Whatever the outcome of this Thursday’s “Brexit” referendum on the United Kingdom’s future to stay in or to exit from the European Union, gold prices are set to move significantly higher during this year’s second half.
Should the British reject devolution, gold prices might briefly move a little lower – even though, in the days running up to Thursday’s referendum, the financial markets may already have “priced in” a no-vote.
By contrast, a majority vote to exit the European Union would likely create years of uncertainly over the terms of the prospective divorce agreement – and uncertainty of this sort is always good for gold.
Non-dollar gold prices are already showing relatively more strength denominated in terms of the British pound and the EU euro. But both currencies remain vulnerable to a European split – and, as a result, I expect gold’s relative price strength denominated in these currencies could extend further.
The British pound and the euro are also important official reserve assets held by many central banks around the world. In the event of a Brexit victory this Thursday, we will likely see official demand for gold pick up as the appeal of holding central bank reserves in pound- and euro-denominated assets diminishes.
Apart from Brexit-related considerations, gold-price performance in the next few months will be largely “data driven,” which is reflecting the ebb and flow of the economic indicators.
More than anything else favoring gold, a persistently disappointing economic and financial-market performance with weaker-than-expected business activity in the United States and, even more so, globally, will force the Fed and other central banks to keep their feet on the monetary accelerator.
Indeed, against a backdrop of “secular stagnation”, the Fed will find it difficult to raise short-term interest rates and may seek alternative monetary measures to stimulate the economy. The European Central Bank, the Bank of England, the Bank of Japan, the People’s Bank of China, and other central banks will similarly undertake more stimulative easy-money policies – policies that are decidedly pro-gold.
With this in mind, the recent price retreat from the $1300 an ounce level back down to the $1265 vicinity presents investors an opportunity to initiate or increase their holdings of physical gold – and this recommendation will prove even truer if the metal corrects still further before the “great advance” takes off.
Submitted by: Jeffrey Nichols, Rosland Capital
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