Yesterday, the Bank of England released its most recent monetary policy statement and minutes of the July meeting. What do they say about the consequences of Brexit and what do they mean for the gold market?

Surprisingly, the BoE maintained its main interest rate at 0.5 percent and the size of its asset purchase program at £375 billion. Investors had expected a cut at this meeting. The news was negative for the shiny metal as gold futures edged down after the release (however, they rebounded later). Two factors explain gold’s initial response. First, the BoE’s reaction was hawkish, but in a way which increased confidence in the British economy. For example, the Bank said:

“Markets have functioned well, and the improved resilience of the core of the UK financial system and the flexibility of the regulatory framework have allowed the impact of the referendum result to be dampened rather than amplified.”

In consequence, the fears about the economic consequences of the Brexit vote could ease, reducing the safe-haven appeal of gold. The decision to keep interest rates unchanged seems to be quite wise, as a cut could be considered an act of desperation and trigger a small panic among investors. The BoE’s inaction signals that the economy has not deteriorated so significantly as to act in a hurry and undertake an important decision without a proper assessment of the consequences of the Brexit vote.

Second, the BoE suggested delivering monetary stimulus in August:

“Most members of the Committee expect monetary policy to be loosened in August. The Committee discussed various easing options and combinations thereof. The exact extent of any additional stimulus measures will be based on the Committee’s updated forecast, and their composition will take account of any interactions with the financial system.”

In that manner, the BoE had its cake and ate it too. It signaled an additional stimulus as it had previously suggested (and as investors expected), but only after it considers how the outlook for the economy has changed in light of the referendum result. Thus, the BoE signaled that there is no need to rush.

However, investors should not forget that BoE judged that “a vote to leave the European Union could have material implications for the outlook for output and inflation”. The UK’s central bank also found that:

“Businesses are beginning to delay investment projects and postpone recruitment decisions. Regarding the housing market, survey data point to a significant weakening in expected activity. Taken together, these indicators suggest economic activity is likely to weaken in the near term”.

The key takeaway is that the Bank of England’s monetary policy remained unchanged at the first meeting after the Brexit vote. The inaction eased the fears about the consequences of the referendum outcome and boosted risk appetites, which sent the price of gold down, initially. The ‘risk on’ stance is negative for the gold market, but the BoE’s decision alone should not significantly change the current positive sentiment toward the shiny metal (as the later rebound partially confirms).

Summing up, the July Beige Book was positive, but it noted some signs of softening in consumer spending. Moreover, price pressures remained slight, while some contacts expressed concerns about the consequences of the Brexit vote. It seems that the uncertainty will remain at an elevated level until the U.K and the EU establish the terms of their new relationship. All these factors are good for gold, as they should make the Fed reluctant to hike in the nearest future. Indeed, the expected path of the federal funds rate for the medium term implied by market quotes declined yesterday. The price of gold increased – perhaps because of the flatter expected path of the federal funds rate, but other reasons include the decreased risk appetite and fading stock rally, or expected monetary stimulus from the Bank of England. Stay tuned – tomorrow we will cover today’s publication of the Bank of England’s decision undertaken at the meeting ending on 13 July.

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Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our trading alerts.

Thank you.

Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor

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