Gold prices could hit $1,400, if Britain votes to exit the European Union

Dubai - Brexit would be very beneficial for shorting sterling and we will probably see a big pick up in gold

Gold prices, which rallied to a near two-year peak last week as investors sought the "safe-haven" commodity on fears of Brexit, could hit $1,400 if Britain votes to exit the European Union in the June 23rd referendum.
"The big question remains what kind of impact the vote will have on the yellow metal. We view the risk reward as being skewed to the upside," said Ole Hansen, head of Commodity Strategy at Saxo Bank.
Gold, whose twin drivers are investment buying and jewellery demand, surged on Thursday to $1,315.71 an ounce - the highest since August 2014.
"A vote to leave the European Union would almost ensure a prolonged period of uncertainty where stocks could suffer and bonds continue to be sought. While it may also support the dollar thereby creating some headwind giving the negative correlation we see an increased risk that gold could be propelled towards $1400, the 2014 high," Hansen wrote.
"A 'remain' result would initially trigger a major relief rally across global stocks but with the dollar also likely to weaken and with global bond yields remaining compressed we see the downside risk limited to around $1250/oz," he said. Most analysts are of the view that precious metals, which are famous for their safe-haven appeal, are poised to bounce when risks in the markets rise. "Thus, the volatility over Brexit is also helping gold rise," they said.
According to James Butterfill, head of research and investment strategy at ETF Securities, the yellow metal is set to become one of the biggest beneficiaries of a "leave vote" on June 23 and could rise as much as eight per cent from current levels.
"Brexit would be very beneficial for shorting sterling and we will probably see a big pick up in gold. In that scenario we think gold could hit $1,400 an ounce," he said.
Recent surveys ahead of the referendum show an upswing in support for the "leave" campaign although some polls suggest that the vote will be close. However, the bookmakers are still pointing to a narrow win for the "stay" camp.
Analysts fear such uncertainty is fuelling jitters in the financial markets. For instance, the pound has lost 2.3 per cent against the dollar in June so far, while the blue-chip benchmark, the FTSE 100 index is down 4.8 per cent.
Gold, on the other hand has been one of the best performing assets with a 7.7 per cent rise this month, partly lifted by a dovish statement from the Federal Reserve, analysts pointed out.
With uncertainty looming, investors show an increasing appetite for safe haven investments, notably gold, the yen and German government bonds, seeking financial protection in case Britons vote to leave, analysts said.
Since the beginning of 2016, gold has rallied a whopping 24 per cent. That compares with a lacklustre 1.4 per cent gain for the S&P 500 and 12 per cent drop in the Stoxx Europe 600 index.
Saxo Bank's Hansen said the potential "leave vote" does not only raise questions about the impact on the UK but also the contagion risk to the rest of Europe. "Other countries, if given the chance, would likely also be showing scepticism towards the European Union."
"Fading US rate hike expectations, falling stocks and rising volatility combined with collapsing bond yields and the general raised level of uncertainty have seen gold make a break through the high from early May," said Hansen.
Demand for exchange-traded products backed by gold also remains strong, he noted. Even during a correction in May, when both gold and silver succumbed to profit taking following a very strong beginning to 2016, demand continued to climb. Tactical traders using futures were the main culprits behind the selling witnessed in May where hedge funds reduced bullish bets on gold by one-third. With the sharp reversal seen this month, they have been busy rebuilding long positions and during the week ending June 7 they added 20 per cent, said Hansen.
HSBC chief precious metals analyst James Steel believes that using gold as a hedging measure could be effective against the effects of the financial uncertainty of a Brexit. "As perceived safe-haven assets, the Swiss franc and gold often move directionally together. A stronger franc may indirectly support gold," said Steel.
The HSBC analyst believes that the Swiss franc is unlikely to weaken should the UK choose to remain in the EU and said the same rationale applies to gold.
- issacjohn@khaleejtimes.com

• Gold and Forex