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Brexit It Is; Gold Shoots to 2-Year Highs

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After months of speculation, the historic headline for the day is “Brexit results: Britain votes to leave the EU.” After being a part of the EU for 43 years, the vote in favor of Brexit has sent shockwaves throughout the world. Official results show that the “Leave” campaign secured 51.9% of the votes. As per key Brexit campaigner, U.K. Independence Party leader Nigel Farage, Jun 23 would go down in the history of Britain as its “Independence Day.”

Pound Pounded

Pound witnessed a sharp rally in the run-up to polling day, riding to as high as $1.50, the strongest performance in 2016. Traders seemed to put their wager on a “Remain” victory. However, in a matter of few hours, the results knocked the wind out of the pound, which plummeted to $1.3230 in early hours – the lowest level in 31 years. Pound is currently trading against the dollar at $1.38.

The fall was far worse than the 6.5% drop during the 2008 financial crash and the 4.9% fall on Black Wednesday in 1992, when the pound was forced out of Europe’s exchange-rate mechanism. With the pound falling off the cliff, France has overtaken U.K. to become the world’s fifth largest economy. Per the statement issued by the Bank of England governor, Mark Carney, The Bank of England will monitor developments closely and would take necessary action to support monetary stability.

Markets React to Brexit

London's stock market has plunged following the vote. The FTSE 100 index fell as much as 8.7% when the London market opened and subsequently regained some ground to stand nearly 5% lower. The FTSE 250, which is considered a barometer of the UK economy, also plunged 12.3%, before paring losses back to 7.1%. The FTSE's initial slump was its worst one-day fall since the collapse of Lehman Brothers in Oct 2008. World stocks are headed for one of the biggest slumps on record.

Gold Aglow

Amid the mayhem, one asset that has emerged as the ubiquitous winner is gold. The surging gold price clearly depicts the panic that has gripped the financial markets triggering a rush for a safe harbor. Gold climbed 8% to $1,358 an ounce, the biggest jump in a day since 2008. The yellow metal had last crossed the $1,300 threshold in 2014.

Brexit has added fire to gold which was already surging this year. The yellow metal has shot up 23% year to date with gold miners raking in the gains. Among others, Vista Gold Corp. (VGZ - Free Report) , Golden Star Resources, Ltd. (GSS - Free Report) , Harmony Gold Mining Company Limited (HMY - Free Report) , Kinross Gold Corporation (KGC - Free Report) , Richmont Mines Inc. , Barrick Gold Corporation , IAMGOLD Corp. (IAG - Free Report) , and Yamana Gold, Inc. (AUY - Free Report) have appreciated more than 150% year to date. This is nothing short of a reversal of fortunes for these gold miners which saw millions wiped off last year due to weak gold prices. Gold miners resorted to trimming costs and shedding non-core assets to optimize their portfolio as they grappled with lower prices of the metal.

How Long Will the Shine Last?

Negotiation for what is being termed as the world’s most complex divorce begins. This will now lead to a prolonged period of uncertainty, which will invariably work in favor of gold.

A few days before the referendum, Fed Chair Janet Yellen had said a Brexit could "negatively affect financial conditions and the U.S. economic outlook." As things have unfolded, it seems unlikely that the Fed will hike rates anytime soon and may seek alternative monetary measures to stimulate the economy. A delay in raising interest rates elevates demand for gold, which produces no income but relies on price appreciation to attract investors.  The European Central Bank, the Bank of England, the Bank of Japan, the People’s Bank of China, and other central banks will likewise resort to further monetary policy easing. Things couldn’t have turned out any better for gold as markets come to terms with the crucial Brexit referendum.  

Moreover, we are entering a seasonally stronger part of the year, as gold prices are generally supported by retail demand in countries like India and China with the wedding and festival seasons coming up. In addtion, pent-up demand due to the shutdown of jewelry stores in India will likely be a catalyst.

As the factors leading to gold’s gains remain robust, it would be extremely prudent to add gold stocks to your portfolio now. This is also upheld by its Zacks Industry Rank of #73, indicating a positive outlook.

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