Brexit: Not Done Yet, Gold Market To Benefit For A While

(Kitco News) - If you thought you were tired of talking about Brexit before the actual referendum, buck up because the conversation is just heating up.

Early Friday, as the “leave” side was in complete control of Thursday’s referendum, gold prices shot to $1,362.60 an ounce, its highest point since March 2014. Since then, prices have come back but August gold futures are still holding onto significant gains as it prepares to close its fourth consecutive week in positive territory, with prices above $1,300 an ounce.  August gold settled the week at $1,322.40 an ounce, up almost 2.3% on the week.

According to reports, gold’s nearly 8% rally overnight was its biggest swing since the 2008 financial crisis.

Although the referendum is over, analysts expect that markets will continue to digest the results next week and try to determine the impact a Brexit will have on the global economy.

“This is not going to settle down anytime soon,” said Ole Hansen, head of commodity strategy at Saxo Bank.

Although the referendum passed, analysts agreed that it is important to realize that the ball is now in the politicians’ court and nothing moves fast in government. In other words, the U.K. will have two years to work out its EU exit plan so analysts expect the political rhetoric to continue for a while.

Gold Is A Pillar Of Strength

The results of the Brexit vote have definitely shaken sentiment around the world as equity markets fall along with bond yields. In currency markets, investors around the world are flocking to gold to protect themselves from the potential ramifications.

Adrian Ash, head of research at Bullion Vault, said that the company has seen “crazy” demand from its U.K. clients as they have bought a combined total of £1 billion in gold bullion. U.K. residents now hold more gold than “most of the world’s central banks, and more than all but the world’s 11 largest ETPs,” he said.

In currency terms, gold is up almost 13% against the British pound, but is also up more than 6% against the euro and and more than 6% against the Swiss franc. In U.S. dollar terms, gold prices are up more than 4% and more than 5.6% in Canadian dollars.

The ramifications of the Brexit vote was felt on the other side of the world as gold in Australian dollar hit a record high. Gold is up almost 6% against the Aussie dollar.

Sandra Close, a director of Aussie-based mining consulting company Surbiton Associates, perfectly summed up the action seen in the gold market: “Things are moving so fast that it is hard to keep up,” she said. “One thing I have learned over time is that the gold market is full of surprises.”

The Next Domino To Fall…

With the Brexit vote now over, economists and analysts are now speculating on which European nation will be the next to break away. After the Brexit vote, French political leader Marie Le Pen said that if she wins the next general election, she will hold a referendum.

France will be holding its next presidential election in April 2017.

However, experts at Capital Economics said that the Netherlands could be the next country to want to break away from the EU.

“Despite the Dutch being the least optimistic about their country’s chances outside of the EU, the Netherlands arguably has the greatest potential to hold the next referendum, given that elections are set for March 2017 and the euro-sceptic Party for Freedom has a commanding 13%-pt lead in the polls,” they said.

Hasen said that he remains bullish on gold as the Brexit vote has revealed cracks in the euro experiment. He explained that gold will continue to benefit as a safe haven in an uncertain global currency market.

Levels to Watch Next Week

Most analyst see further upside potential in gold next week as markets continue to digest the results of the Brexit vote; however, investors should still pay attention to the downside.

Gold prices are off their overnight highs but still trading around last week’s highs at $1,318 an ounce, which is seen as the first important support level. A break below that could lead to a test of $1,300.

“I would be concerned if gold prices break below $1,300 an ounce,” said Colin Cieszynski, senior market strategist at CMC Markets.

George Gero, managing director with RBC Wealth Management, said that $1,300 presents a major strike price for the options market and there could be a battle around this area Monday as it is options expiration day.

On the upside, some analysts noted that a break above $1,355 could leave gold to a test $1,400, which has been on the radar since the start of the month.

The Final Say…

With markets reeling from the surprise Brexit vote, many economists have said that they now don’t expect the Fed to raise rates at all this year. CME 30-day Fed Fund futures are pricing in only a 21% chance that rates will be 25 basis points higher by December, expectations have been cut in half as markets were pricing in a 42.6% chance of a rate hike Thursday when the UK headed to the polls.

Although the Fed is expected to stand pat for the rest of the year, investors should still pay attention to economic data. Some of the highlights in the data calendar next week include the release of final second quarter GDP, June consumer confidence, June national manufacturing data and more May housing sector data.

Courtesy: Kitco News