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Gold gets Brexit boost

20 June 2016 in Trading Ideas

Key takeaways:

  • Gold prices rose after the Fed backed off its rate-hike projections.
  • Uncertainty about Britain’s membership in the European Union this week also lifted gold.
  • Motifs mentioned: Precious Metals
  • Stocks mentioned: AngloGold Ashanti (NYSE:AU), Barrick Gold (NYSE:ABX).

It’s always nice when the best-performing commodity of the year can continue to rally with the help of developments across two continents.

Late last week, gold rose as high as $1,318 an ounce – its highest level since August 2014, with the yellow metal very much on track to post its first annual gain in four years.

Fed’s rate-hike fade helps lift gold
Here in the U.S., sentiment was helped by the Federal Reserve’s lowering its projections for how much it expects to tighten monetary policy in the next few years. A tepid recovery here and slowing growth outside of the U.S. has contributed to a dovish mindset for the Fed, with a greater number of its officials now anticipating just one rate increase in 2016, rather than two.1

The traditional investing thesis is that more of the status quo helps gold, which doesn’t pay its holders anything and has difficulty competing against yield-bearing investments when rates shoot higher.

“The longer the Fed is seen as delaying a rate hike, the better for gold,“ HSBC analysts said in a note to clients last week. “Fed policy is shaping up to be long-term supportive of gold, in our view.” 2

The Fed’s statement last week on its thinking noted that while economic activity and household spending have picked up recently in the U.S., jobs gains have shrunk and market-based measures of inflation compensation had declined — even as surveys of individuals’ inflation expectations remained little changed.

While Fed Chair Janet Yellen was optimistic overall about the U.S. economy in a speech last week, she also withdrew an earlier expectation that she expected a rate rise in the coming months. Going into last week’s Fed announcement, futures markets were predicting only a one-in-five chance of a move at the central bank’s next meeting in July, with slightly stronger odds in September.3

Thanks, Brexit
One chunk of the Fed’s cautiousness – and the other key recent driver of gold prices — has been the upcoming June 23 referendum in the U.K. regarding that company’s continued membership in the European Union. Investors fear tumult in financial markets should Britain choose to leave (or “Brexit,” as it’s commonly called.

That’s could also be good for gold. Indeed, prices may rally to the highest in more than two years if the Brexit campaign succeeds, reaching $1,350 an ounce within a week of the vote — about 3 percent above current levels, according to a Bloomberg survey of 22 traders and analysts.4 Gold’s gain during the past two weeks already reflects the increased enthusiasm for a breakup, which bulls say will spur demand for a haven asset, according to the Financial Times.5 Meanwhile, The Sun, Britain’s biggest-selling newspaper, backed a Brexit on its front page last week.

Some sellers of physical gold are readying themselves. CoinInvest.com, a Frankfurt-based retailer of bars and coins, extended working hours and added staff to cope with extra demand. It reported sales are up 35 percent this year. In addition, the U.K. Royal Mint is “prepared for possible market turbulence.”6

Gold mining stocks could also benefit – Goldman Sachs mining analyst Chris Jost wrote in a recent note  that gold stocks, such as AngloGold Ashanti (NYSE:AU) and Barrick Gold (NYSE:ABX), should be in investor portfolios to offset losses if the U.K. vote sparks a broader equity selloff.7

Those two stocks comprise more than a 23 percent weighting in the Precious Metals motif, which has increased 10 percent in the past month. In that same time frame, the S&P 500 has gained 1.2 percent.

In the past 12 months, the motif has risen 40.9 percent; the S&P 500 has lost 1.1 percent.

Broad-based buying in yellow metal
Despite the bump to gold prices from Brexit, however, analysts noted that recent buying has been broad-based. Assets in gold-backed exchange traded funds have hit their highest level in three years, while funds increased their net long position — the difference between bets on higher and lower prices — by 20 percent earlier this month after three weeks of selling.8

Some of the most recent polling – conducted in the wake of the apparent murder of a British minister of Parliament who advocated for staying in the EU – suggests those favoring Brexit may now be in the minority.

But even if the U.K. does vote to remain at next week’s referendum, traders and analysts believe gold would not suffer too much. “Should Brexit not take place then the price of gold would mildly come off as the main driver has been the U.S.,” wrote Natixis analysts in a recent note.9

That could mean limited downside in the short term for those investing in gold stocks.


1,2Ira Iosebashvili, “Gold Soars to Highest Level in Nearly Two Years Amid Haven Demand,” wsj.com, June 16, 2016.

3Sam Fleming, “Fed pares back 2017 interest rate forecasts,” ft.com, June 15, 2016.

4, 6, 7Eddie Van Der Walt, “Gold Pinned to Brexit Angst as Traders See $1,350 if Leave Wins,” Bloomberg.com, June 16, 2016, http://www.bloomberg.com/news/articles/2016-06-15/gold-pinned-to-brexit-angst-as-traders-see-1-350-if-leave-wins, (accessed June 18, 2016).

5,8,9David Sheppard and Neil Hume, “Gold sparkles at two-year high as Fed stays cautious,” ft.com, June 16, 2016.


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