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June 19, 2016 | 11:55 | Dubai
The result of next week’s Brexit vote will help determine gold’s direction. Precious metals have benefited greatly from the market uncertainty ahead of the UK referendum on June 23. During May, both gold and silver succumbed to profit taking following a very strong beginning to 2016.
Weakness was driven by renewed dollar strength combined with Federal Reserve Chair Janet Yellen and her colleagues at the Federal Open Market Committee trying to reinstate a more hawkish tone with regards to the speed and frequency of future rate hikes. According to Ole Hansen, Head of Commodity Strategy, Saxo Bank, these attempts to introduce a more hawkish mindset in the market were quashed on June 3 when a weaker-than-expected US jobs report sent rate expectations lower once again. This was followed up on Wednesday with a distinctive dovish statement following the latest FOMC meeting. The FOMC lowered its projection of its own interest-path with six members now only seeing one rate hike in 2016.
“In addition to the changing outlook from the Fed we have also entered the run-up to the UK referendum and with the leave camp gaining momentum, the market has begun to reduce risk while seeking shelter amid the brewing storm,” Hansen said in a note.
The big question remains what kind of impact the vote will have on the yellow metal. “We view the risk reward as being skewed to the upside. A vote to leave the European Union would almost ensure a prolonged period of uncertainty where stocks could suffer and bonds continue to be sought. While it may also support the dollar thereby creating some headwind giving the negative correlation we see an increased risk that gold could be propelled towards $1400, the 2014 high,” he says. On the other hand, “a remain result would initially trigger a major relief rally across global stocks but with the dollar also likely to weaken and with global bond yields remaining compressed we see the downside risk limited to around $1250/oz.”