Election or referendum in Great Britain. British and European Union flags in background.

Brexit and the impact on gold

Towards the end of last week many commodities which are dependent on global demand, such as oil, fell sharply in response to the EU referendum vote and the uncertain trading conditions which resulted. Similarly, at a point, the pound dropped to its lowest level since 1985 and the FTSE 100 saw a dramatic decline as global markets and investors reacted to the somewhat unexpected news.

searches for buy gold following eu referendum result
Searches for the term 'buy gold' following EU Referendum result, courtesy of Google Trends

This heightened economic uncertainty caused more investors to turn to gold because, as is often the case in hostile trading conditions, the price increased substantially. On Friday, the Telegraph reported that searches for the term ‘Buy Gold’ on Google spiked by over 500 percent as people searched for quick gold investment options.

Similarly, we reported that traffic on The Royal Mint Bullion website surged by over 550% at the start of the morning compared with the previous day. Also, throughout the day, new account openings on the website increased by 520% when compared to the 23rd of June as new users reacted to the news and turned to gold.

What caused this increase in demand?

Even though much of the demand was driven by the UK economy and the Brexit result, the global economy has a large role to play in the amount of confidence the markets have in gold. When the economic situation is weak, investors rally towards gold to insulate their portfolio from poor market conditions, pushing up the demand and subsequently the price. This was demonstrated early on the morning of Friday 24th June because as the result began to sway more towards a ‘Brexit’ vote the price of gold began to quickly increase. Just as the gold price peaks at times of inflation, deflation also tends to push down the price of gold as the pound strengthens and investors regain confidence. However, with the value of the pound at its lowest since 1985, the price of gold in sterling terms increased. World events will always have a significant influence on the price of gold, and the Brexit result was certainly a significant event.

What is the situation now?

One week on from the Brexit result and the markets are in a very different position.  The value of the pound is beginning to recover and the FTSE 100 has recovered to pre-referendum levels However, both the gold price and the silver prices remain higher than pre-referendum levels. Before the referendum result was announced, HSBC predicted that a vote to leave could result in as much as a 10% rally in gold prices to USD 1,400 /oz. They also suggested that the increase may be more pronounced if there were to be broader concerns about the future direction of the EU after the vote.

Gold (PM Fix GBP) Silver (GBP) FTSE 100
23/06/2016 Pre Referendum 851.57 11.61 6338.10
24/06/2016 Post Referendum 955.84 13.19 6138.70
27/06/2016 1001.89 13.40 5982.20
28/06/2016 977.82 13.17 6140.40
29/06/2016 976.85 (+14.71%) 13.55 (+16.71%) 6360.06 (+0.34%)

But what causes people to turn to gold in a crisis?

Gold has traditionally been seen as a safe choice in times of uncertainty, as reported by our survey results earlier in the month, where 85% of users suggested that they see gold as a good safe haven investment. This is simply because traders and investors view gold as a safe place to store assets so that they are unaffected by currency fluctuations.

The rise in gold and silver prices shown in the table above, in comparison to FTSE trades, demonstrate how the USD value of gold drives the overall price as the purchasing power of the sterling currency is still low. This is why gold is seen as a safe haven investment and offers protection from currency fluctuations. Since the referendum, the pound has dropped significantly against the US dollar, at one point down more than 11%.

Similarly, gold is often used to diversify your portfolio and reduce overall risk. This is why many market commentators, including the World Gold Council, recommend that holding up to 10% of an investment portfolio in gold can protect and enhance overall performance.

In July, we will be publishing results from our research into the performance of gold and other precious metals in the first half of 2016. To receive updates, please subscribe to The Royal Mint Bullion newsletter by entering your details below.