By Joshua Saul – Director of The Pietra Sussan Company
It’s a provocative title, but Brexit is a provocative topic. It has polarised this country, the political landscape, families, friends and our European neighbours, and as the deadline for leaving approaches the mudslinging and soap-boxing gets louder.
Aside from polarising the nation on whether or not it’s a good idea to leave, the longer-term consequences are also debated vociferously. Some people think leaving the EU will enable the country to prosper in the years to come, and others believe it to be such an economic calamity the UK is unlikely to recover for decades.
There is one thing all sides of the debate agree on, Brexit is a very destabilising force, and the uncertainty surrounding a ‘deal or no deal’ outcome is having an immediate effect on the value of asset. Our clients who are buying gold now believe this uncertainty will remain at least in the short to medium-term and they’re preparing for this by removing exposure to various investments accordingly.
Property
Brexit has already affected the property market, with very low or stagnant property price growth in 2018 according to the Nationwide index. And the deadline is certainly affecting the market’s fluidity, with fewer houses up for sale and fewer people choosing to buy now before the UK’s position in Europe becomes clear. It’s possible an 11th-hour deal will unclog the market, but this could also impact interest rates, and any rise in mortgage rates could work to tamp down a recovering property market.
Some people with a pessimistic view of property have already chosen to sell up, and have purchased gold, which tends to rise when other asset classes fall, to convert back into property at an opportune dip in the market. Those less fortunate are the forced sellers who have no choice but to move, and may need to accept a lower price for what is often someone’s main asset.
Equities
The stock market is a popular investment option but it comes with inherent risk, and that risk intensifies during times of uncertainty. Brexit is an obvious source of substantial concern, and this has translated into volatility in the stock market. It’s not the only factor impacting whether shares rise or fall (global economic and political news also affects stock prices obviously) but it is dominating the news agenda as March 29 approaches and is impacting sentiment negatively.
We are seeing many clients choosing to liquidate their equities in anticipation of a substantial drop in the stock market if the UK leaves the EU without a deal, and invest in physical gold which they expect to rise in that situation. Even if a deal is made, the economic impact of Brexit is likely to put pressure on equities for some time to come. Many of our clients who hold equities in their pension or SIPP have chosen to hold physical gold in the same vehicle to protect their pension pot from the expected market volatility which could substantially reduce their retirement savings.
Cash
Holding cash in a savings account earns little or no interest, and has done for almost a decade. While these deposits will remain protected by the Financial Services Compensation Scheme after Brexit (even though the scheme was part of an EU directive), the threshold remains at £85,000. So while that amount of cash is protected, any further deposits will be subject to the vagaries of the banking system.
Even with government mandated stress tests for banks following the financial crisis, there will always be an element of counterparty risk when using the banking system. Several European banks, from Italy to Germany, have been under extreme pressure in the past two years and there is justified concern about whether any banks could really withstand another global economic crisis. UK challenger bank Metro Bank lost almost half of its share value last month after a cash call to plug a funding gap.
Holding physical gold is not dissimilar to holding cash since some forms are legal currency, but the value of gold can go up, (whereas inflation erodes the value of cash), and gold buyers can bypass the systemic banking risk.
Gold
Gold historically holds its value in times of crisis. Demand for the yellow metal and the steep decline in the value of the pound in the immediate aftermath of the Brexit vote (when gold in sterling terms jumped 22% overnight) is an extreme example of the inverse relationship between gold and other asset classes. While the politicians shuttle between Brussels and Westminster trying to broker a deal, volatility has shrunk the supply of dependable investments, and our clients are turning to gold to fill the gap.
Because of its inverse relationship to other asset classes, gold is often bought as a hedge against a fall in property or stocks and bonds. This means that many of our clients are buying physical gold as a safety net rather than a quick profit earner. However the Brexit negotiations conclude, gold (and silver, which tends to grow in tandem with gold but at an amplified rate) will still be a tax-efficient method of protecting wealth.
Post-Brexit economic landscape
The retail sector is already looking bleak, with numerous insolvencies and branch closures announced over the last year. Small businesses of all types without a strong financial platform are coming under increasing pressure as Brexit looms. There is only so much preparation that can be done when no-one actually knows what legal, economic and political structures will be in place in the coming year. Food and medicine shortages are being touted, potentially affecting restaurant supply chains and pharmacy stock. But the ripples will be felt everywhere. The closure of car manufacturing plants may directly affect its employees, but supply chains radiating out from that plant are also impacted, affecting many more people and business across the country.
Making measured and informed investment decisions is the only sensible counterbalance to the uncertainties of the future. The smart money (banks, central banks, hedge funds) have been purchasing gold as an insurance policy over the last year against risks they can and can’t see. It’s not about making money or doubling one’s portfolio – it’s more about safety, security and wealth preservation during times uncertainty. If and when a client needs to liquidate – we offer all clients a Buy Back Guarantee and a means of instant liquidity. Moreover if you’re a UK resident and you’ve purchased Tax Free Gold – all the growth you make is yours (with no tax to pay).
