Gold continues to cool its heels after the tragic killing of a British Parliament member last Thursday, with the latest polls on a potential United Kingdom Brexit showing that momentum seemingly has swung back to the Remain camp.
We did have momentum until this terrible tragedy, said Nigel Farage, leader of the UKIP party and one of the leading advocates for a Brexit. It has had an impact on the whole campaign for everybody, he said of MP Jo Coxs killing. When you are taking on the establishment, you need to have momentum.
With the Leave camps push slowing at the moment, stocks surged Monday and gold dipped, trading near $1,285 in the afternoon.
Shock waves threaten global growth: However, this is a race down to the wire, and no one knows the outcome. But the ramifications could be huge, with The Washington Post warning this week that Britains departure from the European Union could send shock waves across the global economy and threaten more than a trilliondollars in investment and trade with the United States.
Along with a possible deep blow to the global economy, the Brexits potential to unravel the cohesiveness of the European Union has led another major investment bank to issue a bullish pronouncement for gold prices.
Citi Research says the yellow metal could surmount the $1,350 level if the Leave camp prevails. We believe a Brexit result could see gold prices eventually hit levels above $1,350/ounce even if a proportion of the risk is already baked in to current prices and even if the USD (U.S. dollar) likely rallies on any knee-jerk reaction, its analysts wrote. In our view, gold would rally on potential asset market drawdowns, a spike in vols, further yield compression and greater risk of the Fed being on hold for longer.
Buy the dips, analysts say: Conversely, with hedge funds placing near-record bets on golds continuing upside, investors should expect a pullback in bullion prices if the UK votes to remain, but nothing approximating a crash, Citi added.
Even if the Brexit does not occur, the low-interest-rate environment going forward still favors the metal, which has shown strong support at the $1,200 level. I still think now one has to buy on dips, MKS trader Afshin Nabavi told Reuters.
Gold is more likely to trade lower ahead of the Brexit vote given its strong rally over the last few weeks, added Altavest co-founder Michael Armbruster in comments to MarketWatch. Gold bugs looking to get long may get an opportunity to buy near these levels. The big picture for gold is still quite bullish as real interest rates remain negative nearly everywhere, including here in the United States. We look for gold to make another push higher after the Brexit vote.
Risks are not trivial and are rising: After all, take away the Brexit issues, and fears of a slowing global economy remain. The ratio of the gold price to the slumping copper price has driven home those concerns. And Gluskin Sheff chief economist David Rosenberg is warning that risks are rising thanks to the 3D: debt, deflation, and demographics.
I may not see a recession around the corner, he wrote in detailing his firms reduction of equities exposure, but I am not exactly whistling past the graveyard either. The risks are not trivial and are on the rise, but even if a downturn is averted, we are likely to remain in a stuck-in-the-mud global economy, with no leadership, diminishing returns from monetary stimulus and still little in the way of a fiscal response.
The bottom line is that the Fed has waved the surrender flag at its meeting last week, and thus higher rates arent coming anytime soon. Indeed, expectations for the next rate hike have been pushed to 2017, 2018, may be even ?? noted Komal Sri-Kumar of Sri-Kumar Global Strategies.
Stay tuned for more clues about the Feds next move as Yellen speaks before a Senate panel this week, but in the meantime, prudent portfolio diversification remains key in the days, weeks, and months ahead.