- Prithviraj Kothari, MD RSBL
The most talked
about and the most awaited trend changer of the year after the FED rate hike is
finally out: UK has exited EURO after 43 years and BREXIT has been implemented.
UK themselves have got divided during the results of the referendum where England
and Wales voting strongly for leave, while Scotland and Northern Ireland backed
staying in the EU.
Undoubtedly, along
with me almost everyone was caught by surprise. There were possibilities but a
result like this is a bit hard to digest. Simply because it creates fractions
in Euro group where countries like France, Netherlands could also take up a similar
decision. It sent shock waves across the financial markets, with all the risky
asset classes such as equities heavily down and safe-haven vehicles such as
government bonds, gold and silver steeply higher. The volatility, uncertainty, fluctuation
went beyond expectations. Gold saw investor favour resume on safe-haven Brexit
buying. Let’s pick each market individually and see the effect Brexit had them.
GOLD:
Gold
soared as much as 8 percent to its highest in more than two years on Friday
after the UK referendum results, sending investors rushing for protection. Gold prices surged
to its highest level in more than two years, at $1,359 since March 17, 2014, sending
shock waves across markets. Gold is currently trading around $1316 a $40 lower
from the high.
Major Indices:
All the major indices across the world were nearly 3% down while European
indices fell to the tune of 5%. The indices have shown some resilience as the
news item fades, but the uncertainty in the markets have reached to unprecedented
level, calling in government, state heads to provide clarity on the future map
ahead.
India:
Even before the final numbers were out,
India’s benchmark Sensex index opened over 700 points or 2.85% lower in the
early trading hours When the trading ended for the day at 3:30 PM, the Sensex
closed at 605 points lower, marking a decent recovery. Though BREXIT pushed
Indian equity prices down, the governments has been very confident in their
message and do not see a much long term impact on the Indian economy.
Currency - Pound
versus others:
The British pound fell more than 10% against
the US dollar, lowest since the 1980s. In morning trade, the rupee fell to
68.22 a dollar, the lowest level since March 1. Weaker pound will reduce burden on children
studying in UK but it might get partially offset by a rise in cost of living. The
dollar index shot higher on safe-haven buying, last at 96.10, the euro had dropped
to 1.0912, the Aussie dollar had fallen to 0.7335, but the yen has had a
massive rally to 99. In emerging market currencies, the Yuan has fallen to
6.6295 and most others had a knee-jerk reaction to the downside as the dollar
has strengthened and as risk-off has hit the markets.
ETF:
ETF investors are
expected to boost their physical holdings following the vote. According to
market estimates, they have just accumulated 7.3 tonnes of gold so far this
week after buying 25 tonnes in the previous week.
For investors:
Do not lay your investments in one asset class only. Returns on Gold have
surpassed most of the indices returns in the current year. A whopping $100
movement and thereafter settling at around $1330, showcases the metal's safe
haven appeal strength.
Investors currently see gold as a currency – it is rising alongside
other safe-haven currencies such as the dollar and the yen. Gold’s upside
potential will be dependent on the degree of uncertainty and instability
stemming from the Brexit as well as the ability of central banks to provide a
co-ordinated solution to calm the storm in the financial markets.
Gold set a fresh 2016 high although the rally was quicker and stronger
than expected given that the UK would remain in the EU. Brexit helped it to be
a white Friday for gold after the vote against markets expectation of it
turning to be a black one. Gold has done what’s its best at- acting as a safe
haven for its investor, giving protection against uncertainties and volatility. Such environment is
expected to persist for a few days until the central banks provide a
co-ordinated package of measures to calm the financial markets, in turn
triggering some profit-taking in gold.
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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.
Previous blog:
BREXIT – Unity of Europe challenged: RSBL - http://riddisiddhibullionsltd.blogspot.in/2016/06/brexit-unity-of-europe-challenged-rsbl.html
Photo courtesy: https://twitter.com/trade_24
