Gold is one of the primary beneficiaries of the increase in uncertainty surrounding Britain’s vote to leave the EU. It’s up $US12 an ounce, to $US1327, toward the end of the Asian session after surging earlier when the pound came under pressure, and stocks futures on US and European stock indexes came under heavy selling pressure.
But the question of just how far gold can go in an environment of low inflation and against a backdrop which is likely to favour US dollar strength is an open question.
We asked Jordan Eliseo chief economist at ABC Bullion how he thinks the outlook stacks up for gold in the weeks and months ahead.
Eliseo said he the initial surge wasn’t surprising because markets were reacting to the previous few days pricing which had seen “gold ease as a “Remain” vote was priced in”.
He told Business Insider that he is “cautiously bullish from here”, because “central banks the world over are likely to be even more dovish post-Brexit, with rate hikes from the Fed off the table for now”.
Low and negative interest rates make the cost of owning gold – which carries no rate of return other than capital gain and has a cost to store – more attractive. Eliseo said gold was a hedge against uncertainty and he believes “there will also be many who want to own gold as a hedge against further volatility in risk assets, with its role as a safe haven gaining greater appeal in a world where traditional defensive assets offer negative real yields”.
Eliseo said it may not be all plain sailing for gold because its rally, and the level of support from the speculative community so far in 2016, could be a handbrake.
“We’ve now seen a circa $US280 / oz move already this year, with speculative positioning stretched, whilst gold also has some key resistance levels it needs to clear if it’s going to continue to push higher in the second half of 2016”.
But the level to watch is $US1350 an ounce. IF that level break then a rally to US$1400 and beyond is in the offing because of low rates and this safe haven buying.
In Aussie dollars terms Eliseo said that after making a new all-time high around $1850 in trade Friday, and even though it is back at $1790 today, there is a strong chance that gold in Aussie dollar terms climbs to $A2000 by the end of the year “if the currency heads toward $0.70” which Eliseo believes is “something that is entirely possible with the RBA likely to cut at least twice in the coming months”.
That’s a view that accords with the latest from Westpac chief economist Bill Evans who released a note today saying a rate cut from the RBA in August is a “near certainty”.
If Eliseo and Evans are right then even though gold stocks like Newcrest have doubled since November lows the rally may not be over yet.