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Monday 20 June 2016

BREXIT – Unity of Europe challenged: RSBL


- Prithviraj Kothari, MD RSBL



Clearly FED dominated first quarter of 2016 with respect to price movements in precious metals market and specially Gold. Moving here, there are lot of key events that could be considered game changing for Gold and Silver prices.

The June FOMC left the borrowing rates target unchanged while St. Louis Fed president James Bullard said the U.S. economy might need only one interest rate increase through 2018. The Fed's actual pace of rate increases has been much slower than what was mapped out by the committee in the past. This mismatch between what they are saying and what they are doing is arguably causing distortions in global financial markets, causing unnecessary confusion over future Fed policy, and eroding credibility of the FOMC.

Gold prices endured an extremely volatile session last Friday after Thursdays aggressive wash-out, grinding its way higher throughout the European and U.S. days to close out the week on a positive note (+1.6% higher for the week).

The Bank of Japan also did nothing to reassure the markets with a "shock and awe" monetary ease, impotent to act on the eve of Brexit and the upper house Japanese Diet election.

Everyone has been talking of the Brexit and as to how it will affect Gold prices. Those concerns were echoed by policymakers around the world last week. The Bank of England called the referendum the largest immediate risk facing U.K. financial markets, and possibly also global financial markets. Lets have a look as to what exactly Brexit is and how will it affect the financial markets and more importantly what effect it can have on the yellow metal.

WHAT IS BREXIT:
 International policymakers are ramping up their warnings on the dangers of a British exit - popularly known as "Brexit" — from the political and economic alliance that has united Europe for the past four decades. Voters in Britain will decide whether to leave or remain in the European Union in a referendum on Thursday, but financial market volatility has already spiked as polls show a growing desire to abandon the partnership. 

HOW WILL IT AFFECT UK:
The International Monetary Fund on Friday issued one of the direst forecasts to date, calling the impact of Britain's departure from the European Union "negative and substantial." The fund predicted that a Brexit could reduce economic growth by up to 5.6 percent over the next three years in its worst-case scenario. The gloomy outlook is driven by an expected sharp decline in the pound and severe disruptions in trade as the nation is forced to renegotiate deals with countries across the continent, potentially on worse terms.

HOW IT WILL AFFECT GOLD:
Gold is the obvious beneficiary of a dovish Fed, negative interest rates in Germany and Japan and the safe-haven bid to hedge Brexit risk.If Brexit happens then we may see gold trade at $1350 an ounce in the days to come. If Britain does not vote to leave the EU, gold prices could fall to $1220 as an immediate liquidation move.

If Britain leaves EU, the other states would also look for this option and the idea of unified Europe would fail. The challenges are coming at an already weak moment for Europe's economy — and the world's. Europe is still recovering from the series of financial crises that have been roiling countries such as Greece and Italy along with others across the continent. Waves of refugees from the Middle East are spurring political and cultural unrest.

In short, A Brexit would be bad for the U.K., it would be bad for Europe, and it would be bad for the world, and will further add to the current global uncertainties thus sending shockwaves through all financial markets but a positive for safe haven status of Gold.

Thank You!



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The primary purpose of this article by Mr. Prithviraj Kothari is to educate the masses of the current happenings in the Bullion world.

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2 comments:

  1. Sir , gold is now 1330 $ what u predict from here....n at what level to buy gold ? N for what target ?
    Pls advise

    ReplyDelete
  2. Dear Vikram, Sorry for the delay in replying. Thanks for your message.

    Before coming to your question, kindly note:
    Do not lay your investments in one asset class only. My advice for the investors would be to stay away from the current volatile markets and see how things span out till the governments across UK and Eurozone, provide some clarity from here on.

    Coming to your question,
    $1330 is where I predicted Gold to be with the recent bullish run. I still expect the volatile market to continue, which would be difficult to predict outright targets. With the ongoing UK uncertainty, FED will be in spot of bother with their RATE HIKE programme. This pressure situation would pan well for Gold and I do feel Gold's next target should be $1,370 or $1,400 (Psychological level), if the bull run continues, but a lot would depend on world factors from here on.

    ReplyDelete