Brexit and Bitcoin and Gold...Oh My!

Brexit is the abbreviation for “British exit,” and it has come to mean two things: the UK’s departure from the European Union; and the June 23rd “in or out” British referendum on leaving. How will the vote affect bitcoin and gold?

Also read: Bitcoin Price Lift-Off Might Be a Moonshot

Where Things Stand

No one knows what will happen with currencies or politics. Wild speculation is driven by the apocalyptic predictions of anti-Brexit officials such as European Council President Donald Tusk, who declared, “UK leaving EU could spell end of Western political civilisation.”

Of course, many would say that’s a good thing.

Meanwhile, anti-Brexit British P.M David Cameron warned the public that a ‘no’ vote could trigger World War III. Raising the image of “lines of fallen British soldiers’ graves on the continent,” Cameron cautioned a local gathering, “[w]hat happens in our neighbourhood matters to Britain. That was true in 1914, 1940, 1989. . .and it is true in 2016.”

The pound and euro have already reacted by falling, and they seem poised to follow politics off a cliff. A recent headline (June 12) at Zero Hedge read “’Leave’ Takes Shocking 19-Point Lead In Brexit Poll – If It Happens, Gold Will Be The World’s Strongest Currency.”

Bitcoin and cryptocurrencies would hike as well.

Conjecture about currency volatility, however, should be prefaced by conjecture about politics.

Will the UK vote for Brexit?

Polls in the UK vary widely but they all say “yes”. ‘Leave’ leads with a substantial number of voters being undecided.

The Economist’s Brexit poll-tracker for June 15 is 44 percent leave, 42 remain, 10 don’t know. A June 14 poll by YouGov and The Times showed 46 percent leave, 39 remain. This means the UK is likely to begin exiting on June 24th, right?

Wrong. Polls are woefully unreliable, as the U.S. primaries proved. But even if the majority vote for ‘leave,’ Brexit faces three formidable obstacles.

First, the referendum is advisory, not mandatory, and it includes no legislative trigger. Since a solid majority within Parliament oppose Brexit, they may choose to ignore the referendum’s ‘advice.’ A more likely scenario is that the anti-Brexit Parliament will cede to the popular will and announce the intention to leave the EU.

Second, how will the exit occur? A member of Parliament recently stated, “We would accept the mandate of the people to leave the EU. But everything after that is negotiable and Parliament would have its say. The terms on which we leave are entirely within my remit as a parliamentarian.”

Debate and procedures in Parliament could take years, bog down in irresolvable conflict or run counter to the popular will on issues such as immigration.

Until Article 50 of the Lisbon Treaty is invoked, Brexit remains a matter of politics rather than law. The never-used Article 50 provides for a nation to depart the EU.

The Financial Times explains, “Once the notification is given, the member state and the EU are stuck with it” because there is no provision to rescind the move. And “[o]nce notification is given, then the member state is out in two years, unless this period is extended by unanimous agreement.”

Until Cameron lays Article 50 on the EU table, Brexit is not legally real.

Third, prior to invocation of Article 50, the EU could offer the UK tempting waivers to make it stay.

Fishing quotas have been a particularly contentious issue because the French get a disproportionately large share of the haul. Pro-Brexit George Eustice, the minister for farms, food and fisheries, complained, “In the Celtic Sea, France gets nearly three times our allocation of dover sole, roughly four times more cod and five times more haddock.”

With enough waivers, the Brexiteers might be pacified and remaining in the EU might be possible for politicians to negotiate without committing political suicide.

Then, again, the outcome of the July 23rd referendum might be ‘remain.’

What Will Happen to Currencies?

No one knows, but there are some good bets.

The British pound has been battered in advance due to uncertainty and the high risk of Brexit. On June 15, the Pound Sterling Forecast announced, “Sterling exchange rates are already falling and against the Euro compared to just 2 weeks ago we have a seen a drop in the value on GBPEUR rates by 6 cents or the difference of £3,600 on a currency transfer of €100,000.”

Paresh Davdra, co-founder of the international money exchange RationalFX in London, predicts, “The turmoil…in the build-up to the Brexit vote suggests that the day after the referendum – the 24th – will be a day of extremes for the pound, whatever the outcome of the vote. If Britain votes to stay in the EU, I would expect the pound to spike to its highest level this year. If Britain were to vote out, all signs suggest a massive and immediate drop in the pound – in all likelihood sinking to its lowest point of the 21st century.”

The best predictions of the impact on currencies – especially on Sterling and the euro – probably come from non-UK and non-EU sources, because more ‘local’ ones can sound hysterical or be politically-motivated.

Nick Parsons, Head of Markets Strategy, Europe at the National Australia Bank, suggests what will happen on and after the 24th. “I think we could see the pound down at 1.20 against the euro, but within a matter of course, days at most, I think we could be back up nudging 1.40.” The long-term fate of the pound depends upon whether Brexit is good or bad for the British economy.

The euro, Parsons predicts, will be the big loser. “The euro has come under pressure against the dollar over recent days as markets start to see it as being at risk of a UK exit from the European Union. The declines comes at the same time as market funding costs in euros rise – a symptom of waning confidence in the euro.”

Parsons thinks the euro would eventually settle into parity with the U.S. Dollar.

The reasons are clear. Although the pound and the euro have always been separate currencies, the central banks, investments and stock markets are not. Due to Brexit fears, for example, the yield on Germany’s benchmark 10-year bond went negative for the first time.

The political impact would be equally significant. Confidence in the European Union would be shaken to the roots, with other nations likely to exit.

A poll in May found that “nearly half of citizens in eight European Union countries want a referendum on the union like the one due to be held in the UK.” The nations are Belgium, France, Germany, Hungary, Italy, Poland, Spain and Sweden.

Meanwhile, the already loud anti-EU voices have swollen in volume and number.

Money is fleeing to safety in various directions. A prime one is gold. To a lesser degree, bitcoin. The appeal of bitcoin could soar in a snap, however, if beleaguered EU nations impose severe capital controls.

Conclusion

It is difficult not to cheer lead for a demise of the ill-conceived behemoth that is the European Union. The EU has consistently served the interests of elites at the bitter expense of average people. And, in rare agreement with Lady MacBeth, I believe “[i]f it were done when ’tis done, then ’twere well It were done quickly.”

And, yet, it is also difficult to applaud the misery that will accompany the disengagement of UK’s policies from the EU ones with which it has melded. David Cameron and EU officials were counting on public fear of that misery to keep the union intact. They didn’t count on the public anger.

Will the UK leave the European Union? Let us know in the comments below!

Images courtesy of IG, Yahoo Finance, This is Money.