Gold’s sharp gains on uncertainty over Britain’s European Union membership are likely to end, regardless of whether Britons vote to leave or remain in Thursday’s referendum.
Prices hit their highest since August 2014 last week as the $5-trillion a year gold market rose with other “safe” assets, such as German bunds, the Swiss franc and Japan’s yen.
Recent polls suggest an evenly split opinion and although investors are worried about the economic and market fallout of a “Brexit”, bullion’s uncertainty premium is not expected to last.
According to analysts and fund managers an “In” vote is seen as quickly unwinding gold’s five percent gain in June, as appetite for risk rises and focus returns to the U.S. economy.
ICBC Standard Bank analyst Thomas Kendall said, “A clear win for the Remain side will see U.S. yields rise as the potential drag on the global economy and risk appetite is removed”.
He continued, “Gold in dollars would likely drop four to five percent”.
The metal is negatively correlated to rising U.S. real yields because the opportunity cost of holding it increases.
And while some see a “Leave” result as a risk-off event that could see gold rally, others see lower prices if the dollar rises and oil falls. Gold is often seen as a hedge against rising inflation.
“If investors become overly worried, it is likely that the greenback strengthens with implications for earnings and industry group positioning as precious metals and commodities weaken,” Citi analyst Tobias Levkovich said.
Another reason for gold to see a sharp, albeit short-lived fall is that in times of financial stress, it can be used as a source of cash to cover losses elsewhere.