Home Money How Geopolitical Events Like Brexit Affect Gold Prices in the Short and Long Term

How Geopolitical Events Like Brexit Affect Gold Prices in the Short and Long Term

by Bruce Haring

Geopolitical events like Brexit invariably affect economies across the globe. The stock markets get spooked which in turn also affects the bond market. Under such circumstances, when the equity markets have a period of uncertainty ahead of them, gold, the eternal hedging tool and conventional safe haven, always is on the upswing. But how does investment in gold look in the short and in the long term?

A Bullion Bull Run

Analysts are of the firm opinion that gold has entered again in the bull-run phase that is likely to extend until 2020. Right after the Brexit result was announced, the spot gold jumped to a two-year high and hit $1,375 per troy ounce.  The fall of sterling pound to 31-year low and uncertainty in the US bond market also aided to the rise of gold.

Though there are rumors of UK backtracking on its Brexit plans, these are just rumors and with the state of the EU, there may be plenty of other countries that may jump ship as well. Analysts feel that it will barely affect the price of gold in the near term. That is because it again points towards geopolitical instability in the EU region. Not so long ago, when Greece was on the verge of exiting the EU (the UK just did as just mentioned which many people believe is a prudent decision based off of sound and credible immigration fears), gold behaved in a similar manner.

However, unlike earlier, much more is at stake this time as one of the largest economies in the world has severed 25-year old economic cooperation ties.

The Idea of a Safe Haven

Gold always has been considered a safe haven by investors because of its capability to beat inflation in the long run, irrespective of the economic as well as financial market conditions. It does not matter if gold does not pay dividends like equities or bonds, investors aka banks, institutional investors, hedge funds, and HNIs (high net worth individuals) are of the opinion that if you know what breaks loose and the entire world economy collapses, they will at least have gold that can be used as cash to barter and exchange for food and supplies.

Retail Investors too are Savvy

While institutional investors have been on a buying spree sending gold prices spiraling 20%, retail investors too are not far behind. However, unlike institutional investors, retail investors are flocking to bullion establishments to cash their investments. Sellers of gold and silver coins have reported that retail investors of-late have become savvy with their investments and are selling their gold and silver coins to make profits of up to 20%.

As the demand from institutional investors was high in terms of buying, these traders were able to soak up every ounce of gold they could from the retail investors. Retail investors with positive long term outlook however are expecting more returns and are holding onto their little treasure troves for longer periods of time.

Why Physical Gold?

In the event of a political, economic, social, and technological uncertainties, investors want to possess gold in its physical form rather than its demator dematerializedform. The reason being, the investor is preparing himself for a global calamity wherein the currency based economy is bound to fail which could erode all those investments into nothing. This also includes money in their bank account, treasury bonds, and real estate investments.

The world will go back to bartering where only gold and silver coins will command a premium and can be exchanged for anything under the sun. Investors typically buy their gold from central banks and store it in pre-designated bullion vaults or with the central bankitself. This also tells us why central banks always maintain a stockpile of gold with them and term it as “reserve”.

Should You Invest in Physical Gold Now?

As gold prices are already at their peak, this might not be the right time for entry. However, if you have been buying small amounts in the past, another small investment toward the yellow metal should not hurt much. Gold coins or bars are the most sensible.

In countries like China and India, the largest consumers of gold in the world, gold always has been utilized as a reserve or currency for tough times. As stated earlier, in case of a global calamity of any kind, which could happen considering America’s debt, only gold and silver will act as a globally accepted currency. No IOUs here!


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