Brexit concerns, monetary policy and geopolitics underpin continuing gold rally

Brexit concerns are driving a big run in gold, but they aren’t the only factor underpinning the rally.

Gold rose above US$1,300 an ounce this week, reaching the highest level since August 2014, as fears that Britain could vote to leave the European Union intensified. The key futures contract closed at US$1,294.80 on Friday, up 22 per cent since the start of the year.

Much more volatility in gold is expected next week, both before and after Thursday’s vote.

“If the vote is to leave (the EU), I think gold would probably go through US$1,400. Just on that,” said Martin Murenbeeld, chief economist at Dundee Capital Markets. He noted that a crisis typically moves the gold price by about 10 per cent.

On the other hand, he thinks a drop below US$1,250 an ounce is likely if the “remain” side wins.

One indication of Brexit’s impact on gold came after the horrible murder of British MP Jo Cox on Thursday. Gold quickly dropped by more than US$20 amid rumours that the vote could get postponed.

Even if the British vote to remain in the EU, as the oddsmakers expect, market watchers said the Brexit debate could have longstanding positive implications for gold.

Bart Melek, head of commodity strategy at TD Securities, noted that the referendum has “opened up a can of worms” for Europe, and arguments in favour of breaking up the EU will continue to be visited in the months and years ahead, which could create plenty of market volatility.

“I don’t think the risk-on environment fully abates (with a “remain” vote), mainly because it still presents a bit of an existential crisis for Europe,” he said.

Other issues have also contributed to gold’s recent strong performance. The U.S. Federal Reserve came out with a highly cautious statement on Wednesday, offering little hope of a summer rate hike. The European Central Bank is aggressively buying bonds, helping to drive German 10-year bund into negative territory for the first time. There is even talk of potential “helicopter money” policies to drive economic growth.

Meanwhile, China has reduced its U.S. dollar holdings. And other geopolitical risks, including the U.S. election cycle, remain on investors’ minds.

“I don’t think it’s all Brexit-related,” Melek said. “There’s a sprinkling of factors that have contributed to gold’s rise.”

Investment demand for gold has been robust throughout the year. Exchange-traded funds have increased their gold holdings by more than 400 tonnes in 2016, putting them on pace to replace all of the tonnes they dumped in 2013, when ETF holdings fell by an unprecedented 880 tonnes. Golf prices dropped nearly 30 per cent that year, due largely to ETF liquidations.

Financial Post

pkoven@nationalpost.com

Twitter.com/peterkoven

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