Brexit! What’s Next?

The British vote to leave the EU Thursday sent shockwaves through the financial markets and pushed gold to a 2-year high.

In the historic Brexit referendum, the British voted to leave the European Union by a 51.9 to 48.1 margin. Unofficially, 17,410,742 Brits cast exit votes, with 16,141,241 casting ballots to remain in the EU.

Nigel Farge headed up the UK Independence Party. He called the vote a victory for the little guy:

The dawn is breaking on an independent UK. If the predictions are right this will be a victory for the real people, for the ordinary people, and for the decent people.”

As it became clear the UK exit from the EU would prevail, gold surged. The price of the yellow metal climbed 4.7% to $1,316.05 an ounce by 11 a.m. in London. When markets opened in the US, gold rose as much as 8.2%, hitting $1,358.2 an ounce before paring gains and settling around $1,325 per ounce. Dominic Schnider, head of commodities and Asia-Pacific foreign exchange of the wealth-management unit at UBS Group AG said this is exactly what one would expect:

Gold is doing what an asset like gold should do. Gold has delivered what it promised: doing extremely well in adverse times.”

Naeem Aslam, chief market analyst at Think Forex in London, called gold the “real winner” in the Brexit vote:

The precious metal is on fire and it is the real winner of Brexit situation. Investors are really trying to protect their investment and we are seeing some big bets coming in the market, which is pushing the metal price higher.”

IG analyst Angus Nicholson told CNBC gold prices would likely extend their gains on the official leave decision, with the potential for “quite a rally” over multiple days.

In the weeks leading up to the Brexit vote, Brits snapped up physical gold. Stocks of gold coins and bars were selling out before they even hit the shelves.

Of course, a surge in the price of gold and general chaos is to be expected in the wake of such a momentous vote. But what does Brexit mean for the future? Will it have a long-term impact on the price of gold?

The Brexit will certainly add another element of uncertainty to the world economy. The British exit from the EU will not move ahead quickly. According to the Associated Press, the process could take years:

Under Article 50 of the Treaty of European Union, talks would likely last two years, with the possibility for extension if all of the remaining 27 EU nations agree. But the clock starts ticking only when the UK notifies the EU that it wants a divorce — and some on the ‘leave’ side have suggested that this won’t occur until 2018.”

In fact, the British government could conceivably ignore the referendum. It does not automatically trigger an exit from the EU. But analysts say politically this is a virtual impossibility.

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Closer to home, the Brexit will almost certainly push back another Federal Reserve interest rate hike. Even before the vote, Peter Schiff said that an alien invasion was more likely than a July hike. The Brexit vote gives the Fed the perfect excuse to push back a rate-hike further.

All-in-all, it seems like the Brexit vote will be good for gold.

But as Peter said in his podcast, the Brexit vote isn’t the main factor investors should be looking at. In fact, Peter said he expected gold to go up no matter how the British voted.

The price of gold is not going up because of what’s happening in Europe. It’s going up because of what’s going on in the United States, more specifically in Washington, and even more specifically, at the Federal Reserve.”

The fact of the matter is, the US economy is in a mess, and it will remain a mess no matter what happens in Europe over the next several months. The turmoil across the Atlantic merely adds another layer of uncertainty on top of an economic malaise facing the United States.

Lost in all of the Brexit chatter was the fact that The Chicago Fed National Activity index released Thursday plunged to negative 0.51. Wall Street was expecting a .11 gain. On top of that, last month’s number was revised downward. The three-month moving average fell to negative 0.36 in May from negative 0.25 in April. That’s’ the lowest level since August 2012. This is yet another sign the US economy is sliding toward recession – if it’s not there already.

So the Brexit is something of a side-show. Not that it’s unimportant, or insignificant. But there are other ongoing economic issues in the US investors need to pay attention to. As Peter pointed out, there are major structural problems. At some point, the bubble with burst.

This recovery is weaker than most recessions. So if this recovery is weaker than your typical recession imagine what the next recession is going to be like…We’ve had this pretty good run-up in the price of gold with everybody expecting the Fed to hike rates. You know, they’ve been dialing back when they believe those hikes are coming, but the anticipation is still for higher rates, just when. But imagine how much stronger gold is going to be when people no longer believe in the Tooth Fairy…they no longer believe that we are going to get higher interest rates and they start factoring in lower interest rates, they start factoring in quantitative easing. And not just factoring it in, but they have to absorb it because the Fed is doing it.”

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