Is Brexit a ‘Eureka’ moment?

Published at Jul 15, 2016, in Features

Since its discovery a thousand years ago, gold has managed to maintain its relevance and stature writes Kal Kotecha PhD.

Used to make royal crowns and other valuable items, the value of gold has been high as from its discovery days. The Greek scientist Archimedes (287-212BC), the inventor of the Archimedes principle was the first person to find a way to measure the density of gold and other metals without deforming them.

This tale begins when King Hieron II of Syracuse suspected the goldsmith, whom he had commissioned to manufacture the royal crown, and suspected the gold given to him was replaced with an equal weight of silver. The king therefore asked Archimedes to determine the purity of the gold crown. Being a holy object dedicated to the gods, the crown had to be examined without deformation of any kind. While in a bath, Archimedes noticed that his body displaced more water the more he sank into the tub. He immediately got out and ran home naked shouting “Eureka! Eureka!” which is Greek for “I have found it!”

This method of displacement as a test for determining an object’s density helped Archimedes prove that the goldsmith had in fact been fraudulent and used a gold-silver alloy in the manufacture instead of pure gold. Gold is around twice as dense as silver making it easy to differentiate an alloy and pure gold. The royal goldsmith’s fate as a result was sealed. The Archimedes’ Principle is still in use to date!

How Brexit Affects the British Economy, Gold and Junior Mining Stocks.

With the recent passing of the Brexit vote that saw an increase in the instability of the British Economy, gold and junior mining stocks have been no exception to the post-Brexit effects. According to predictions by various economists, the British economy is set to suffer due to Brexit. George Osborne, the Chancellor of the Exchequer believes a number of companies are already pulling out on investments as the UK plans to leave the European Union. Credit ratings have already been downgraded with agencies like Fitch and S&P finding the UK government to be a less safe option when it comes to lending. The pound has also gone down considerably against the US dollar but not so much against the euro. Mark Carney, the Governor of the Bank of England stated that UK interest rates would in turn go lower to new records in a bid to boost demand in the country after the release of the Brexit vote results.

The interesting fact however is, as a number of stocks including the Pound have been going down with fears of inflation in the coming future, gold prices and junior mining stocks have been on the rise. Most mining companies posted substantial gains in 2016 as opposed to the major losses witnessed in 2015. With the announcement of the Brexit vote, gold prices reached an unprecedented two-year high.

On a year-to-date (YTD) basis, mining companies have witnessed substantial gains for example Coeur Mining (CDE) has risen 301.2%, Yamana Gold (AUY) 174.2%, Agnico-Eagle Mines (AEM) 97.9%, VanEck Vectors Gold Miners 94.7% and First Majestic Silver (AG) 300%. These companies were trading close to or above their target prices as a result of the Brexit vote.

Mining-based companies like Franco Nevada (FNV) and Cia De Minas Buenaventura (BVN) saw jumps in prices of 2.8% and 4.8% respectively due to Brexit and other gold related rises over five days. Pretium Resources Inc, one of the newest junior gold miners, saw a rise in stock by 9.82% in a period of just two days. This goes to show that junior mining stocks are equally on the rise just like gold prices.

The past performance of these products is not and should not be taken as an indication of future performance. Caution should be exercised in assessing past performance. This product, like all other financial products, is subject to market forces and unpredictable events that may adversely affect future performance.

Why Mining Stocks and Gold Prices Are Rising Post-Brexit

This rise came about as a result of investors looking for other ways for storing their money taking the instability of other investments such as property and stocks at the moment. Investors have therefore been selling equities in exchange for safer asset options like gold or currencies such as the Yen or US dollar. Global sentiment, including Brexit has therefore strongly impacted gold and hence given it a substantial price bounce. With highs of $1,355.60 per ounce and lows of $1,253.70 on June 24, 2016, a 4.6% rise a day after the Brexit vote, it is clear that the effects were pretty immediate.

Physical demand for gold went up as a result. The world’s largest gold-backed ETF, SPDR Gold Trust ETF (GLD) witnessed its highest rise levels since July 2013 with a 2% to 934.3 tons in June 2016. This drastic rise in gold prices affected even China and India, the world’s biggest markets, with investors choosing to stay aloof since most Asian consumers view gold as a long-term store of wealth.

The expected volatility and uncertainty in the markets is therefore the main reason behind the post-Brexit rise in mining stocks and gold prices. Other precious metals such as silver and platinum have also experienced this rise with YTD (year-to-date) rises of 27.5%, and 9.8% respectively. Most company shares experience major fluctuations depending on different political variations, leaving the EU being one of the examples. Precious metals like gold have over time proven to be very stable in the market and are as a result most preferred when it comes to safe long-term investments.

This gold rush was not for major investors only but also for ordinary savers. With many seeing precious metals as a safer investment haven, it is no surprise that the Google search for the phrase “Buy Gold” in the UK spiked by about 500% overnight after the announcement of the Brexit vote and subsequent resignation of Prime Minister David Cameron.

Mining shares move hand in hand with gold prices meaning a rise in gold prices could mean a rise in junior mining stocks.

Bibliography

  1. http://marketrealist.com/2016/06/tracking-precious-metals-cross-commodity-rates/
  2. http://marketrealist.com/2016/06/much-can-brexit-affect-precious-metals/
  3. http://marketrealist.com/2016/06/why-mining-stocks-are-rising-post-brexit/
  4. http://ca.investing.com/commodities/gold-historical-data

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