News ID: 188321
Published: 0232 GMT February 25, 2017

Gold fingered for distorting Brexit Britain’s trade balance

Gold fingered for distorting Brexit Britain’s trade balance

A surge in Chinese demand for gold is distorting UK trade and investment figures and confusing the picture of the EU referendum’s impact on the economy.

A rise in exports and a fall in business investment since the vote last June have sparked debate over whether Brexit is fuelling a trade-boosting rebalancing of the economy — or prompting companies unsure of the outcome to rein in capital spending, FT reported.

A closer look at the statistics suggests that an increase in trading of gold assets is making these export and investment shifts look much more dramatic than they really are.

Sales of the precious metal from the UK to foreign markets appear as both an increase in exports and a reduction in investment in the national accounts, because, while the country has sold something abroad, it now has fewer assets.

These two effects exactly offset one another so do not affect the headline reading of gross domestic product. But they make it appear as though trade and investment flows are much larger than they are.

As the London Bullion Market accounts for more than 80 percent of the global gold trade, sales of the yellow metal have a big potential to drive short term measurements of UK trade.

In the fourth quarter, Chinese investors ramped up demand for gold as a means of hedging against movements in the renminbi. This led to outflows of the metal.

The Chinese market uses gold bars in a different size to the ones that are held in London so they import via Switzerland where the bars are recast, said Oliver Harvey, a foreign exchange analyst with Deutsche Bank. In the final three months of 2016, UK goods exports to Switzerland increased by 282 percent to their highest level ever.

During the previous quarter these movements happened in the exact opposite direction as the UK became a net importer of gold.

It has become very distorting,” said Harvey. During the third quarter rising demand for gold exchange traded funds — a kind of low cost investment product — meant that traders in London, where the ETFs are bought and sold, had to buy gold from abroad.

These gold movements are not due to investors getting nervous about the health of the UK, said Samuel Tombs, chief UK economist at Pantheon Macroeconomics. “Other indicators of whether foreigners are willing to invest in the UK have held up quite well.”

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