Gold to ease further if UK remains in EU

Safe haven slips out of favour, but global economic risks could still push it back towards $1,300 by year end

PUBLISHED : Wednesday, 22 June, 2016, 4:22pm
UPDATED : Wednesday, 22 June, 2016, 4:22pm

As fears over Britain leaving the European Union ease, gold futures have lost ground.

Analysts say the price of the precious metal might pull back further if a Brexit is avoided, but could still rise later this year, as anxiety remains over the global economic outlook and the downward trend of interest rates.

After rising for three weeks in a row, gold futures retreated this week, as investors increasingly factored in the growing likelihood Britain would vote to remain in the EU on Thursday’s referendum.

Gold for August delivery finished lower for a third straight session on Tuesday night, settling at a two-week low of US$1,272.5 an ounce, but still hovering near the closely-watched psychological $1,300-an-ounce mark.

“Gold prices could pull back if an Brexit doesn’t happen, but concerns about the prospects of global growth could still drive money into the safe-haven gold, longer term,” said Xu Wenyu, an analyst at Huatai Futures.

“Despite the retreat in prices, the demand for gold as a long-term safe haven has significantly increased,” he said.

“Uncertainty over the US economic outlook and more cases of negative interest rates are still bothering investors.”

Despite the retreat in prices, the demand for gold as a long-term safe haven has significantly increased
Xu Wenyu, analyst at Huatai Futures

On Tuesday, holdings by SPDR Gold Trust, the world’s largest physically backed gold exchange-traded fund, rose 0.4 per cent to 921.33 metric tonnes, the highest level since September 2013.

On the same day, the Federal Reserve chairwoman Janet Yellen said the US central bank would keep a “cautious approach” on future interest-rate actions, as there are a number of risks to economic growth and financial market stability.

She said US growth might falter, given mixed readings on the jobs market and other economic indicators. Global markets are vulnerable and risk sentiment can change abruptly, she said, as many economies are facing sluggish growth, low inflation and already accommodative monetary policies.

“Even given moderate financial vulnerabilities, a number of possible external shocks, including if the United Kingdom chooses to leave the European Union in a pending referendum, could pose risks to financial stability,” the Fed said in an economic report to Congress.

Besides the growth concerns, more cases of negative interest rates across the world may also drive prices of the yellow metal.

In its June meeting, the Fed kept interest rates on hold and delayed the timing of its next rate hike, largely in line with market expectations. The Bank of Japan also decided to keep rates on hold.

“Actions by major central banks around the world to maintain a relatively accommodative monetary policy have exacerbated the downtrend in interset rates,” said Ao Chong, an analyst for Citic Securities, in a recent research note.

“Around the world, rates will delve deeper into negative territory at a faster pace going forward, which supports the uptrend in gold prices,” Ao added.

“Favourable structural demand” and “supply dynamics” could also be two influential price factors, said analysts from Nomura, a Japanese investment bank, in a separate research report on Tuesday.

Growth in Asian demand, in particular from China and India, will drive gold prices “higher in the rest of 2016”, due to rising investment demand and favourable liquidity conditions , they said.

Weakness of the Chinese yuan against the US dollar, especially, has boosted investor appetite for buying gold as an alternative asset.

Last year China and India’s retail demand for gold accounted for 44 per cent of the global pool, according to statistics from the World Gold Council and China Gold Association.

Besides the demand side, the analysts said small declines in long-term mining supply due to falling global mine grades and limited room for further reduction in costs will both push prices higher.