Gold prices are likely to explode if Britons vote to leave the European Union when they go to the polls next Thursday, gaining as much as 10% in a short space of time.
Gold is seen as a haven for cash. It does not pay a coupon like a bond, and it does not pay a dividend from a stock, but it does mean you own ounces in a physical precious metal that you can hold onto.
And it is for this reason that chief precious metals analyst James Steel and his team at HSBC say that the precious metal will take off after a Leave vote in the UK’s European Union referendum when market turmoil will reign supreme. Here is the quote (emphasis ours):
A vote to leave, could result in as much as a 10% rally in gold prices, to cUSD1,400/oz, we believe. The drive higher may be more pronounced if there were to be broader concerns about the future direction of the EU after the vote. Gold could also benefit from the reluctance of investors to move into the GBP [sterling] or even the EUR [euro].
HSBC continues (emphasis ours):
As a risk-off asset, gold would likely rally in the event of a leave vote. We anticipate a sizable safe haven bid in gold in this event. The argument for this is straightforward. The uncertainty spurred by an exit vote would likely elicit sufficient gold purchases to buoy prices. The link is the interconnection between the gold market and wider financial markets. In periods of uncertainty, gold is often one of the few liquid perceived safe haven assets. It is also historically negatively correlated with risk-on assets.
Pretty much everyone in the markets right now is predicting that if Britain does vote to leave, what will follow will be a period of immense stress with virtually all assets taking a hammering. Morgan Stanley on Tuesday predicted that markets will get devastated within six months, while Bernstein Research argued that Britain’s financial sector would take a hammering following an “Out” vote.
That volatility, HSBC argues, would send investors flooding into gold.
Wednesday’s prediction about a gold rally after a Brexit is not the first time HSBC has made the call. In April, the bank argued that gold could provide a “good hedge” against the financial impacts of Brexit, as it would be subject to a “substantial safe haven bid.” However, when the bank made that prediction, it was looking a lot less likely that Britain would actually leave the EU. Recent polling data suggests that the Leave campaign now has a substantial lead ahead of the vote on June 23.
While Steel and his team see gold going sky high in the event of Brexit, should Britain vote to remain, the opposite may not necessarily be true. Here is the key quote (emphasis ours):
“We believe gold is well placed to withstand any repercussions of a vote to remain in the EU. As pointed out by the currency team, shorting the GBP may be a way to hedge a leave vote, although GBP could rally sharply if the referendum reaffirmed the UK’s membership in the EU. This would not be the case with gold, we believe. The risk to gold of a vote to remain in the EU would be asymmetric. While a vote to leave the EU would likely result in a rally, we do not think a vote to remain in the EU would trigger a major sell-off.”
“We believe gold is likely to fall by no more than 5%, or to USD1,220/oz, as other bullish factors are likely to support prices,” HSBC adds.
Gold has already seen huge gains so far in 2016 amid crazy volatility in the markets, and a general sense of foreboding about the global economy, and has gained almost 20% since the start of the year, making it one of the most profitable asset classes of the year. Here is a look at the way gold has rallied this year:
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