Brexit: What Next?

The British Pound has faced significant volatility over new developments in the Brexit story. On January 17, the Sterling's 2.5% rally was its biggest positive move in almost a decade as Theresa May committed the crucial final Brexit decision to vote in the U.K parliament.

The market is trying to decide whether or not the U.K will experience a 'Hard Brexit' or a ‘Soft Brexit’.

The Currency Shares Pound Sterling ETF (FXB)



Hard Brexit: Extremely bearish for the Pound. May be bullish for gold, negative effect on equities markets.

Soft Brexit: Monumentally bullish for the Pound. Good for the British banking industry and may hurt the Dollar.

What about Gold?

Gold's reaction to a hard Brexit or a soft Brexit is impossible to predict. Both possibilities will have ramifications that can either help or hurt precious metals. The gold price in British Pounds is likely to continue outperforming the price in U.S Dollars, especially in a hard Brexit scenario.



In the 'hard' Brexit scenario, the Pound is set to experience another steep decline. This decrease may boost gold prices initially (and will certainly boost them relative to the U.K's currency) just like the original Brexit vote did. However, when the Pound gets weak, the Dollar gets stronger. And a high Dollar is bad for gold - both in U.S gold prices and internationally because gold is traded in Dollars.

On the other hand, a 'soft' Brexit removes much of the uncertainty in the global economy and removes many of the economic 'dangers' of Brexit. This will result in a massive boost to the Pound, but it may hurt gold. Nevertheless, a stronger Pound means a weaker Dollar, and a weaker Dollar is good for gold.

Outlook

Predicting precious metals price reaction to specific events is incredibly difficult due to the multitude of factors involved and the fact that many of these factors cancel each other out.

Next week, the U.K Supreme Court will announce its decision on whether or not Theresa May will need the consent of MPs before starting the Brexit process. As for the rest, we can only wait and see how the markets will respond.