Gold Soars On Safe-Haven Bid After U.K. Vote; Analysts See More Gains, Volatility

(Kitco News) - Uncertainty about future economic prospects and the likelihood of further loose monetary policy mean potential for gold to keep building on the sharp overnight gains in the aftermath of the U.K.’s historic vote to leave the European Union, analyst said.

But some also caution there could be more volatility, such as when gold rallied some $100 overnight, and then fell back roughly $40 from the peak as profit-taking set in.

News organizations reported that the camp that favored leaving the EU prevailed in a referendum on Thursday, and U.K. Prime Minister David Cameron has resigned. Global markets have been in a tizzy, with the British pound tumbling to a three-decade low, the euro also weakening, global stock bourses tumbling and most commodities on the defensive.

Gold and silver have been among the few beneficiaries, while the more industrially oriented platinum group metals are weaker along with base metals like copper and aluminum.

“Euro bourses and base commodities are a mess…,” said Janet Mirasola, managing director of the metals group with Wells Fargo Securities LLC. Only gold is “shining” so far this morning as the “rush for safe-haven status” sent the metal soaring, she said.

As of 7:39 a.m. EDT, Comex August gold was up $59.90, or 4.8%, for the day to $1,323 an ounce. Earlier, the metal hit a peak of $1,362.60, the highest level for the futures since March 2014. July silver was 62.2 cents, or 3.6%, higher at $17.975.

Gold has posted its biggest single-day gain since the U.S. financial crisis in 2008, analysts reported. Gold is also ignoring strength in the U.S. dollar index, especially since a rate hike by the Federal Reserve seems “extremely remote” at this time, said George Gero, managing director with RBC Wealth Management.

“We’ve seen a crazy move after the U.K. decided to get out of EU,” said Afshin Nabavi, head of trading with MKS (Switzerland) S.A. “There was a lot of safe-haven buying earlier in day during Far East hours that took it to much, much higher levels.”

Then the market backed down from the peak during European trading, he continued.

“We rallied almost $100, so obviously we saw some profit-taking there,” he added. “It’s a very bullish market. One should look to buy dips.”

Analysts look for further gains, but also more volatility.

“Ultimately, there should be more room for upside from here given the move lower in (bond) yields and as investors turn to gold as a safe haven amid elevated uncertainty and market volatility,” said Joni Teves, strategist with UBS.

The referendum creates a period of “heightened global financial-market and economic uncertainty,” which she said suggests potential for a dovish shift in central-bank monetary policy. UBS economists now expect the U.S. Federal Reserve to keep rates on hold in September, the Bank of England to cut policy rates to zero and make further asset purchases, and the European Central Bank to be ready to inject extra liquidity in the weeks ahead, she said.

But a move higher in gold may not occur in a straight line, Teves added, pointing out that Comex speculators are already heavily net-long, or bullish, in their positioning.

“Consensus view among our recent conversations with various market participants puts the high for the year around $1,400 as a more realistic target – any further moves beyond this level are probably going to be more labored, although a few did acknowledge that a test of $1,500 cannot be ruled out,” Teves said. “We think a stronger dollar on the back of risk aversion also somewhat complicates gold's upside response, although the current scenario of heightened uncertainty should ultimately enable the dollar and gold to rally together.”

Jonathan Butler, strategist with Mitsubishi, pointed out that other perceived safe havens besides gold are also higher. The Japanese yen hit a two-year peak against the U.S. dollar, while the U.S. Treasury market has been bid up. The yield on the 10-year note, which moves inversely to the price, has fallen to its lowest level since 2012.

“The near-term direction in dollar gold and silver prices is likely to be upwards as safe-haven bids outweigh the headwinds from a stronger USD/weaker sterling and euro,” Butler said. “Although there may be a degree of rally selling, gold could go significantly higher from here in the short term, with $1,400 marking the next psychological level.”

He looks for more investment in exchange-traded funds that hold gold, as well as an expansion of long futures positioning in Comex, as “institutional investors seek to park assets in bullion amid market stress.”

Butler also commented that the outcome of the U.K. referendum means central bankers are likely to be accommodative.

“This will not only keep the macro environment favorable to gold in terms of real rates but it should ensure safe havens/risk hedges will have increasing importance in investor portfolios,” Butler added.

By Allen Sykora of Kitco News; asykora@kitco.com
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