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Brexit Turmoil Pushes Price of Gold Up in Pounds

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The price of gold in pounds spiked Monday as Brexit confusion and political instability sent Brits scampering into safe havens.

Spot gold against the pound rose nearly 1% after Brexit Minister David Davis and British Foreign Minister Boris Johnson both resigned their posts in protest.

Business Day described Brexit as a “ramshackle exit from the EU,” as a European Central Bank policymaker warned it could damage economic growth in the eurozone.

Davis and Johnson both represent the hardline “Leave” faction within the Conservative party. Davis was the chief Brexit negotiator. Both left in protest of Prime Minister Theresa May’ plans to keep close trade ties with the European Union after Britain leaves the bloc. Their departure was a major political blow to the prime minister. MarketWatch said May is fighting for her political survival as she tries to forge a deal to finalize Brexit.

The chaos and uncertainty surrounding Britain’s EU exit have pummeled the pound. Since the Brexit vote, the UK currency has fallen 10.9%. So far in 2018, it’s down 1.8%, and in the one week of July trading, the pound fell 1%, according to MarketWatch.

The British have been buying a lot of gold. There was a major rush into the yellow metal in the UK leading up to and after the Brexit vote in 2016. One gold company CEO reported some people converted as much as 40 to 50% of their net worth into physical gold in the weeks after the UK voted to leave the EU. But the British appetite for gold didn’t wane along with excitement after the vote. In fact, gold sales picked up in the early months of this year. Sharps Pixley reported a whopping 253% year-on-year increase in physical gold sales in March. Showroom sales that month came in at over $12.7 million compared to $3.6 million during the same period in 2017.

Europeans, in general, have been jittery about Brexit and that has driven safe haven investing in the EU. While gold has flowed out of ETFs based in North America, European funds have seen net inflows of the yellow metal.

Along with the British, Germans have also been buying a lot of gold. We reported last year about Germany’s budding love affair with gold. Over the last 10 years, Germany has established itself as a 100 ton-plus per year market for gold bars and coins. The World Gold Council calls the growth in the German gold market a “radical transformation.”

According to a WGC report, 42% of German investors agreed that they trust gold more than national currencies. As one German investor put it, “Gold is still, compared to other investments, the safest investment opportunity because it is economically independent, as it’s accepted worldwide.”

Brexit isn’t the only issue causing concern in the EU. As the World Gold Council noted in its July 2018 Gold Investor, “Political developments in Italy have catalysed investors’ attention over the last few weeks, as the possibility emerged that the country might leave the Eurozone, or that its new ‘populist’ government might adopt a much more confrontational stance on key EU matters, such as fiscal discipline and migrants.”

The report said developments in Italy could have global implications, noting some analysts even feared “Italy could trigger another global financial crisis, especially if the next general election (whenever it might occur) becomes a de-facto referendum on the country’s participation in the single currency.”

While investors in the US seem to be paying little attention to risk factors in Europe, European investors seem more interested in seeking a safe haven for their assets. As a World Gold Council analyst noted, “gold will remain a crucial component of diversified portfolios, as a hedge against potential corrections across asset classes.”

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