Article / 22 June 2016 at 8:30 GMT

From the Floor: 'Bremain' tilt sends gold sliding

Your Next Trade
  • Gold falls $30/oz as Brexit decision edges towards a 'Bremain' outcome
  • Most of the Brexit risk "priced out of gold" — Hansen
  • Long position in gold unwinds as 'smart money' exits — Hansen
  • GBPUSD, EURGBP in clear mean-reversion zones — Hardy
  • Markets "ignore Yellen testimony" as Fed credibility sinks to new low — Hardy
  • Bonds retreat as markets move in synch with Brexit polls — Boye


By Martin O'Rourke

Taking a dive

Gold fell some $30/oz overnight after the rally that had helped propel it above $1,300/oz last week hit a formidable  'Bremain' hurdle as the countdown to the UK referendum on EU membership enters its final 24 hours.

"There have been a couple of big selloff days and that has seen gold suffer a big loss", says Saxo Bank head of commodities strategy Ole Hansen. "Most of the Brexit risk has now been priced out of gold".

Hansen pinpoints $1,257/oz and $1,244/oz as pivotal supports for gold in and around the vote. Gold was at $1,264.71 at 0655 GMT.

"Brexit is leading to a tremendous repricing of gold", says Edmund Liu from Saxo Bank's Singapore hub. "Gold will definitely take centre stage over the next couple of days and if 'Bremain' happens, we will see a temporary selloff".

"The Bremain camp is still ahead but it might be losing some momentum", he adds.

A primary driver of the plunge in the gold price has been the exit of 'smart money' from long positions established when Brexit fears hit a peak last week (before the dreadful murder of remain-campaigner Jo Cox), says Hansen. "ETF demand is still accelerating into the drop", notes Hansen, "with some 8 tonnes added during the $30/oz drop yesterday".

"Risk reward is skewed to the upside", says Saxo's commodities chief.

Gold rally well and truly punctured as Bremain camp sustains momentum

Source: Bloomberg

Gold of course is not the only safe-haven asset suffering as a consequence of a return of some risk-on appetite with bunds also slipping and both the dollar and the yen faltering.

"Bonds are moving in synch with the Brexit polls", says Michael Boye from the fixed income desk in Copenhagen. "There is very limited upside in case of a 'Bremain' vote". 

Mean reversion

The subtle but definite tilt towards a 'Bremain' vote indicated by the polls (we do urge caution in putting too much store by the pollsters after last year's UK election) has also left sterling somewhat caught between a rock and a hard place as the British make up their minds.

There are mean reversion cases for both GBPUSD and EURGBP after "a clear pricing in of Brexit", says Saxo Bank's head of forex strategy John J Hardy. "If we assume that we are going to neutralise the Brexit then EURGBP could go to 0.73 and GBPUSD could go to 1.52-53 or could even extend a bit higher to the upside".

"The safer trade is to focus on EURUSD or EURJPY and it is hard to trade anything at the moment that is not correlated with the Brexit", says Hardy.

Mean reversion in both EURGBP and GBPUSD evident in the last few days

Source: SaxoTraderGO

Federal Reserve chair Janet Yellen gave her two pennies worth on the Brexit when giving testimony to the senate but, says Hardy, markets largely ignored what she had to say.

"The Fed is a bit rudderless at the moment and markets don't believe in its credibility", says Saxo's forex chief. "Quote of the week from Yellen has to be that 'we are not relying on forward guidance'".

With the Fed effectively accepting it is completely driven by data points, that has also left the dollar somewhat stranded and the twin whammy of a 'Bremain' vote and Fed dovishness is likely to keep the dollar weak for now, he adds.

And finally....

The agricultural rally looks like it could be unwinding after corn fell 9% in the last two days which could see an end to a huge speculative long position in the sector over the last few weeks, says Hansen. Sugar is also potentially on the turn, he says.


It probably wouldn't be the worst assumption that the Canary
Wharf workforce will be backing a 'Bremain' result. Photo: iStock

Martin O'Rourke is managing editor at Saxo Bank

Editor’s note: From the Floor takes advantage of's unique real-time access to Saxo Bank’s various trading desks around the globe to put our community in touch with the developments that matter to their portfolios.

Martin O'Rourke Martin O'Rourke
Saxo Bank's very own Brexit poll is decidedly in favour of a 'Bremain' result tomorrow with 66% predicting a 'Stay' outcome but we can't help thinking that the vote is going to be much closer than this.
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