How much will Brexit impact commodities in the UK and Europe?

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Commodity trading is the oldest form of trading there is. It has been around for centuries, and it is rooted in agricultural trading, such as the buying, selling and exchanging of grain and animals. Other commodities include precious metals or natural resources such as silver, copper, cotton and aluminium. Those wanting to invest in commodities often buy gold or oil as these are the most liquid assets.

These days the commodities market is highly regulated, with much of the trade regulation tied up in EU jurisdiction. As the UK plans to leave the EU imminently, the way in which commodities are traded inevitably needs to be reviewed, and measures put in place to enable trading to continue, regardless of what, if any, Brexit deal occurs. Some of the existing EU rules will cease to apply, or will change, following Brexit.

The UK based trade platforms would be classed as third country venues in the event of no deal. How a range of commodities, such as gold, natural gas and even carbon will be traded would also change, as rules linked to market regulation will be impacted by a no-deal outcome.

EMIR (European Market Infrastructure Regulation)

Commodities classed as Exchange Traded Derivatives (ETDs) could be re-categorised as OTC (Over The Counter) derivatives after Brexit, which has implications for investor’s obligations in trading. This may include calculation of the EMIR clearing thresholds, and changes to what happens if that threshold is breached.

MiFID (Markets in Financial Instruments Directive)

Companies impacted might need to re-consider the delineation of what is a physical or financial product. As an OTF (Organised Trade Facility) has to be authorised by the EU, some OTFs based in London are relocating within EU jurisdictions.

Further changes may occur relating to the market size reduction. The removal of UK based transactions and venues from the market size could be significant and impact their exemption rights. This will be gradual, due to a three year period of calculation.

REMIT

This impacts energy companies trading in wholesale energy. The only changes here relate to reporting and registration. Those registered with UK authorities will have to register within the EU NRA in order to trade in a post-Brexit EU27 market. Those EU27 companies that want to continue UK trading won’t need any re-registration.

Gold – the safe haven?

In times of uncertainty, when the economy looks unpredictable, commodities such as gold have often been considered a safe haven for investors. With no clear Brexit deal agreed, a no-deal Brexit still a possibility, and even another referendum on the cards, investors are having to plan how to respond in a very complex and uncertain landscape. Those companies trading in gold and other commodities will also need to be aware of the impact Brexit could have on their activities in 2020 and beyond.

There are currently three potential outcomes regarding Brexit and trading in gold specifically:

No deal:

In the event of no deal, the UK will find it difficult to trade in isolation. With no clear legalities around tariffs, work visas and supply chains, the UK will be less productive, and therefore not as profitable. The fears driven by political and economic uncertainty in the UK has already started to push up gold values, seeing them rise from £901 an ounce to £930. Some experts predict that as uncertainty reigns the value of gold could rise as high as £1,200 an ounce.

Hard Brexit:

A hard Brexit would mean instant removal from the EU and an end to free movement for migrant workers, and would also end the single market access. Investors who are concerned about the lack of access to the single market are likely to hold off investing in stocks and shares, and would possibly look towards gold as a viable alternative. Experts predict that the UK could still establish European trade deals if a hard Brexit happens though, albeit that trade could be more difficult and complex, and therefore would be likely to slow down. This would impact shares, meaning commodities such as gold could rise in value as an attractive alternative. A hard Brexit would be unlikely to cause as great a surge as a no deal though, with predictions for gold values rising to around £1,100 potentially.

No Brexit:

If the Labour government won the UK general election, there would have been the chance of Brexit not happening at all. Labour would have wanted to hold a further referendum, or a ‘People’s Vote’, with a choice of their own new deal for Brexit or an option to remain in the EU. If the public vote to remain, it’s back to business as usual for trade. In this scenario the value of gold would have dropped slightly, as investors’ fears over investing is stocks and shares are allayed. Gold values would likely settle at around £900-£930 per ounce.

Gold is being traded everywhere now, even online through social trading platforms. Global demand for gold is up by 7% year on year, growing 1,053.3 tonnes in Q1 2019. Trading gold and other commodities in UK markets via such platforms like eToro enables investors to diversify their portfolios and invest in areas that may be less susceptible to the fluctuations associated with the current ongoing uncertainty. eToro offers the possibility to trade commodities such as gold, oil, natural gas, silver and platinum as CFDs, meaning that you do not need to purchase the asset to trade it. Whatever the outcome of Brexit, investors often put their trust in gold as a means of riding out the storm.

Electricity trading

If we have a no deal Brexit, the UK electricity market will de-couple from the EU27. This will affect how the National Grid participates in EU-wide balancing measures. A single cleared GB price will no longer be guaranteed in the day-ahead.

Carbon Markets

UK installations will not be subject to EU Emissions Trading Scheme in the event of a no deal and will instead migrate to the carbon tax regime.

The commodity market plays an important part when it comes to the UK economy and a lot of different industries are impacted by the changes in commodity prices due to the impact of Brexit. However, there still is uncertainty when it comes to commodities and its growth prospects. Brexit might severely impact the prices or they might stay at considerable levels if trading agreements are put into place.

 

 

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