Brexit fears likely to drive gold higher, HSBC says
As the citizens of Great Britain mull a potential exit from the European Union, many of them took umbrage at warnings from U.S. President Barack Obama during his recent visit to London.
Obama said that if the June 23 referendum on a Brexit passes, it might be five years from now, 10 years from now, before the U.S. complete new trade deals with Britain.
Despite the outrage generated by Obamas remarks, which were construed as patronizing, the odds of the Brexit actually occurring have dropped since then.
Still, it will all come down to the wire, and the long-term effects of a Brexit could be considerable. Per-household worth would drop by several thousand British pounds, and GDP would fall by 6.2% over 15 years, according to Britains Treasury.
Gold can move with franc, yen: But HSBC thinks at least one immediate winner could emerge from the carnage: gold.
In a couple of recent notes, HSBCs teams wrote: As perceived safe-haven assets, the CHF (Swiss franc) and gold often move directionally together. A stronger CHF may indirectly support gold.
Like the CHF, gold would also likely benefit from a sizable safe-haven bid in the event of a Brexit vote. The currency team believes the CHF is unlikely to weaken should the UK choose to remain in the EU and we believe the same rationale applies to gold.
Like the CHF, gold does not appear to reflect a substantial premium regarding an exit vote. The lack of sensitivity may make both a good hedge.
Positioning ahead of June 23 vote: And with uncertainty lodged in place until the vote is held, investors eventually will start hedging against the possibility of a Brexit with gold.
Another bullish driver of gold may be the potential for hedging ahead of the UKs referendum on EU membership. HSBC forex strategists offer a variety of reasons why the CHF is a good currency hedge ahead of the referendum.
These include the likelihood of a rally in case of a vote to leave the EU, but likely less downside if the referendum affirms the UKs membership in the EU.
We believe this asymmetric relationship also applies to gold. The bank noted that gold, as well as the Swiss franc and the Japanese yen, all rose in the runup to the UKs general elections in 2015. The same safe-haven appeal could apply in the weeks ahead as the Brexit referendum nears.
Sticking by its $1,300 prediction: The bank also once again reaffirmed its forecast that gold will hit $1,300 in 2016. We continue to see the potential for gold to reach USD1,300/oz this year. As well as a weaker USD, we see global risks and a modest recovery in oil prices as gold-bullish. The more tame Fed tightening cycle, compared to expectations last year, should also support gold.
Until closure on this potentially major shakeup to European governance and commerce is reached, gold looks like a solid play heading toward June 23.