Gold: New two-year highs

Market report Michael Blumenroth – 17.06.2016

Weekly market report

This week, the primary focus was on next Thursday’s referendum on the UK’s EU membership. And as it turns out, the outcome is still completely unclear. For a long time, poll results as well as betting odds published by British bookmakers indicated a clear majority for voters endorsing the UK’s EU membership. This changed last week, when we saw the first ratings with a clear majority of Brexit supporters. The polling institutes have amended their forecasts accordingly, albeit with a large number of undecided voters.

As a result, investors fled the stock markets; the DAX fell 7.5 per cent and the demand for safe havens saw a steep increase. Accordingly, the Yen, Swiss franc and government bonds from countries with top credit ratings increased in value. Even federal bonds saw strong demand in spite of the fact that return was negative for the first time, i.e. the buyer theoretically suffers losses when holding bonds until the end of the term (does that mean it’s time for me to finally get rid of my old economics study books?).
With exit movements this dramatic into safe investments, Gold of course did not remain unnoticed. From 1,270 US$/ounce last Friday, it reached a new two-year high of 1,315.50 US$/ounce yesterday. This development was further supported by the Fed chair Janet Yellen’s statements on Wednesday, in which she remained extremely guarded (she used the words “uncertain” or “uncertainty” eleven times). The market reacted by drastically pricing out the Fed’s interest rate increase potential.

However, yesterday afternoon at around 4.30 p.m., the stock market, pound sterling as well as high-risk investments rebounded due to new quotes issued by British bookmakers indicating that the UK will most likely vote to remain an EU member. Gold fell to 1,277 US$/ounce last night and has recovered to its current price of 1,285 /ounce.

That is still a good weekly profit. The Xetra-Gold price also rose during the course of the week, although yesterday’s highs did not last. It rose from last week’s 36.00 €/gram to a weekly high of 38 €/gram yesterday afternoon. As the gold price in US dollar started to fall yesterday evening, Xetra-Gold followed suit and lost part of its weekly gains, but currently still trades approximately 2 per cent above last week’s price at 36.75 €/ounce. 

The next days will most likely continue to focus on the British vote. Next Friday, we might see extreme market movement. Should the British people cast their vote in favour of EU membership, Gold will probably slump (liquidation of safe haven positions). The opposite will occur should they vote to exit. However, these price movements might be very short lived.  Any attempt to forecast the movements of stocks, currencies, gold, etc. until the end of next week would make about as much sense as consulting a crystal ball.

I wish you all a good weekend – hopefully with more sun and less rain. 

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