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Friday, June 24, 2016 Derek Macpherson

"Leave" Vote‎ Benefits Gold; Ongoing Uncertainty Likely to Support the Gold Price


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Yesterday, citizen’s ‎of the United Kingdom (UK) voted to leave the European Union (EU). This result was unexpected, as evidence by both currency markets and the gold price move. With no orderly exit mechanism, we believe this uncertainty may persist for some time providing support for the gold price. As well, should other EU countries consider departing; we would expect decreased confidence in the Euro, to benefit the gold price. Despite a parabolic move, we believe the gold price is sustainable at current levels and is likely to continue moving higher in 2016.

 
Uncertainty, bad for the economy, equity markets but good for gold. UK citizen’s decision to leave the EU creates significant uncertainty as there is no mechanism for an orderly exit. As such many of the country’s international agreements, particularly with respect to trade, will need to be renegotiated. It is likely the uncertainty around these new agreements will impact the UK and international economy, providing support for the gold price.
 
Other countries may follow the UK.‎ Anti-EU sentiment has been on the rise across Europe. Should other EU countries decide to hold their own referendums, economic uncertainty is likely to increase and confidence in the Euro erode. These additional referendums are likely to push the gold price higher, should they occur.
 
“Risk-off” trade benefits ‎gold and the U.S. dollar. As a result of elevated uncertainty, the “risk-off” trade has seen funds flow to U.S. Treasuries, the U.S. dollar, and gold. Historically, the U.S. dollar and gold are inversely correlated, such that a significant up move in the U.S. dollar would negatively impact gold. Likely because of the uncertainty surrounding the U.S. general election in November of this year, some investors prefer gold over U.S. Treasuries and the U.S. dollar which has negated this historic correlation.
 
Gold made a parabolic move last night, current levels are likely sustainable. Since the markets appeared to be pricing in a “Remain” outcome yesterday, there was a violent reaction to the “Leave” result. While this significant move up was not factored into our view that we are in an NEW BULL MARKET FOR GOLD, it certainly helps our call. Taking that into account we believe the current level is sustainable, and gold is likely to continue moving higher during 2016.

 

 

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