A week in gold: Price holds as Brexit gives way to other uncertainties

New York (July 2)  So far, gold is one of the clear beneficiaries of  Brexit. The metal predictably soared when news the UK had rejected Brussels first broke, but a week on and in spite of a rally by stock markets, the gains are sticking.

A couple of hours into trading on Friday, spot was US$1,337 per ounce, up around US$10 on the week.

But how much of this gain was really down to Brexit and how much to other concerns?

That was a question asked by Credit Suisse this week and the answer was a little surprising.

“The common argument we hear from gold participants is that gold is currently benefiting from a fear trade on Brexit, and that may indeed be the case,” said analysts at the Swiss bank on Wednesday.

But it added in its belief the recent strength of gold is down to something more enduring and more familiar to market watchers.

In particular, the Brexit vote has solidified the general current macro and political uncertainty and extended the time frame for a negative real rate environment in the US and potentially abroad.

Another plank of Credit Suisse’s argument is that the US presidential election in November will see central banks edging into gold as hedge.

More longer term, meanwhile, it sees supply deficits increasing as gold mines produce less and hoarding of gold bars and coins picks up.

To go with its prognosis, Credit Suisse also produced some punchy forecasts for the gold price.

By the end of this year, the price will average US$1,475 it predicts and climb through US$1,500 by early 2017.

To recall, gold started this year at around US$1,068, so the Swiss bank is predicting a gains of 38% in 2016 and 40% early next year.

While not as bullish as Credit Suisse, Societe Generale, too, upped its forecast for gold in the wake of Brexit.

Like Credit Suisse, it says the Fed’s caution and the proliferation of negative interest rates means the opportunity cost of holding is diminishing.

Analyst Robin Bhar is concerned over the amount of gold at present held through futures and exchange traded funds, which could make it vulnerable, but even dips might spark more buying he says.

“Gold will remain one of the major beneficiaries in the current backdrop, as heightened volatility and lingering uncertainty will keep investors’ risk appetite in check.”

SocGen expects an average price of US$1,350 in the final quarter of 2017.

Source: ProactiveInvestors