There is a winner in every apocalyptic economic event and in the case of the Brexit vote – which is as apocalyptic as it gets – it has so far been gold. As stock markets suffered their worst day since 1987 and sterling hit a 31-year low on Friday, gold rose by US$60 to hit $1,362, its highest level in two years.
Gold loves a good financial crisis and thrives on uncertainty, market turmoil and political upheaval – all of which we have in abundance this week. It also loves low interest rates, which make its carrying costs very low, and all the signs are we are going to get those too for the foreseeable future. The chances of the Fed putting up rates this year has now effectively become zero and the Bank of England is expected to cut rates maybe as soon as this week.
The more fleet-footed investors had seen it coming. Over the weekend it was revealed that the hedge fund manager Crispin Odey, who had heavily backed the Leave camp, made more than $200 million by moving a chunk of his investments into gold, a fraction of the $1 billion that George Soros made in the 1992 Black Monday crisis, but a handsome sum all the same. And he’s not finished yet – gold seems still headed higher.
A post-Brexit Bloomberg survey of 12 gold analysts and traders in London and New York produced a median forecast of $1,424 an ounce by the end of the year, the highest since August 2013 (yesterday’s spot price was $1,327.65 at midday in Singapore). Some were a lot more bullish than that: “Due to the Brexit vote and upcoming US election, I see no reason why or how the Fed will raise rates,” said Bob Haberkorn, a senior market strategist at Chicago-based RJO Futures. “And, I see gold trading north of $1,600. A Fed rate hike would be bearish for gold and I don’t see any chance of a rate hike at this point.”
As the pound continued its fall yesterday morning, rattling the euro and putting uncomfortable upward pressure on the yen, the attractions of gold held strong. “In the near term, we expect safe-haven demand to support gold prices,” Georgette Boele, an analyst in Amsterdam at ABN Amro, told Bloomberg.
Another trader made an even more convincing case: “In the event of additional shocks (e.g. bank failures, renewed financial crisis, reduced western world interest rates, a violent hurricane season, Donald Trump winning the US November election, a further fracturing of Europe and renewed crisis in Greece and potentially taking in Portugal, Spain, Italy and France etc.), I think that it could hit $1,580.” There is more than an evens chance we are going to get at least one of those factors.
George Osborne, the British chancellor, emerged from his self-imposed purdah early yesterday to reassure the world that the Treasury and the Bank of England have a plan to restore stability, that British banks are well capitalised (10 times what they were before the 2008 crisis) and that Britain’s economy is still in great shape.
Unfortunately, Mr Osborne’s reputation has suffered irreversible damage in the Brexit campaign and his statement was greeted with a great deal of scepticism and even scorn. A month ago, Mr Osborne was regarded as one of Britain’s best post-war chancellors, almost certain to succeed David Cameron as prime minister before the next general election. Now, after a last-minute threat of a punitive budget, involving higher taxes and years of austerity in the event of a Leave vote, he is not even in the running. It is he, much more than Mr Cameron, who the Remain camp are blaming for Project Fear, which tipped many undecided voters into the Leave camp.
Even before Brexit there was clear evidence that the British economy was slowing down but in the past week, as companies put investment on hold and the big banks announced they were preparing to move up to 50,000 jobs overseas, it has come to a standstill.
“We expect the UK to quickly enter recession, the Bank of England to cut rates [to zero, from the current 0.5 per cent] in July and restart QE, potentially in August,” said the Bank of America Merrill Lynch’s chief economist. HSBC revised its economic forecasts for next year down from 2.1 per cent to 0.7 per cent, which is close to recession, and every other economic forecaster, including the rating agencies and the IMF, painted a bleaker picture of the year ahead.
It may all look different in a few months when the shock wears off, Britain gets a new prime minister, negotiations start in earnest with the EU and a more sober assessment of Brexit reveals it is not such a disaster after all, which is what 52 per cent of the population thinks. But in the meantime gold bugs are back in their element. They are in for a summer of fun.
Ivan Fallon is a former business editor of The Sunday Times.
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