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George Soros warns of Brexit "Black Friday"

Emma Simon  |  22 Jun 2016Text size  Decrease  Increase  |  
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In one of the starkest warnings yet about the economic consequences of the UK leaving the European Union, legendary investor George Soros said a Brexit vote would cause the pound to "decline precipitously"--causing "an immediate and dramatic impact on financial markets, investment, prices and jobs".

Soros famously made a fortune betting against the sterling--and the UK government--when the UK crashed out of the European Exchange Rate Mechanism in 1992.

The chaos this caused in markets the day after was known as "Black Wednesday".

Writing in The Guardian, Soros said he expected disruption on markets in the aftermath of a Brexit vote to be even more significant.

"I would expect this devaluation to be bigger and also more disruptive than the 15 per cent devaluation that occurred in September 1992, when I was fortunate enough to make a substantial profit for my hedge fund investors."

He predicted the UK currency would fall by at least 15 per cent--and possibly by more than 20 per cent from its current level of around $1.46.

If his prediction is correct this could depress the pound to less than $1.15.

Speculators would profit from Brexit--not voters

His comments were echoed by Nouriel Roubini, the New York University economics professor dubbed "Dr Doom" for correctly predicting the 2008 financial crash.

He also warned of the "severe" consequences of a Brexit vote, which could tip the UK into recession.

Soros warned that speculators would be the ones to profit from a Brexit, not voters.

"Today there are speculative forces in the markets much bigger and more powerful [than in 1992]. They will be eager to exploit any miscalculations by the British government or British voters."

"Brexit would make some people very rich--but most voters considerably poorer."

Strong gains for sterling on "Remain" hopes

This warning comes as sterling has rallied significantly in recent days—with the latest polling showing the "Remain" campaign was moving ahead of the "Leave" camp.

On Monday, the pound recorded its biggest one-day gain in seven years. It increased by more than 3 cents against the dollar, to $1.4672, and also rallied 2.5 cents against the euro to 1.2972 euros.

This shift in sentiment also helped pushed the FTSE 100 up by 3 per cent on Monday.

In early trading on Tuesday, the pound continued to gain in value, as the markets became more confident of the UK voting to remain in the European Union on Thursday. Before lunchtime the British pound was trading at more than $1.4750.

However, with the polls still neck and neck, any movement in the final days of the campaign could cause a sharp correction in the opposite direction.

Strong demand for gold

Despite polls back in favour of the "Remain" campaign, the demand for gold among investors has continued to increase.

This reflects continued uncertainty among investors as gold is traditionally seen as a safe haven in times of market turbulence.

Chris Howard, the director of bullion at The Royal Mint said: "As we head towards the European Referendum vote this week, our royalmintbullion.com trading platform has seen a significant upsurge in traffic with a 32 per cent increase in transactions compared to the same period the previous month."

"This recent uplift in traffic has also helped drive an increase in revenue with a nearly 150 per cent rise on the previous month.

"Overall, since early 2016, demand for precious metals has risen, particularly with gold--our Sovereign and Britannia bullion coins and Signature Gold bars offering have all performed well this year and continue to be an attractive proposition to the investor."

In the past few weeks, gold prices have benefited on fears over a British exit. Gold has risen 21 per cent year to date (in dollar terms) amid worries over global growth and as the Federal Reserve has pushed back plans to raise short-term interest rates.

However, on Monday, with opinion polls playing down Brexit fears, gold prices dipped as sterling and share prices rose.

"This is a market that's going to be very emotional this week," said Peter Hug, global trading director at Kitco Metals.

Regardless of the market reaction after Thursday's vote, Hug noted that broader economic concerns and low interest rates should continue to support gold prices.

More from Morningstar

• Beating the fear factor in equity markets

• There are bigger risks than Brexit, AB warns


Emma Simon is a financial journalist, specialising in investment and consumer issues, writing for Morningstar.co.uk.

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