In this edition of the Market Overview, we will discuss the Brexit vote in more detail. We will examine the reasons behind such an outcome and its consequences for the U.S. economy and the gold market. We will also analyze past examples of break-ups of political and economic unions, including exits from the European Union, to assess the potential impact of Brexit on the price of gold.

Investors have to remember that the referendum was not a formal, legally binding trigger for Brexit, so the United Kingdom is still a member of the EU. Actually, its exit has not been determined yet. And as there are some arguments that Brexit will not happen, there are precedents for countries voting against the EU, but remaining within it after all. In 1992, Denmark vetoed the Maastricht Treaty. Ireland rejected the Nice Treaty in 2001 and the Lisbon Treaty in 2008. In each case, the EU offered some concessions and opt-outs, thanks to which the treaties were ultimately accepted in the following referenda. Therefore, history may repeat itself in the case of the UK, especially when both sides fully realize the consequences of Brexit (some analysts consider them prohibitive). It would be definitely a much less gold-friendly scenario.

However, investors should be prepared for the worst, especially since the lack of a market crash after the referendum lowered the cost of exit. How would Brexit happen? According to the Treaty on European Union, to formally initiate the exit procedure, the UK has to give its notice under  (theoretically, the UK could ignore this legal route and simply leave the EU without invoking that clause, but such an option would be even more costly, as it would keep many details of withdrawing from the EU unresolved – this scenario would thus be the best for the gold market). David Cameron did not trigger it and it is still unclear when Theresa May, the new British Prime Minister, will invoke this article, if at all. Then, the EU shall negotiate and conclude an agreement with the UK, setting out the arrangements for its withdrawal and taking account of the framework for its future relationship with the EU. The treaty gives two years to negotiate a withdrawal agreement – and once this time is up, the UK is out with a deal or without one, “unless the European Council, in agreement with the Member State concerned, unanimously decides to extend this period”. As one can see, the procedure is not very detailed. There are many unknowns: for example, how and when the UK should make note of its exit. During this process the UK government will have to make many important decisions, including the future of its relationship with the EU. Therefore, we will also analyze the UK’s options are outside the European Union.