Why Brexit Could Propel Gold to New Highs

On March 29, 2017, nine months after a referendum approving by 51.9% the UK’s departure from the European Union (EU), UK Prime Minister Theresa May signed Article 50 of the EU Charter to initiate the action.
While professional investors aren’t exactly sure how or even whether the departure, popularly known as Brexit, will affect the stock market, at least one observer, Martin Tillier, feels it will almost certainly cause the price of gold to rise.
Tillier argues that although gold technically is a commodity, Brexit will exact a performance from the yellow metal which is more in keeping with that of a currency on the foreign exchange (FX) market. To appreciate that fact, stresses Tillier, one needs to understand the prestigious standing of the British pound alongside the U.S. dollar, the Japanese yen, and the euro – all major world currencies. Much of the reason for the elevated status of the pound can be attributed to the fact that London, even during the Brexit tumult, has remained Europe’s financial center.
An excess of $5 trillion in diverse currency turns around daily on the foreign exchange market. This is clearly the largest financial market in the world, much larger than the markets for stocks and bonds. It wouldn’t be surprising at all if some of this cash seeps into the gold market. If just a small amount of it does, claims Tillier, the shiny metal will undoubtedly undergo “a strong bullish run.”
Even if the UK works out amicable terms with the EU for its departure, London is now due to lose its preeminent position as Europe’s financial center. Many of the giant banks with London as their center of European operations will move elsewhere. These moves will most certainly put pressure on the British pound.
Although the yen has strengthened somewhat recently, Japan’s struggles with negative interest rates and other inflationary challenges will still make it unattractive as a panacea currency for foreign exchange traders, as will the dollar or the euro, because of their recent setbacks.
Tillier is wagering that traders will turn to gold for its “role as a traditional store of value and an inflation hedge.” As of this writing, the shiny metal is up $4.00 at a spot price of $1,252 on the COMEX close.
Given the strong possibility of a run-up in the price of gold as we get closer to the official date of Brexit, along with the many economic challenges that plague the EU and the United States, you’d be wise to divert some of the profits from your papers asset to physical gold.
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