yen, also strengthening this year. The Bank of Japan last week left interest rates unchanged. BoJ governor, Haruhiko Kuroda, said "Britain's referendum is shaking markets." Increased investment in Japanese government debt saw 10-year bonds fall to minus 0.2%.
The uncertainty around the U.K.'s EU membership, and a weaker dollar, saw gold top US$1,300 per ounce June 16, and the precious metal closed the week up 3.7% at US$1,311 per ounce. Brexit is also a concern for the petroleum markets, and oil prices rose on June 17 for the first time in seven trading sessions. However, Brent Crude was still down heavily for the week overall.

Meanwhile, it is estimated that the People's Bank of China has spent US$473 billion to support its currency since August 2015, despite a commitment to let market forces drive the exchange rate. The Financial Times quotes sources as saying the intervention has been necessary to maintain economic confidence and prevent a disorderly depreciation of the renminbi.

Note: Despite the Brexit name, it is a referendum for the entire U.K. as the three countries that comprise Britain — England, Scotland and Wales — are joined in the vote by Northern Ireland.