Brexit Sends Gold Prices 5% Higher
Just recently, Britain voted to leave the European Union (EU)—a move referred to as the “Brexit.” This sent gold prices skyrocketing more than five percent, in a matter of just a few hours, to more than $1,300 an ounce.
But don’t think this is all. Gold prices could be setting up to provide massive returns going forward.
There are three factors you have to remember when looking at gold prices and the Brexit:
The first is that central banks around the world will jump in to do whatever it takes to calm the situation. If they do what they have been doing over the years to keep economic growth in check, they will most likely print more money. And what does printing more money do? It lowers the value of the currency. Gold bullion becomes very useful in this situation.
The second factor is that Britain leaving the EU will also be devastating for the banks.
Understand this: banks have derivatives (contracts) with banks and businesses. Don’t you think the counterparty risk will shoot through the roof as the future of the U.K. is outright uncertain? I truly believe so.
Also, with this, it shouldn’t be shocking to see some major banks suddenly facing severe headwinds. This is going to create a lot of stress in the financial system. Money in banks won’t be safe.
Where do you think investors will go then? They will most likely seek safety and gold does a great job at providing it.
The third and final factor is that this vote is going to motivate the “leave euro” movement.
Not too long ago, we were hearing a significant amount of noise regarding Greece wanting to leave the common-currency region. There was some movement in Spain and Portugal, as well. With Britain voting to leave the EU, we could see the same rhetoric surface again and demand the breakup of the euro.
This phenomenon would send waves of uncertainty through the eurozone—gold will shine in this case.
Gold Prices Outlook for 2016
Dear reader, if you’re looking at gold prices, understand that the gold market is very small compared to other major asset markets, such as stocks and bonds.
Right now, as I see it, investors are trying to figure out where to go next. You must remember that many government bonds around the world have negative yields, while stocks remain overvalued and risk collapse.
So, where can investors find safety? I strongly believe they can find refuge in the yellow precious metal.
Gold prices are still undervalued. If more investors buy, we could see much higher prices ahead. I will be bold here and say this: a gold price of $2,000 an ounce seems like a real possibility—much sooner than even I had anticipated earlier.
With all this said, I am now paying extra attention to gold mining companies. They are in a very sweet spot right now. Over the past few years, they have cut a lot of inefficiencies to reduce their costs. As gold prices move to the upside, these companies could see major gains.
Even if we assume gold prices move 20% higher from where they currently sit, some of the gold miners I closely follow could double or more in value.