Uncertainties of Brexit making gold attractive as safe asset

With more upside than downside to the impact of Brexit and future rate hikes on gold, nearly all investors agree it is a good bet to stay in gold for the long term.
With more upside than downside to the impact of Brexit and future rate hikes on gold, nearly all investors agree it is a good bet to stay in gold for the long term.PHOTO: REUTERS

Brexit and other possible sources of volatility could push up gold prices further

The outcome of Thursday's Brexit referendum will chart the price of gold in the next six to 12 months, but, in the longer term, investors and analysts agree that bullion is an asset to hold.

The immediate trigger for any gold price moves will come in the wake of the referendum, which could see Britain leave the European Union.

Mr Robin Tsui, exchange traded fund (ETF) gold specialist of Asia-Pacific at State Street Global Advisors, said: "If Britain does decide to vote for an exit, this would trigger more uncertainties. There are also risks that other countries may follow Britain to vote for an exit.

"The European Central Bank's policy of quantitative easing and negative rates could intensify to stimulate growth in Europe after Britain's exit, and an exit would put more selling pressure on the British pound, and the euro if other countries are to follow."

Last Wednesday, the United States Federal Reserve kept a rate hike on hold and said future increases would be slower, with the upcoming referendum a factor.

As Mr David Pinkerton, Falcon Private Bank chief investment officer, said: "The Brexit would also push out a rate-hiking initiative by the US and this is supportive of gold."

The uncertainty has already led to the price of gold, popularised as a safe asset in volatile times, pushing past the US$1,300 level last Thursday for the first time since August 2014.

OCBC economist Barnabas Gan said: "Gold prices at US$1,300 an ounce is a reflection of a pricing-in effect for a Brexit to occur. Should it happen, the bullion would likely rally even further to US$1,350 an ounce. Or else, a 'Bremain' scenario would correct gold prices back to its US$1,250 an ounce easily."

Angel investor Lim Kian Chun, who shorted spot gold in late May, said if Britain leaves the EU, gold prices could easily push past US$1,450, adding: "A vote to 'remain', however, would probably keep gold at US$1,200 levels in the near term because there are still several macroeconomic factors that are propping up the price of gold."

Mr Torgny Persson, chief executive of precious metals dealership BullionStar, agreed, adding that the soaring gold price now is likely an effect of several large hedge fund managers buying on the financial markets. "Known hedge fund managers like George Soros, John Paulson and Stanley Druckenmiller are all on record entering into large gold positions this year."

With more upside than downside to the impact of Brexit and future rate hikes on gold, nearly all investors agree it is a good bet to stay in gold for the long term.

Mr Lim is bullish in the medium to long term, adding that uncertainty in the year ahead could mean a bull run for gold.

He also noted that the price of gold is very sensitive to interest rates. "If we see one, two, or no rate hikes this year, it would still be positive for gold prices because the Fed has signalled to the markets a minimum of two rate hikes, something which the markets are not prepared to believe."

Famed commodities investor Jim Rogers is staying put for now. He has not bought gold for six years but will do so if the price falls below US$1,000. "I expect another opportunity to buy gold in the next year or two. It could happen, if it goes under US$1,000 per ounce," he said.

"I hope I'm smart enough to buy a lot of gold because before this is over, gold will go much higher or even turn into a bubble when the world starts having more serious problems down the road."

A version of this article appeared in the print edition of The Straits Times on June 20, 2016, with the headline 'Uncertainties making gold attractive'. Print Edition | Subscribe