Gold prices jumped as many investors ran for cover on the news that the United Kingdom had voted to leave the European Union. But is gold really a safe haven?
Undoubtedly, the unexpected “Brexit” vote and subsequent market downturn, which erased this year’s gains, coincided with a dramatic surge in gold prices to two-year highs after a prolonged slump.
But cooler heads have prevailed in recent days as the Brexit reaction has subsided, and gold has started to settle, with spot gold prices falling slightly on Wednesday and Thursday to around $1,320 an ounce. Gold ended June up by more than 8 percent for the month.
“Western investment demand is probably what was missing in gold strength,” says Trey Reik, senior portfolio manager of Sprott Asset Management’s Institutional Gold & Precious Metal Strategy. “When we look at the financial and political variables involved in the Brexit vote, it’s tough for me to interpret any of it as not positive for gold at the margin.”
Brexit is a good example of why investors should own some gold within their portfolios, says Reik, but it doesn’t make gold any more or less attractive. Because of the esoteric nature of precious metal prices, there’s no way to know for sure whether gold is overvalued or undervalued at any given time.
While investor sentiment drives sudden changes in gold prices, gold’s value is moved by variables like sovereign interest rates, economic performance, investment demand, physical demand and ETF flows.
“I’ve never found anyone with a high degree of certainty about the true valuation of gold, but there is the comparative valuation, which is extremely important,” Reik says. “There are a few things that we can generally agree on: Financial asset prices are fairly richly priced, correlations between asset classes are on the rise, and liquidity is being challenged in certain parts of the markets. With that in mind, I would say that the insurance value of gold is at the highest level it’s been at in 15 years.
In response to Brexit, central banks could likely either keep interest rates stable or lower rates, or they could provide some sort of quantitative easing, any or all of which could lead to further currency depreciations, leaving gold behind as a stable-value investment, Reik says. “Everyone says that gold doesn’t pay interest, but the dollar doesn’t either. Yes, gold comes with storage costs, but that whole consideration becomes less of an impediment in the ever-decreasing sovereign rate environment.”
It’s not the price of gold that’s moving, but market sentiment around gold driven by political disorder and monetary policy, says Roy Sebag, CEO of GoldMoney, an international asset manager. A lack of physical demand is preventing gold from running even higher.
“When you see an event like Brexit, it reminds market participants that at the end of the day currencies are just an implicit guarantee by governments,” Sebag says. “If there’s a major sea change in politics or government, then the faith in the government currency changes in relation to gold.”