The readjustment of risk across most asset classes ahead of the UK referendum tomorrow continues. Increased support for the Remain camp since last Thursday has seen sterling rally 3.5% against the dollar, the FTSE jump by almost 5%, and has left gold (priced in GBP) down 5%.
The risk of a Leave vote has, in other words, been almost priced out of the market. A Remain vote will remove the final bit of lingering uncertainty and support a further reduction in volatility ahead of the summer holiday months of July and August.
Having retraced almost half of June's rally, most of the Brexit risk premium has now been removed. We look for support to be established between $1,258/oz and no lower than $1,245/oz.
During the early parts of June up until last Thursday, gold had received a double boost from Brexit angst and the Federal Open Market Committee turning more dovish following the dismal US job report on June 3.
The so called "smart money" – flows from hedge funds and CTAs – reversed back into gold during this period after hitting the exit during May.
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Demand for gold through exchange-traded products, meanwhile, continues to rise no matter if the market is up or down. This remains a strong indication that demand from retail and real money managers focuses on other drivers beyond the current nervousness about the UK referendum.
During the four days leading up to last Thursday, total holdings in ETPs backed by gold jumped by 16 tonnes. Since Thursday, when gold had reversed back down, total holdings climbed by 22 tonnes to leave the current total at 1,905 tonnes, the highest level since October 2013.
Having now reversed almost half of the recent $115 gain, we argue that most if not all of the Brexit risk premium has now been removed. The medium-term outlook for gold remains supported and a Remain vote should not change this outlook.
Prior to the heightened Brexit risk, gold had already found support from the dovish FOMC and negative sovereign bond yields with dollar strength being the potential major headwind. A Remain vote may clear out a few remaining Leave hedges but we look for support to be established between $1,258/oz and no lower than $1,245/oz.
A Leave result would cause major tremors across markets, especially considering how unprepared the markets are following the latest position adjustments.
Gold would be a major beneficiary with a break back above $1,315/oz, last week's high, signaling an extension towards the 2014 high just below $1,400.
— Edited by Michael McKenna
Ole Hansen is head of commodity strategy at Saxo Bank