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Gold wins from Brexit. But other commodities lose
Gold prices soar, but many commodities will suffer from the ripple effects of
the referendum
Jun 25th 2016 | Business and finance
GOLDBUGS are natural Brexiteers; intensely suspicious of large bureaucracies
like the European Union and avid conspiracy theorists when it comes to the
power of global elites . They had double reason to celebrate on June 24th,
when Britain s decision to leave the EU sent gold prices soaring. But the rise
of the yellow metal is also a symptom of the fear that Brexit is unleashing on
the global economy. Hence other commodities that are more dependent upon global
demand, such as oil, fell sharply.
After a huge rally since their trough earlier this year, the commodities
markets were vulnerable to a shock. Hedge funds and other money managers had
built up big bets on rising prices. Meanwhile, inflows into exchange-traded
funds linked to gold have been consistent since the start of the year,
according to Deutsche Bank.
The heightened economic uncertainty in the aftermath of the Brexit vote may
induce more investors to pile into gold, which rose to about $1,315 an ounce on
June 24th, up by 4.7% on the previous day. Early in the day it experienced its
biggest spike since the global financial crisis in 2008. The rise was
particularly stark in sterling terms: bullion jumped almost 20% as investors
sought a safe haven from the plunging pound, which tumbled to its lowest level
in 30 years. Ross Norman, boss of Sharps Pixley, a retailer of gold bars, wrote
on the company s website that online sales were so strong that it had drained
the firm s stocks of larger bullion bars, prompting it to ship in emergency
reserves of kilobars from Germany. Later in the day gold came off its highs,
but some investment banks predicted the price could reach almost $1,400 an
ounce if risk aversion in global markets makes it even less likely that the
Federal Reserve will raise interest rates later this year.
The prices of oil, copper and other commodities fell, partly because they are
denominated in dollars. The dollar had been rising against other currencies,
which would have made the raw materials more expensive for non-Americans
without a compensating fall in price. Brent crude oil fell by 4.9% to $48.41 a
barrel; some analysts expect it to fall below $45 a barrel in coming weeks.
Even before the referendum oil had dropped from its highs above $50 a barrel,
as speculators weighed the risk that higher prices would spur more drilling by
shale producers in America, where the number of oil rigs deployed rose for
three weeks before dipping again last week.
The longer-term trajectory of oil prices will depend on how badly Brexit spills
over into lower global economic growth and demand for crude and the products
refined from it. Analysts say a hit to oil consumption in Britain alone would
not have a significant impact on global prices, but if Europe as a whole
suffers from a Brexit-related jolt to confidence, the impact would be more
severe; Europe accounts for about 14% of global oil consumption. That said,
falling oil prices may also halt the fledgling efforts by shale drillers to
pump more, which would limit the downside.
A far more serious risk would be if Britain s vote triggered political upheaval
in other countries, jeopardising the future of the EU itself and perhaps other
trade zones. A global economic slump would cause oil and other commodities to
reprise the misery they encountered early this year. The goldbugs might cheer,
but few others would.