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Does Britain’s Gold Fever Prove its “Safe Haven” Value?

brit vs eu - square

A month ago this week, British citizens placed their ballots in a historic vote to exit the European Union. The extensive fallout has been detrimental in social, and economic terms, with xenophobic violence on the rise, the British pound hitting a 31-year low, and a call for a re-vote from British citizens that reached over 4 million signatures. Needless to say, it’s been the rockiest few weeks for our friends across the Atlantic in recent memory, and there doesn’t seem to be an end in sight.
After the turmoil and uncertainty in the UK stock market at the end of June, some investors have been opting in for gold, arguing that gold will provide the stability that the markets cannot.

Gold, a brief history

Gold and stock markets have always seemed at odds with one another. Some investors have looked to gold in times of economic unrest, as a safety net of sorts. It’s not the first time Brits have turned to gold, dealers saw a buying surge in the initial phases of the subprime crisis at the end of 2008 and during Europe’s debt crisis in 2012 and 2013.
In America during the recession, we saw a similar trend between 2008 and 2012. The value of gold increased dramatically ($1900 per ounce, to be exact), as is evidenced by the 101.1-percent surge in the Producer Price Index (PPI) for gold. The Federal Reserve Chairman Ben Bernanke once stated that gold prices can act as an indicator of the health of an economy, that the rise in the price of gold may be a signal that the economy is struggling. As a result, in times of either a crisis or inflation, many investors turn to gold to protect their principal. By contrast, in times of economic stability, investors are more likely to turn to more speculative investments, such as stocks, bonds, and real estate. During these times, the price for gold often declines.

PPI chart

What’s happening now

Government-owned bar and coin producer, the Royal Mint, saw a 7-fold increase in sales of 100-gram bars, around half the size of a credit card and costing around $4,400, in the two weeks following the June 23 vote. Around 4 million pounds ($5.5 million) of gold and silver were traded online on the platform of London-based on the June 25-26 weekend, seven times the average weekend of the previous 12 months.
The number of first-time UK buyers on the site rose by around 170 percent in June and the first week of July, compared to the previous 12-month daily average, it said. The surge in gold buying is in contrast with Brexit’s effect on the London property market, considered an ironclad bet for the past 20 years. More than 18 billion pounds of property funds aimed at retail investors was frozen in early July following a tide of redemption requests after the Brexit vote.

Does it deserve the “safe haven” status?

It’s important to remember that gold itself isn’t impervious to turmoil. At this moment, gold imports fell from 101 tons in May, to 68.7 in July in value in China, the world’s number 1 gold consumer. While there are still reasons for Chinese investors to purchase gold such as the slowing economy, a lackluster stock market and weakening currency, buyers paused on concern the advance in prices to the highest since 2014 may not hold.
In some investors eyes, it seems gold has worked less and less as a crisis insurance as time has gone on. In the stock market crash of 1987, it rose only 5%, and in the financial crisis of 1998, it rose 2%. Lastly, in the financial crisis of 2008, it failed once again as a safe haven, falling as much as 30% as desperate investors dumped everything, including bullion, to raise cash.

The main appeal of a “safe haven” is that it doesn’t depend on any outside factors, but the main drivers of the gold price seem to be retail demand, both here in America (through exchange traded funds such as the SPDR Gold Trust), and in emerging markets. And that, too, means it is more likely to be volatile than safe.

Where does that leave us?

For one, property developers in London say they’ve never seen panic over the UK financial system to match what has been witnessed in the aftermath of Brexit. For the time being, they’re being forsworn buying real estate, and instead have purchased £350,000 (almost $463,000) in gold.
The good news is that we still have gold, and for the moment, it’s on the rise. Gold coinage has been around since 800 B.C., and that’s one hell of a track record. If the dollar debases, or markets freak out, which, with Brexit aftershocks still unfolding, and an historic election season just getting in gear, it’s more than likely that gold will stand firm.
By making precious metal part of your investment strategy now, you’ll own a hard asset that’s still close to the beginning of its bull market run. We’ll let others ponder the economic implications of Brexit, but in the markets the nervousness is clear.