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