European investors buy heavily into gold ahead of Brexit poll

SPDR, the largest exchange-traded fund for gold, has seen its holdings rise 40% since January, and 9.4% since April

Gold prices are spiraling with a rise in uncertainty in the developed world. In America, the ongoing meeting of the Federal Reserve is expected to decide on whether to raise policy rates. And, there is the June 23 referendum in Britain on whether to leave the European Union ('Brexit'). If rate increase in the US and Brexit does happen, European investors will look for hedging in a safe haven, gold at present.

SPDR, the largest exchange traded fund for gold, has seen its holdings rise nearly 40 per cent since January and 9.7 per cent since April. Since the beginning of May, its gold holdings have risen on a net basis by 94 tonnes, indicating investor buying. For, recessionary conditions will accelerate in Britain if it chooses to opt out of the EU, which is positive for gold.
 
Currently, holdings in SPDR are of 898 tonnes, the highest after October 2013. The international price is around its recent high of $1,285 an ounce.

T Gnanasekar, director, CommTrendz Research & Fund Management, says: “The Brexit impact is going to support gold strongly. Britain exiting the EU could push the euro zone back into recession even as it is recovering from one. A recessionary environment will strongly underpin gold prices. Demand for gold from Europe has increased after interest rates were made negative, pushing investors to move funds into hard assets like gold. More European investors are (now) buying gold to get over the uncertainty of Brexit.”

Apart from Brexit, there are takers for gold. Jean-François Lambert, founder of Lambert Commodities, told this newspaper: “I do not believe the gold rally is linked only to Brexit. Gold was lagging behind most asset classes and in the wake of (noted investor George) Soros' interest, investors looking for opportunities to jump on the bandwagon.”

Adding: “Brexit would be bad news. Bad for the UK as its belonging to the EU has been a bonanza for the country; bad news for the EU as it will epitomise its political vulnerability; bad news for the rest of us, as a stronger Europe would mean a healthy multipolar equilibrium in the world. Without a stronger and stable Europe, the fate of the world in the first half of the 21st century will depend on the relationship (and likely, if not inevitable, tensions) between the two other poles, namely the US and China.” Mostly high net worth individuals and institutional investors buy SPDR gold as a hedge against inflation or as an insurance against economic uncertainty. In this case, Brexit. Also, uncertainty over the US Fed meeting, beside that of other central banks this week. In the short term, he sees the markets to be increasingly nervous. “The pound, the euro, the gilt, and maybe even the gold markets will show volatility. However, gold is not a fix for Brexit,” Lambert added.

When a country leaves an economic union like the EU, its currency will fall and growth will be impacted. A falling currency is invariable hedged against gold.

There are other implications for the bullion market if Brexit occurs. Bernard Dahdah, who tracks precious metals at London-based Natixis Commodities, said: “With the UK leaving the EU, the latter countries will have less control on assets based in the UK and will likely want to repatriate some of it (London is among th three top countries which store the world’s gold, due to better vault facilities). As more and more countries in Europe are already repatriating gold from around the world, the UK leaving EU will only increase the pressure on these EU countries to repatriate some or all of their gold held in London.”

This will increase gold lease market rates and could also impact leasing activities. For example, an Indian importer says: “Banks importing gold and lending to jewellers in India bring gold on lease and re-lend that to jewellers in India.”

The extent to which such activities get impacted could not be ascertained. Standard gold's price in the Mumbai spot market opened on Wednesday at Rs 29,775 per 10g. The market in India is quoting at a discount of $30 or Rs 675 per 10g to the cost of import, as demand is lacklustre.