Futures prices for the metal soared by as much as $100 an ounce on an intraday basis Friday as the United Kingdom’s historic vote to leave the European Union sent investors scrambling for a safer place to park their money.
But the decision, known as Brexit, has vast implications for global financial markets, economies and currencies as well as for monetary policies among the world’s major central banks. That means gold could soon have many more reasons to rally.
“The market’s fearful reaction has made Brexit the most stressful event investors have seen since the Lehman Brothers bankruptcy in September 2008,” said David Beahm, chief executive of Blanchard and Co. “This is a major negative for global markets, and gold is positioned for long-term price growth because of … the Brexit vote and other negative global financial conditions.”
While the outcome of the U.K.’s historical referendum roiled stock markets around the world and European stocks posted their worst daily drop in nearly eight years on Friday, gold benefited from its perceived safety in financial crises.
‘All arguments against holding gold have now been crushed.’
Ned Schmidt, Value View Gold Report
On Friday, August gold surged $59.30, or 4.7%, to settle at $1,322.40 an ounce, logging the highest most-active futures settlement since July 2014.
“Brexit is a once-in-a-lifetime event,” said Ned Schmidt, editor of the Value View Gold Report. “All arguments against holding gold have now been crushed.”
He expects gold to continue its climb, and head to $1,400 an ounce, with prices eventually topping $1,900 next year.
And with other EU nations potentially following the U.K.’s lead, the situation in Europe is set to get worse, said Naeem Aslam, chief market analyst at ThinkForex.
Given that, Aslam sees gold “easily touching” $1,500 by the end of this year.
But expectations for more rallies in gold aren’t just borne from the Brexit news. What happens in other markets, including equities and currencies, will impact gold’s outlook more directly.
Brexit is “a global monetary event, with destructive effects in individual economies,” said Brien Lundin, editor of Gold Newsletter.
‘If everyone is trying to depreciate their currency, including the U.S., what can they depreciate it against?’
Brien Lundin, Gold Newsletter
“The standard central-bank prescription is to ease, to depreciate their currency,” he said. “But if everyone is trying to depreciate their currency, including the U.S., what can they depreciate it against?”
“Only gold will stand tall during the turmoil. And over the long term, it won’t because it’s supposed to be a ‘safe haven’, but because it’s the only safeguard against fiat currency depreciation,” said Lundin.
On Friday, the British pound saw its largest-ever one-day drop against the U.S. dollar and fell to its weakest level versus the greenback since 1985. The euro also tanked compared with the dollar, while the Japanese yen which is seen as a haven asset, climbed to its strongest level versus the dollar in more than 3½ years.
There is “no reason” for gold to rise on such as event as Brexit itself, said Lundin. Such “geopolitical flashpoints” are short lived.”
Instead, sustained gains for gold are “based upon currency debasement almost exclusively,” he said.
Recession risks and central banks
Following the U.K.’s shocking news, central banks around the world, including the Bank of England and U.S. Federal Reserve, have promised to provide more liquidity in the markets when needed.
“This is the biggest risk to markets right now—a possible lack of liquidity like we got during the Lehman crisis,” said Chris Gaffney, president of EverBank World Markets.
The U.K. vote outcome will “definitely make it very difficult for the [Federal Open Market Committee] to raise [interest] rates this year,” he said. In fact, the CME Group 30-Day Fed Fund futures are “currently giving better changes of a rate cut in the U.S. than a rate hike.”
Higher interest rates lift the appeal of holding dollars. That also means that a stronger dollar cuts the worth of holding non-yielding gold that’s priced in this denomination. Lower interest rates tend to have an opposite effect.
Gaffney said there’s speculation surrounding a rate cut in the U.K., and the European Central Bank could “flirt” with moving rates even further into negative territory.
“Lower [rates] for longer is what we continue to expect. The global economy is going to face lower growth prospects and rates are therefore going to be kept lower for longer,” he said.
Blanchard and Co.’s Beahm pointed out that central banks have “little ammunition left to fight” a possible economic recession. “They will have to turn to other extraordinary means to keep markets calm and provide necessary liquidity to keep the financial system from stalling,” he said.
All in all, that spells out further gains for gold.
The metal’s $100 trading range on Friday following Brexit wasn’t unprecedented, but it was “dramatic,” said Adrian Ash, head of research at BullionVault. He noted that prices made a similar sized one-day move in April 2013, when prices plunged on the back of big declines in gold holdings in exchange-traded funds.
And “the uncertainty has only begun—not least about what now happens to the broader European and especially eurozone projects,” said Ash.
“It’s all just a taste of the volatility which gold and other markets could see in November” during the U.S. presidential election, he said.
This story was first published on June 24, 2016.
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