Following frenzied speculation leading up to the big day, gold prices soared sky high, as investors rushed to safe havens. As the Wall Street Journal quotes:
It was just pandemonium. It was absolutely insane,” said Peter Hug, global trading director at Kitco Metals. “It was unbelievable, almost to the point of being funny.
The only way is up
While the appreciation following Brexit particularly pronounced, seeing gold demand soar in times of political uncertainty is quite the norm.
To what does gold owe this bullish behavior?
Firstly, there is the intrinsic value of gold as a rare metal, which holds steady through any political upheaval. Fiat currency on the other hand, has a value closely tied to people’s trust in political stability. This explains the sharp drop in the Sterling Pound’s value following the historical event. Thus, there is an appreciation of gold against currencies in times of uncertainty.
Second, the effect is amplified as these safe-haven asset pursuers begin driving up prices, inviting hedge funds, and other speculative investors.
It may be inviting to analyze this episode as one with short-term effects. Nonetheless, with gloomy prospects for the EU, and the Eurozone, compounded with uncertainty about Federal Funds rate increases this year, could bring a spell of continued gold dominance.
The Wall Street Journal drives this point home:
Gold has also benefited as the Federal Reserve has cut projections for the number of interest rate increases planned for this year. Higher rates tend to weigh on gold, which pays its holders nothing and struggles to compete with yield-bearing assets when borrowing costs rise.
According to the recent analysis by Quartz
The price of safe assets will probably remain high for the foreseeable future and bonds will offer very low, no, or even negative interest rates. Faced with a choice between negative yields and more risk—risk may be worth it
With the severe leveraging that economies across the world are now facing, fiat currencies are under a severe strain. Coupled with excruciatingly sluggish growth in many major economies, and the advent of ‘shrinkflation,’ the prospects for stability through traditional fiduciary assets are on the decline.
Despite minor bouts of decline, and occasional major appreciations as seen during the Brexit, the value of gold is in a general trend of rising, if analyzed across the past few decades. While in the short term, it will be a very effective tool for portfolio diversification, in the long term, it is one of the most secure means of saving.
These factors thus lucidly explain the recent behavior of bullion, but also consolidate the future prospects for gold.