After the Salzburg summit, the prospects of a Brexit deal are gloomy. Will gold gain on failed talks between the EU and UK?
Cake Philosophy And Gold
The Salzburg summit was held last week. It was an informal gathering of heads of the EU member states or governments. The participants discussed immigration, internal security and Brexit. Negotiations between the UK and EU attracted the most attention, as Donald Tusk, the European Council president, said that the Chequers plan for Brexit “will not work” and mocked Theresa May’s negotiating strategy in social media (he posted a picture of May and himself at a cake stand with the caption: “A piece of cake, perhaps? Sorry, no cherries.”
May did not like the joke and accused the EU of a lack of respect. She also complained that the EU does not want to negotiate with the UK. But it’s not true. One year ago, the United Kingdom rejected the proposal that the UK would become a member of the European Economic Area and be associated with the common bloc like Norway or Iceland. May rejected the ‘Norway model,’ saying that it would be a “mockery of the referendum.” And six months ago, UK rejected another proposal for an EU trade agreement, i.e. access to the single market (along with Northern Ireland, so that there would be no physical border in Ireland). May rejected the second proposal saying that it would effectively divide the country.
And last week, the British prime minister said that the UK wants to participate only in the free movement of goods – without the free movement of services, capital and people. It is understandable, as about half of the UK exports go to member countries. However, the EU has been saying for a year that it will not agree to partial access to its market, as it is based on four freedoms, not merely one. There is no “cherry picking.” We are not big fans of EU’s bureaucracy, but we agree that you cannot have the cake and eat it too. The UK can either have a loose agreement like Canada, or a close agreement like Norway, but it cannot pick the best bits from both.
Implications For Gold
What does it all mean for the gold market? Well, we do not see a compromise in Brexit talks on the horizon. British officials live under the illusion and both sides are standing still. If nothing changes, the UK will exit the EU without a deal on March 29, 2019. EU law will no longer apply in the UK. The millions of Europeans working in the UK will need to have permission to work. There will be custom duties for goods (for example, the tariff for food imports will increase from zero to 22 percent), disrupting the trade chains. Britain would fall out of EU regulatory bodies for things like air safety, medicine and nuclear material. So if it does not create its own regulations on time, airlines could be grounded, while medicine and isotopes would not be imported. And there could be even a hard border on the island of Ireland.
Moreover, there will be no continuity of financial business as British companies will lose their passports allowing them to sell services and products across the bloc under London’s regulations. It’s difficult to predict all repercussions, but one thing is certain: there will be a lot of uncertainty and temporary disruptions (we wrote “temporary” as there is also life outside the EU and the UK is one of the most developed economies, after all). The exit is likely to be disorderly. The price of gold expressed in British pounds should rise then.
The impact on US dollar denominated gold is not so clear. After the surprising outcome of the referendum, the international price of gold soared, as one can see in the chart below.
Gold priced in USD (yellow line), the euro (red line) and British pound (green line) from 2016 to 2018 (London P.M. Fix).
But where two are fighting, the third wins. Hence, the greenback should take advantage on the divorce between EU and the UK. It could limit the possible gains in the gold price. Please remember that the EU will be weaker without the UK and its financial contribution to the common budget. We will see, a lot may still happen in that Brexit saga. Now, all eyes are on the FOMC September meeting, which could affect the gold market. The meeting will end on Wednesday and we will cover it on Thursday.
Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our trading alerts.