Gold soared the most since the global financial crisis in 2008 on Friday, after Britons shocked markets by voting to leave the European Union, fueling market turmoil that drove investors toward safe-haven assets. The precious metal jumped as much as 8 per cent to its highest in more than two years, tracking the rally in other safe havens, such as bonds, as risky assets were dumped from stocks to sterling.
Complete results from a British referendum showed a near 52-48 per cent split for the UK leaving the EU. The vote created the biggest global financial shock since the 2008 crisis, this time with interest rates around the world already at or near zero, and policymakers having no more ammunition to fight it. Brexit would have huge repercussions not only on the currency markets but also on the political landscapes and that will have a lasting impact on economic growth. In a environment of low growth, gold tends to perform well as an asset class or an insurance against economic uncertainty.
The recovery momentum that was prevailing in Europe post the Greece crisis would most likely come to a grinding halt and could become worse. Central banks in EU and UK are expected to resort to monetary easing and stimulus packages to boost their respective economies. Such measures would boost gold prices, as the cost of holding gold decreases and the potential to rise during times like this makes it more attractive compared to other risky assets. This trend has been noticed for the past month or so ahead of the Brexit vote. Gold priced in Sterling pounds hit a yearly high as investors there piled onto gold as a safe-haven.
Gold could build on these gains if the resulting uncertainty in Europe will most likely see the Federal Reserve not hiking rates as central banks across the world throws in more liquidity. One of the biggest concerns that pressured gold prices was the prospect of interest rate hikes in the US dollar in 2016 after a surprise rate hike in December 2015 by the Federal Reserve.
Apart from this there are other risk events like the US election and Chinese debt levels are a matter of huge worry for investors and many would take to the safety of gold. Investment demand for gold could once again see an uptick and jewellery demand is expected to witness some weakness going forward. We expect prices to test $1450-75 in the international markets in the coming months and in the domestic markets close to Rs 33,500-34,000 per 10 gm on MCX . However, with investors having amassed a near record long position in gold ahead of the vote and post it, any corrections or sell-off could be sharp and volatile.
The author is Director of Commtrendz Research and the views expressed in this column are his own and the author is not liable for any loss or damage, including without limitations, any profit or loss which may arise directly or indirectly from the use of above information.
