This Thursday Scotland’s 4 million residents have the opportunity to vote for independence.
The past few weeks have witnessed opinion polls suggesting one possible outcome and then the other. But what will the referendum and possible ‘yes’ vote mean for the UK’s investment community? Could the referendum create a perfect storm for gold investors?
Outcome speculation
Certainly speculation over the vote’s outcome has shifted the value of Sterling over the past month. The UK’s currency took a huge hit when polls suggested the vote for change had overcome the vote for status quo for the first time. The immediate knock-on effect for this was mixed. A weaker Pound can lead to higher exports due to the lower cost of goods for our export markets. However, with Europe already on its knees, very little uptrend was seen. For investments such as gold, initially priced in Dollars, a weaker Pound supported prices of the yellow metal for UK investors.
Within days of the ‘yes’ campaign headlines pushing Sterling lower, papers were reporting on the ‘No’ vote gaining momentum – consequently pushing the currency back up. Expect further volatility in the coming days before the outcome is decided.
How would a Scottish break away impact us?
On a micro level, no one really knows the exact logistics a ‘yes’ vote would require. The choice of currency for Scotland is unknown but most speculate it would be weaker than Sterling – immediately squeezing the population of Scotland.
No doubt arguments would last an eternity as to how the British national debt should be divided or North Sea Oil revenues shared. One thing is for sure, it will take time to resolve. In the meantime the UK and Scotland will be shrouded with uncertainty, a factor in itself which will no doubt impact the 2 economies negatively. Foreign companies will hold fire on UK investment until the dust settles, crimping the economic recovery all our hopes desperately cling to. This may lead to less job creation in the short term, withdrawing funds from the pockets of the nation. These are all factors which will likely impact the FTSE index of companies which relies on spending and currently sits precariously high. Scottish independence could be the pin that bursts the equity bubble.
One thing’s certain – Our money isn’t safe.
Political Unrest
A vote for independence would stoke further political debates around Europe. It would become increasingly difficult for Spain to deny the Basques and Catalans independence, the Northern League in Italy could be revitalised and Flemish separatists could reignite the debate in Belgium.
Closer to home, a Scottish move away from the union would leave David Cameron in a precarious position. His decision to boldly offer a straight yes/no vote rather than playing safe with Alex Salmond’s proposal for a compromised option of increased self-Government could leave him with egg on his face. Pressure could mount for the Prime Minister to step aside, fuelled by the strong anti-European sector of the Tories. With the General Election only 9 months away, a Cameron resignation will leave the British Government very weak. Last week Jeremy Heywood, boss of the civil service, admitted that the Government were not making preparations for a UK breakup.
With a further weakened coalition, the chances of a Labour victory in the election would rise to 75% or more. With the Labour party’s pledges of higher taxes, closing foreign resident loopholes and squeezing the activities of the City’s financial heart, international investors would turn their back. Even worse, the Labour Government would lack power as they would be missing the Scottish seats from 2016 on which they depend on so much.
So what can we do to protect ourselves
With the referendum’s unprecedented nature, speculation on its impact will likely continue for some time. So with so much uncertainty, how can we protect our investments?
I think the wisest move if you haven’t done so already is diversification. The more asset types, sectors and countries your money is spread amongst, the more hedged you are to market ‘mega-events’ that shift the entire global economy.
You may consider investing in physical gold to diversify. This presents several advantages. It provides an alternative store of wealth to Sterling, protecting you from the currency’s possible fall in value.
Investing in Tax Free Gold coins will mean that your investment is also ring-fenced from possible hikes in income tax, Capital Gains tax or VAT which could stem from the national divorce.
With the political and economic unrest emerging from a yes vote, a safe haven investment such as gold bullion would also provide a valuable inverse correlation to the mainstream asset classes.
Even if the vote on Thursday supports keeping the Union together, this is only the start of an ongoing debate.
This piece was originally published on the Physical Gold blog here.