HSBC Looks For Gold To Rally Toward $1,400/Oz In Aftermath Of U.K. Referendum

By Kitco News

Friday June 24, 2016 08:31

(Kitco News) - HSBC looks for gold to challenge $1,400 an ounce in the wake of the U.K. vote on Thursday to exit the European Union.

As New York trading was getting under way, the Comex August gold contract had been as high as $1,362.60 an ounce, before correcting back to $1,326.90 as of 8:12 a.m. EDT, still up $63.80, or 5%, for the day.

“We anticipate a sizable ‘safe-haven’ inspired trade in gold following the U.K.’s vote to leave the EU and gold prices to rally significantly to reach $1,400/oz,” said James Steel, chief precious-metals analyst with HSBC.

The argument for a gold rally is straightforward, he continued.

“The link is the interconnection between gold and wider financial markets,” he said. “In periods of uncertainty, gold is often one of the few perceived ‘safe-haven’ assets with liquidity. It is also historically negatively correlated with risk-on assets.”

So far, those risk assets – such as global equities and industrial commodities like copper and oil – are all on the defensive Friday.

HSBC’s forex team looks for the British pound to fall to $1.25 by the end of the third quarter and the euro weakening to $1.10 by year-end. The pound – which already hit a three-decade low – was last quoted at $1.3706 after an overnight high of $1.5006, and the euro was down to $1.10633 after an overnight high of $1.14242.

 Gold could be a destination for the flow of some of these funds seeking a new home, Steel continued.

“This could have a notably bullish impact on gold, as the bullion market is significantly smaller than the forex markets and even relatively modest purchases by forex market standards can impact prices,” he added.  “The drive higher may be more than 10% in the longer term if there were to be broader concerns about the future direction of the EU after the vote.”