No for Brexit Deal, Yes for May. And What for Gold? / Commodities / Gold & Silver 2019

71 days. That’s all that separates us from the Brexitdeadline. And the UK has still no clear path forward exiting the EU. Does goldhave one?

Today's analysis features possible scenarios for theUK and for gold along with their likelihood. In the current politicalsituation, it's a must-read.

Parliament RejectsMay’s Brexit Deal

On Tuesday, the UK Parliament voted on Theresa May’sBrexit deal for leaving the EU. As expected, the MPs rejected her proposition.What was really surprising was the scale of defeat. The parliament voted 432-202 against May’s divorce deal, marking theworst defeat in modern British history.

The reason for that humiliating loss was the splitwithin the Conservative Party. May’s plan was a compromise attempting to softenthe divorce with the EU. But, as it often happens with compromises, it did notsatisfy anyone. Some Tories wanted a more decisive split with the EU, whileothers wanted to remain closer or not leave at all. Both groups joined forces,crushing the deal.

What Next?

Now, the key question is what will happen next. It’shard to say, as – we agree here with May’s post-vote statement – “it is clearthat the House does not support this deal, but tonight’s vote tells us nothingabout what it does support.”

Generally speaking, there are several options. The firstscenario is that May will quickly deliver a new and better deal, which will beaccepted by the Parliament. This plan B will pave way for a formal and an orderlyexit. Given that the EU is not eager to make concessions that would pleaseTories, it’s not a likely scenario.

The second option is that there is no deal at all. Itmeans that by March 29th, 2019, the UK will crash out of the EU without aformal plan in place. The consequences could be substantial, as the disorderlyBrexit would disrupt supply chains and bring chaos, at least initially. Tradewith the EU would switch then to World Trade Organization rules, hitting theeconomy. Given that the country will faceunprecedented uncertainty in that scenario, gold should shine.

The third option is that there will be a secondreferendum on Brexit, as many British people call for it. We agree that itcould undermine the idea of a referendum, but it would not be unprecedentedcourse of action, actually. As the Remainers would have higher chances duringthe second vote, gold bulls should not like that scenario. Wehave suggested a long time ago that the UK will never exit the EU, so wewould not be very surprised. However, as Theresa May – who is against the ideaof the second referendum – won the no-confidencevote yesterday, that scenario is also unlikely, at least for now.

The lastoption we would like to analyze is the most probable one in my view. As May wonthe no-confidence vote, she will try to delay Article 50 and come up with a newdeal (or a way to not deliver Brexit), perhaps similar to the Norwegian model,which is allegedly gaining momentum among the Conservatives. It would be theleast damaging form of Brexit, as it would allow the UK to retain the fullaccess to the single market. But the country would have much less say inshaping its rules than it does now as an EU member. However, it’s not an easypath, as the EU would agree to extend the deadline in exchange for furtherconcessions. And May would probably have to cooperate with the Labor Party aswell to gain the support for plan B.

Implicationsfor Gold

What does it all mean for the gold market? Well, itseems that markets have already priced in the worst. Why do we think so? Justlook at the chart below, which shows that USD/GBP exchange rate.

Chart 1: USD/GBP exchange rate

As one can see, sterling lost before the vote, butrallied after it, on expectations thatthe defeat would force the British government to buy more time and continuetheir negotiations. In other words, investors believe that on March 29th,the UK will still remain within the EU. Asthe US dollar weakened against the pound sterling, gold prices inched upyesterday, as one can see in the chart below.

Chart 2: Gold prices from January 14 to January 16,2019.

However, gold failed to jump above $1,300. It’s a rather bearish signal giventhe fact that the United Kingdom is now in the deepest political crisis in halfa century, while the US government is partially closed for almost a month. It suggests that gold needs even moreserious trigger to rally.

Thank you.

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Arkadiusz Sieron

Sunshine Profits‘ MarketOverview Editor

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