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Gold wins from Brexit. But other commodities lose

Gold prices soar, but many commodities will suffer from the ripple effects of the referendum

GOLDBUGS are natural Brexiteers; intensely suspicious of large bureaucracies like the European Union and avid conspiracy theorists when it comes to the power of global “elites”. They had double reason to celebrate on June 24th, when Britain’s decision to leave the EU sent gold prices soaring. But the rise of the yellow metal is also a symptom of the fear that Brexit is unleashing on the global economy. Hence other commodities that are more dependent upon global demand, such as oil, fell sharply.

After a huge rally since their trough earlier this year, the commodities markets were vulnerable to a shock. Hedge funds and other money managers had built up big bets on rising prices. Meanwhile, inflows into exchange-traded funds linked to gold have been consistent since the start of the year, according to Deutsche Bank.

The heightened economic uncertainty in the aftermath of the Brexit vote may induce more investors to pile into gold, which rose to about $1,315 an ounce on June 24th, up by 4.7% on the previous day. Early in the day it experienced its biggest spike since the global financial crisis in 2008. The rise was particularly stark in sterling terms: bullion jumped almost 20% as investors sought a safe haven from the plunging pound, which tumbled to its lowest level in 30 years. Ross Norman, boss of Sharps Pixley, a retailer of gold bars, wrote on the company’s website that online sales were so strong that it had drained the firm’s stocks of larger bullion bars, prompting it to ship in “emergency reserves of kilobars” from Germany. Later in the day gold came off its highs, but some investment banks predicted the price could reach almost $1,400 an ounce if risk aversion in global markets makes it even less likely that the Federal Reserve will raise interest rates later this year.

The prices of oil, copper and other commodities fell, partly because they are denominated in dollars. The dollar had been rising against other currencies, which would have made the raw materials more expensive for non-Americans without a compensating fall in price. Brent crude oil fell by 4.9% to $48.41 a barrel; some analysts expect it to fall below $45 a barrel in coming weeks. Even before the referendum oil had dropped from its highs above $50 a barrel, as speculators weighed the risk that higher prices would spur more drilling by shale producers in America, where the number of oil rigs deployed rose for three weeks before dipping again last week.

The longer-term trajectory of oil prices will depend on how badly Brexit spills over into lower global economic growth and demand for crude and the products refined from it. Analysts say a hit to oil consumption in Britain alone would not have a significant impact on global prices, but if Europe as a whole suffers from a Brexit-related jolt to confidence, the impact would be more severe; Europe accounts for about 14% of global oil consumption. That said, falling oil prices may also halt the fledgling efforts by shale drillers to pump more, which would limit the downside.

A far more serious risk would be if Britain’s vote triggered political upheaval in other countries, jeopardizing the future of the EU itself and perhaps other trade zones. A global economic slump would cause oil and other commodities to reprise the misery they encountered early this year. The goldbugs might cheer, but few others would.

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