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Brexit means the gold price looks about to go gangbusters

The Motley Fool logo The Motley Fool 24-06-2016 Tom Richardson

The results from the United Kingdom’s vote on whether to remain a member of the European Union or not suggest the Brexit vote has won the day. This has wide-reaching implications across a number of asset classes, in particular gold.

A Brexit is likely to trigger a mass flight to safety, especially among the powerful global asset managers, which means the price of gold as a hedge against uncertainty is likely to soar.

This afternoon gold has lifted around 6 per cent to US$1,325 an ounce, although I expect it could lift another 20 per cent over 2016 to around US$1,600 an ounce given the weight of capital that is now likely to pour into the ultimate safe haven asset.

This call is not so outlandish when you consider that the Brexit vote is likely to put back the timing of US interest rate rises, with US Fed Reserve chair Janet Yellen effectively conceding this point in several public statements recently.

As US cash rates hikes are put back gold will become increasingly attractive in relative terms as it does not pay interest, but does represent a store of value.

More important is the uncertainty created due to the unknown potential consequences of a Brexit.

The uncertainty includes:

  • Potential for the United Kingdom to collapse with Scotland and Northern Ireland already reportedly preparing referendums to leave.
  • Potential for the European Union to collapse with one of its most powerful members gone. Now it’s possible others like Italy, Spain and France, among others, could leave.
  • Potential for the single currency and market in the EU to collapse
  • Potential for North European banks and governments to face massive debt write downs if EU collapses
  • The potential for global interest rates to remain lower for longer, this will support gold as it pays no interest

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