There is now less than one week of campaigning remaining before the Scottish Independence Referendum, which takes place next Thursday, September 18.

The pro-union ‘no’ vote campaign is back in the lead this week after the latest opinion poll from pollsters YouGov put them at 52%, marginally ahead of the pro-independence ‘yes’ campaign.

The referendum question being asked is simply “Should Scotland be an independent country?”

After being ahead significantly since the outset of the independence campaign, the pro-union side was abruptly shocked last weekend when the pro-independence side took the lead based on an opinion poll result, also from YouGov, released on Saturday, September 6.

This forced the pro-union campaign into panic mode this week with the UK witnessing an unprecedented coordinated campaign between all the main political parties. who are pro-union, and a number of major UK companies to try to convince the Scottish electorate to stay in the United Kingdom.

Scotland’s financial sector became one of the main battlegrounds this week, with many Scottish headquartered banks and financial services companies first threatening to relocate their headquarters to London and then actually announcing that they will move south if the referendum outcome results in a ‘yes’ majority.

The HQ move threats and announcements appeared to be part of an orchestrated corporate campaign run by the UK’s Treasury department and the Treasury did not deny this.

According to the banks, they are seeking to move because an independent Scotland would create too much economic, regulatory and financial risk and uncertainty for their headquarters to remain there.

Amongst the banks, two of the UK’s biggest banking institutions, the Royal Bank of Scotland (RBS), and Lloyd’s led the charge. Crucially, since the RBS and Lloyds were both bailed out by the UK government during the financial crisis, the UK government is now a significant shareholder in both institutions, owning a whopping 80% of the RBS and 25% of Lloyds.

RBS has been headquartered in Scotland since 1727 and employs 35,000 north of the border. Lloyds owns various institutions including Bank of Scotland (not to be confused with the Royal Bank of Scotland), Halifax and Scottish Widows, the pensions and life insurance group.

Scotland’s third biggest bank, Clydesdale, owned by the National Australia Bank (NAB) said it also planned to relocate its HQ to London, again citing the uncertainty that a yes result would generate. Other banks such as the TSB and Tesco Bank also followed suit and said they too would move.

Many of the banks’ and asset managers’ share prices had been hit on the London Stock Exchange this week due to the pro-independence movement’s lead including the share prices of RBS, Lloyds, Aberdeen Asset Management and Standard Life.

Financial services giant Standard Life joined in, saying that it would relocate large parts of its operations such as pensions and investments out of Scotland if the country voted for independence. Dutch asset manager and insurer Aegon said it too would move operations to London.

Other industry leaders also sided with the pro-union alignment with the CEO of the UK’s largest oil company British Petroleum (BP) saying that the company and the economy was “best served by maintaining the existing capacity and integrity of the United Kingdom”.

Scottish first minister and pro-independence leader Alex Salmond said that the corporate announcements had been orchestrated by the prime minister’s office in Downing Street in London, and that Treasury had been ‘caught red-handed in a campaign of scaremongering”.

According to the FT, a Treasury official admitted that “Danny Alexander and George Osborne have been making calls.” George Osborne is the Chancellor of the Exchequer and Danny Alexander is his assistant at the Treasury. The calls to RBS would have been quite easy to make given the government’s 80% shareholding. Likewise with Lloyds.

As RBS and Lloyds are already essentially run from London, the HQ move announcements do appear to have been more politically motivated than anything. HM Treasury does appear to have been bullying and pulling strings behind the scenes. On one hand it says plans by companies to move were ‘understandable’, while on the other hand it has been making phone calls encouraging companies to move.

Elsewhere, Mark Carney, the Governor of the Bank of England, became involved in the debate which is slightly surprising given that the Bank of England is supposedly neutral of political interference. Carney said this week that a currency union between Scotland and the rest of the UK is incompatible with an independent Scotland.

Media mogul Rupert Murdoch chimed in, hinting that he was on the side of pro-independence, most likely because of his current coolness towards the Westminster leaders, while financier George Soros weighed in on the pro-union side.

There is much to lose for the City of London’s financial sector due to the economic uncertainty and sterling currency risk of an independent Scotland and the loss of financial power, international standing and resources that a smaller UK would represent.

The International Monetary Fund (IMF) also became involved this week warning that “the main immediate effect is likely to be uncertainty over the transition to a potentially new and different monetary, financial and fiscal framework in Scotland.”

The pound sterling has fallen and risen this week based on the prevailing sentiment expressed in the various independence polls. Sterling strengthened today following the latest poll but had touched an 11 month low earlier this week against the dollar.

In terms of sterling, the gold price has not really moved significantly over the last month, remaining in a £20 trading range between £780 and £760, although the price did fall from the £780 range on Monday down to £760 today, slightly more than the US dollar denominated price move in gold, but in in general sentiment to the weakness in the US dollar gold price.

Scotland’s bid for independence has also crystallised nationalist aspirations in other countries, most notably in Catalonia which is on the brink of its own unofficial referendum to try to break away from Spain. Yesterday was National Catalan Day and millions protested across the region most notably in Barcelona.

There has been much speculation this week about how the UK’s gold reserves would be affected if an independence result emerges. The UK Treasury said that all Treasury reserve assets would be up for negotiation. Since this is a very general statement it does not provide much clarity as to whether an independent Scotland would be able to take any of the UK ‘s gold reserves, but this did stop various media outlets from appearing to think that Scotland would get its share of the UK gold.

At this stage it is best to adopt a wait and see attitude since there are too many unknowns for any factual conclusions to be reached on the future of the UK, let alone future UK fiscal plans.

Whatever the outcome of next week’s independence referendum in Scotland, it has illustrated that the UK is a economic entity which is in some parts held together by groupings that do not have the same outlook. The closeness of the results for the two campaigns suggests that if the pro-union campaign wins, they will still have to address the concerns of the large Scottish independence movement, and calls for a future referendum on the subject may not go away.

Economic uncertainty in the UK will remain in the near term and it is hard to see the UK economic landscape ever being quite the same again after the heated campaigning on both sides of the independence issue.

MARKET UPDATE

Today’s AM fix was USD 1,237.25, EUR 957.11 and GBP 760.87 per ounce.

Yesterday’s AM fix was USD 1,247.00, EUR 964.20 and GBP 767.53 per ounce.

Gold fell $7.90 or 0.63% to $1,242.10 per ounce and silver slipped $0.27 or 1.42% to $18.71 per ounce yesterday. For the week, gold is down 2.27% while silver is 2.56% lower.



Gold in US Dollars - 2 Years (Thomson Reuters)

The gold price closed New York trading yesterday at $1,240.10 and fell to a January low of $1,232 in Hong Kong overnight. Gold in Singapore recovered to test the $1,240 level but was turned back at $1,240 prior to going in to London trading where gold is flat.

Palladium fell 2.24% today to $829, and is down 6.53% for the week on profit taking after reaching a multi-year high the previous week. Platinum is trading at $1,364 and is down 0.94% since yesterday and down 2.98% on the week.

FOMC ‘Jawboning’ Next Wednesday

A dilemma awaits the US Fed governors at the two day FOMC meeting next week (16-17 Sept) and at the end of meeting press conference, the FOMC members will have to decide whether to amend their interest rate forward guidance language which currently states that Fed funds rates will be kept near zero for a ‘considerable period’.



Gold in Sterling - 2 Years (Thomson Reuters)

Although there are now a number of Fed governors on the hawkish side, such as the Philadelphia and Cleveland governors, will this be enough to sway a consensus towards amending the language, and would the phrase just be dropped or would there be conditionality added such as interest rates will remain as is until unemployment or inflation data justifies adjusting the current outlook?

There is a market expectation that some sort of fine tuning of the language will occur next week. The Fed will probably subtly amend the language while trying to keep their options open. If this happens it would cause a short term dollar rally since the market would then expect interest rates to rise at an earlier stage in 2015 than previously expected. And rising interest rates mean higher nominal returns for dollar denominated assets. In this scenario, the gold price would come under pressure due to a stronger dollar.

With the recent non-farm payrolls growth data coming out as weak, can the indebted US consumer and economy absorb an interest rate increase? When interest rates begin to rise its usually part of a rising trend, not just a one off rate rise. Are the Fed prepared to follow through with a change of course at this early stage? These are just some of the questions that may be answered by the FOMC press conference next Wednesday.

In our view, the Fed will probably adjust the ‘considerable period’ language at the FOMC meeting next week by adding conditionality to the language linked to an improvement of economic performance such as unemployment data.

If this occurs, the US dollar could have a short term rally on the back of the FOMC announcement since this is not yet fully priced in to the US dollar. This then is a real risk for gold because the gold price would most likely come under pressure as the US dollar strengthens.

Any US dollar rally would in our view be short-lived, since the Fed is not fully committed to increasing rates and is to an extent just engaged in the management of perceptions.

Therefore, any dollar rally would probably fizzle out shortly after it had begun. The fundamental reasons to own allocated and segregated gold remain intact.