(Kitco News) - It has been an intense and also tragic 10 weeks in the United Kingdom as
voters will soon head to the polls to vote on whether the country remains a member of the European Union, which could have major implications for the gold market.
The gold market had a bit of a setback Thursday as prices gave up all of their gains since the last Federal Reserve meeting. However, the metal is still up on week. Comex August gold prices last traded at $1,293.60 an ounce, up 1.2% on the week. The market is on track for is third consecutive weekly positive close.
While gold is holding onto some gains, silver has underperformed as prices are relatively unchanged on the week; July Comex silver futures last traded at $17.415 an ounce, up 0.5% on the week.
Emotions And Volatility Are High Ahead Of Brexit Vote
Thursday’s price action demonstrated just how sensitive markets are to the Brexit vote. After hitting a nearly two-year high at $1,318.90 an ounce, August gold futures lost 2% and ended the day in negative territory on news that pro-EU politician Jo Cox was murdered. All referendum campaigning has stopped until Sunday.
According to some analysts, gold’s sell-off Thursday was due to a belief that the murder has provided some support for the “remain” camp, which has recently lagged in the polls. There were also rumors circulating around Wall Street that the actual vote could be postponed; however, those have proved to be false. If the Brexit vote does fail, it would create much-needed stability in the European Union, which would be negative for gold prices, according to some economists.
Playing Gold Ahead Of Brexit Vote
A potential Brexit has created a lot of uncertainty in financial markets; Fed Chair Janet Yellen admitted on Wednesday that it was one of the reasons why the central bank decided to leave interest rates unchanged Wednesday. But the question is with so much volatility and uncertainty, how do you play the gold market?
French bank Natixis might have the best advice for traders as Thursday, the firm’s precious-metals analyst, Bernard Dahdah, said that he prefers the gold options market ahead of the June 23 vote.
“For $10, buying a one-month gold call with a strike of $1,375/oz looks like a reasonable decision considering the potential aftermath of a leave vote,” he said in a report. “Should the U.K. vote to remain, the loss would be minimal ($10 premium), but should the U.K. vote to leave, important gains can be made.”
But Brexit Is Only A Piece Of The Puzzle
Ronald-Peter Stoeferle, fund manager at Incrementum AG and author of the In Gold We Trust Report, said that while the Brexit vote will continue to add volatility to the market, it doesn’t change the gold long-term bullish landscape. He added that issues like rising inflation and global negative interest rates will continue to be the important factors to drive gold’s new bull market.
“Our research has shown that political events only have a minor impact on gold and don’t define the long-term trend,” he said.
Bill Baruch, senior commodity broker at iiTrader, said that he is also taking Brexit out of the equation as the metal still has plenty of potential to move higher.
“Brexit was just the extra fuel that could get us to $1,400 an ounce earlier than we expect,” he said. “But with global interest rates in negative territory, that will remain our long-term goal.”
Just When You Thought the Fed Was Done… Yellen is Back
After leaving interest rates unchanged this past week, Fed Chair Janet Yellen will testify before Congress next week. Her twice-a-year appearance on Capitol Hill starts Tuesday when she sits before the Senate Banking Committee. She is back on Wednesday to testify before the House Financial Services Committee.
George Milling-Stanley, head of gold strategy at State Street Global Advisors, said that Yellen’s comments could create some volatility in gold next week; however, he recommends investors try to tune out the “white noise.”
“I don’t think it really matters what Yellen has to say. Interest rates will remain low for a long time and that is good for gold,” he said. “Six months ago, markets were expecting to see four rate hikes. Last month they were expecting to see two rate hikes and now it’s not even clear we will get one rate hike.”
Milling-Stanley added that investors should also put any rate hike into perspective as the most the Fed would move was 25 basis points. That is minimal as the U.S. consumer price index shows core inflation running at 2.2%.
Paul Ashworth, chief U.S. economist at Capital Economics, compared the latest downgrade in the central bank’s economic projections to a “veering drunken sailor.”
Is $1,400 Gold In The Cards Next Week?
At last count, at least eight financial firms have raised the specter of $1,400 gold if the Brexit vote passes. However, with prices below $1,300, some analysts see this as the first resistance level to watch.
“A close over 1304 is needed to rekindle bull forces for a drive to 1330-1340,” said analyst at RJO Futures.
However, most analysts are looking at gold’s downside after Thursday’s sharp correction.
Sam Laughlin, precious metals trader at MKS Switzerland, said that he could see gold prices fall to $1,275 an ounce early in the week and then retest $1,300 an ounce ahead of the U.K. referendum.
In a report Friday, Baruch noted that the market is vulnerable to test support at $1,267.30 an ounce and could even fall as low as $1,242.10. “We will look to these major support levels to be tremendous buying opportunities,” he added.
The Final Say…
Brexit and Yellen’s testimony represent the biggest risk events for gold; however, investors and traders will want to keep an eye on economic data as housing sales data, preliminary manufacturing data and durable goods numbers that will all be released this week.
By Neils Christensen of Kitco News; nchristensen@kitco.com
