Brexit Day Of Reckoning: Gold And The Pound In The Balance

| About: SPDR Gold (GLD)

Summary

The British go to the polls today for a referendum on whether to leave the EU or not and polls suggest the outcome is too close to call.

A 'Brexit' result would likely lead to at least short term financial instability in the UK, throughout Europe, and potentially globally.

It would set the pound sterling on a downward path, at least in the short term, and potentially provide a huge boost to precious metals prices.

A 'Bremain' vote (the safe option) would likely see the pound rise and precious metals stutter.

I suspect that no-one involved in investment and global finance will be unaware of today's referendum in the UK as to whether the country will vote to leave the European Union (EU) - the Brexit option - or to retain membership (Bremain). The potential fallout could be huge, particularly if Britain votes for Brexit. And the opinion polls are really not giving us much guidance as some suggest Bremain is in the lead and others Brexit. The pollsters are not going to come out of this unscathed.

Financial markets - and the bookmakers who usually call things more correctly than the polling organizations - are both suggesting that Bremain, considered the safer option, will prevail with the gold price relatively unmoved over the past couple of days, and the pound sterling strengthening. The general consensus is that should Britain vote to exit the EU the pound:dollar parity could plunge (George Soros has come out suggesting the pound could fall 15-20%, and he has a track record of successfully betting against the pound before, a bet that is believed to have made him billions!), and also that gold might skyrocket given the potential financial disruption of a Brexit vote.

But feelings run very high on whether to Bremain or Brexit. It basically boils down to the supposed 'safe' option of maintaining the status quo, which seems to be the almost unanimous opinion of economists and financial experts against the regaining of sovereignty (EU legislators and lawmakers can override British laws, and impose sometimes unpopular regulations) and allow supposedly better control of immigration - which may be something of a mirage. The former is the position of most of the political and financial establishment, while the latter appears to have most appeal amongst the working class and the middle-aged and elderly. The result may all come down to who is most motivated to get out and vote - and turnout is anticipated to be very high.

Few politicians have come well out of the debate. Estimates of what the two options might mean for the UK population have been supported by figures which appear to have been drawn from thin air and are undoubtedly exaggerated on both sides and most political leaders supporting the one side or the other have been branded as 'liars' by those who take a different view. It's been a nasty campaign which seems to be the way of the world at the moment. (The U.S. presidential campaign, for example, it turning into something equally nasty with huge polarization of very strongly held opinions).

But what of the result - which we expect to know between 9 am and 10 am British Summer time (5 hours ahead of Eastern Standard time) tomorrow morning? Should Bremain be the answer, the political and financial world will undoubtedly breathe a huge sigh of relief. The pound will likely get a boost, albeit perhaps a temporary one, and gold will probably stutter and fall back given that taking this particular uncertainty out of the global geopolitical and geofinancial equation will perhaps contribute to the U.S. Fed taking an earlier decision to raise interest rates. We all already know what kind of effect that tends to have on precious metals prices.

BUT, a vote for Brexit will really put the cat among the financial pigeons. It will be seen as a vote for uncertainty vis-a-vis the UK economy (still the world's fifth largest) and perhaps even more so as a potentially huge destabilizing influence on the EU, where several other countries have seen anti-EU feeling rising. Indeed many see it as potentially leading to the complete break-up of the EU. And with ever increasing financial globalization it would have a substantial knock-on effect on the rest of the world, too. The uncertainty that would result would reduce the chances of the U.S. Fed bringing forward any interest rate rise - indeed might even knock back such a decision into 2017, if then! Gold and silver prices could get a huge boost propelling the former perhaps to $1,400, or perhaps even higher and silver to $20 or more. That's the gambler's option.

We think the most likely outcome though is a vote for Bremain and 'safety'. A Brexit vote would take the UK into the unknown and a likely immediate economic downturn, although this probably wouldn't be as severe, or as long lasting once the dust has settled, as the Bremain supporters would have us believe. If we take the Scottish independence referendum of nearly 2 years ago as an example, despite feelings running high and polls seeing the vote as too close to call, the eventual result was fairly comfortable win for maintenance of the status quo (the 'safe' option). One suspects the outcome of today's vote will be similar and we Brits will vote to remain part of the EU despite a big groundswell of anti-EU feeling amongst a large section of the populace. But don't bank on it!

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I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.