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Article / 23 June 2016 at 13:00 GMT

Saxo on Brexit: Gold could rise 8% if UK quits

Head of Commodity Strategy / Saxo Bank
Gold priced in sterling would rip higher if the British decide to quit the EU. Pic: iStock

By Ole Hansen

Gold rallied very sharply during the first half of this month, boosted by a blend of poor US jobs data, a dovish Fed and worries about Brexit. But as these fears subsided in the past few days, gold dropped back and has now retraced retraced about half of that June rally.

Against that backdrop it is fair to argue that a ‘Leave’ vote risk premium has almost been priced out of the market. The impact of a ‘Leave’ vote would most likely send a shockwave through financial markets while providing gold with a major boost. The initial winner would be gold priced in GBP and EUR on the assumption the dollar would strengthen. 

If they Leave...

The main reason why gold would benefit from a British decision to leave the European Union is that it would expose other asset classes to uncertainty and risk aversion and might cause the US Federal Reserve to delay hiking interest rates. It could also bring the fear of contagion to other EU countries with Marine Le Pen having promised a “Frexit” vote if she wins the French Presidential election next year. Dollar strength in the event of a Brexit decision would also be critical for the gold price and EURUSD would likely hit 1.10 immediately with the potential of falling as low as 1.08. In such a scenario, gold would need to rally by $30 to $50 to offset this dollar strength, a move that should be achievable.

Because the dollar would surge should Britain decide to quit the EU, the biggest uplift for the yellow metal would surely be seen in gold priced in euro and sterling. XAUGBP hit a three-year high last Thursday at £938. A ‘Leave’ vote could see GBP lower by 6–10% which could bring it within striking distance of £1,000/oz while priced in euro it could be taking a look at €1,200/oz. 

If they Stay...

The picture, obviously, would be quite different should British voters opt to retain their membership of the European Union. But we should bear in mind that the referendum is not the sole influence on the price of gold. Even before the heightened Brexit risk in recent weeks, gold had already found support from the dovish FOMC and negative sovereign bond yields.  

In the event of a Remain vote, some short-term volatility would hit all markets with positions being adjusted. The medium-term outlook for gold, however, would stay supported and a Remain vote should not change this outlook. We would look for support to be established ahead of $1,245/oz.

The May correction ran out of steam at the 38.2% retracement of the December to early May rally. Considering the +$250 rally prior to that it gave a good signal about the underlying strength of the market. In the past couple of days gold has settled into a range roughly determined by the 38.2% and 50% retracement of the June rally. Key support below will then be $1,245 (61.8%). A break below this would signal some additional consolidation but we believe that support towards $1,200 remains firm.

When the dust settles

On the other side of the vote the focus should fairly quickly return to the multiple supports coming from a dovish Fed, the diversification/re-allocation negative sovereign bond yields and concerns about global growth.

This cliffhanger referendum is impossible to call but as Britons pile into the polling stations today one thing is clear – it's either In or Out. There is no third way.

For gold, if the British choose to stay, the current range may get extended somewhat towards $1,300 at year-end. 
A Leave vote would raise the year-end price to $1,350.

– Edited by Clare MacCarthy

Ole Hansen is head of commodity strategy at Saxo Bank. His Twitter account was cited by MarketWatch as one that investors should follow in 2016.

23 June
John Roberti John Roberti
Dear Ole, I forgot to ask you this morning, your opinion of a bremain vote on the oil prices and oil markets? Thanks in advance.
23 June
sbadran sbadran
bremain is the result and oil will surge along with gold to new highs currency will collapse as the market is over priced .i can see euro 1.11 gbp 1.41 gold 1320 oil 52 ....
23 June
John Roberti John Roberti
Sbadran Very difficult to believe oil will surge once the glut is getting worse week after week with you projection of dollar index going very high! I am interested to Ole Opinion
23 June
Ironeyelid Ironeyelid
People believe exactly what they want to believe. Logic and understanding the real physical movement of oil is a completely different issue. Interesting that every report that is let into the media is compiled by a human. There is not a process for verification of the correctness of the data. Nothing about consumption has actually diminished. All the information +/- about an 'oil glut or oil scarcity' one must always follow the money and the purpose of the information begin disseminated. Raw oil is not used by anyone but refineries. The refinery contracts have been in place for the most part for over 20 years and the output is gasoline, aviation fuel and diesel for heating in some areas. Unless we are all missing something, there are not fewer airplanes flying today and there are not fewer wars and conflicts across the globe that use the oil products everyday. Following the money.
Just thoughts.
23 June
abach abach
I'm in the oil business. The glut is a fact. And consumption falls every month. The latest price strength has nothing to do with the reality. But what nothing is real these days. Why should oil pricing be real?
23 June
John Roberti John Roberti
I am in contact regularly with oil explora
23 June
John Roberti John Roberti
John Roberti

I am in contact regularly with oil exploration (Exxon mobile) and refiners (Total) and I confirm Abach statement that the glut is there but the market does not want to worry about that now and as the proverb says "the market is always right" and we have to be patient...! By the way, the price is slightly down this afternoon...
23 June
sbadran sbadran
what do u think about my comment 9 hours ago??
24 June
John Roberti John Roberti
My question was what about a remain vote! It was evident that, in the event of a brexit, your comments on oil prices were wrong! I sold this morning at huge profits


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