Frantic Investment In Gold And Bonds Adds More Speculation To Panicking Global Market
Since the U.K. voted to leave the EU, the investment trend is similar to a scene out of apocalyptic movies, as many sources — including Reuters — report that the global stock markets have taken a devastating tumble, losing an estimated $2 trillion in value Friday.
The same source also quotes an investment strategist from BlackRock Inc. in New York who says that even if there was a temporary rebound for the British pound, sterling will still be low over the next six months as it’s widely reported to have plummeted after the news of the Brexit vote.
That investment strategist is Ewen Cameron Watt who says that people are buying Sterling pounds in order to sell it later, speculating it will do well later in the year.
The investment values are based on certainty (and in this case, uncertainty) of investor confidence, and there is certainly a lot of speculation.
That confidence is weaker now than it’s ever been since 52 percent of the British voters decided to leave the European Union (EU) Friday morning.
It’s been reported that money is now pouring into “safe-haven” investment efforts for gold and government bonds.
The Wall Street Journal also reports on investors forcing the price of gold to skyrocket.
Gold settles at a two-year high, up 4.7% at $1,322.40 an ounce, as investors seek havens https://t.co/wxdZlAv4gb
— WSJ Markets (@WSJmarkets) June 24, 2016
The Federal Reserve was looking to raise interest rates this year but Britain’s decision will certainly delay that, while many investors consider this will ease policies over major central banks.
The article points this out as well where the delay in raising those rates “would support gold prices” as earlier in the week it was reported that gold bullion was selling like hotcakes.
The WSJ describes a situation where one woman came in and wanted to make a investment of her life savings on gold bullion, going past the recommendation of 15 percent.
The article also describes the spike in gold immediately after the referendum.
Gold soared to an almost two-year high in London after the referendum result was announced, breaching the psychologically significant level of $1,300 an ounce. It is currently trading 25% higher than at the beginning of the year.
The response to the investment of U.K. government bonds, while similar, is mostly contested over whether yields will be high or low in response to the referendum, which is further explained by the Financial Times‘ article on those safe-haven assets.
Some investors are relying on the Bank of England’s lowering the interest rate to stave off recession; however, Motley Fool is suggesting that with the surge of government bond purchases to take advantage of the low yields, that “loan yields should follow; bad news for the U.K. banks.”
It’s widely reported that the estimates investors had for Britain to remain in the European Union were high, and the predictions were therefore much more thorough to anticipate.
The consensus in favor of staying was so great that little effort was made to predict fail-safes, thus causing investors to panic in mass numbers and go to gold bullion or bonds.
The Brexit results are being compared to the financial crisis of 2008 where the response was similar, but the recovery is estimated to be a lot faster, judging from the optimism expressed in the video above and even with the statement made Friday morning by the governor of the Bank of England, Mark Carney, who said they are prepared to recover the British pound, according to Forbes.
He said that Britain’s banks are far better positioned to face this situation than they were in the financial crisis in 2007, their capital requirements now 10 times higher than at that time, with £130 billion of new capital and “more than £600 billion of high-quality liquid assets” in place.
In a similar way, according to another article by WSJ, U.S. Treasury Secretary Jack Lew promises to work together with the EU and U.K. to stabilize the economy where they would try to help volatile markets.
Of course, there are doubts such as those coming from Hal Scott, a professor of international financial systems at Harvard Law School and director of the Committee on Capital Markets Regulation, who’s written an article with PRNewswire about the difficulties along with the implications this will have on the U.S.
“This vote exposes a major flaw in banking regulation, which focuses on the risk of interconnectedness among banks instead of contagion. The financial system may not be prepared to handle the potential fallout from Britain voting to exit the European Union.”
He further suggests that the Dodd-Frank laws restrict many of these banks to be creative to be able to find a solution, but also explains the possibility of a fire sale of assets by frantic investment as fear has overwhelmed the banks.
[Image by Thomas Kienzle/AP Photo]