Gold and silver remain two of the “winners” in the aftermath of the Brexit vote last Thursday. Support from negative bond yields and an increasingly dovish Federal Open Market Committee was already firm before the vote.
Developments since have only helped increase the number of investors taking an active look at gold and silver from a longer-term perspective.
Following the initial surge, gold has settled into a $30 range so far this week. On Monday the CME, in response to the spike in volatility, raised the margins for initiating and holding a position in COMEX gold futures by 22%.
This meant that hedge funds holding portions of the present record long position had to deposit more than $250mn in additional margin. This helped trigger some light profit-taking, but so far gold has managed to find support at $1,305/oz, the previous high and now the 50% retracement of the spike seen on Friday.
The below table shows the market impact of the Brexit vote and while we have seen some of the initial panic being reduced, nervousness still persists.
Stocks are lower, especially in the eurozone, while government bonds remain in demand thereby further increasing the number of sovereign bonds trading at or below zero.
Gold has seen continued demand from investors using exchange-traded products with total holdings having accelerated since last Thursday. Demand for gold futures has, despite the margin hike, risen strongly with the total open interest on gold futures jumping by 8.5% to the highest level since 2011.
Following the Brexit and the surprisingly dovish FOMC meeting last week, the market has now nearly removed any chance of a rate hike in 2016. Looking at the probabilities below, the chance of a rate cut is now rated higher than a hike until February next year.
With stock markets bouncing, gold has struggled to make it higher but so far it has only been a sideways correction with all the drivers cited above still providing support. This has given silver a chance to play catch-up and today’s strong move has seen it trade back to the high from last Friday.
The ratio to gold has fallen and is once again challenging support towards 72.
Having seen the ratio fall from above 80 to the current level, silver is no longer as cheap (relatively) as it was but with the historical average being closer to 60, silver is likely to outperform should the current bull market continue.
Gold and silver’s biggest threat right now is their own success in attracting new investors. The big jumps in participation through exchange-traded products and especially futures, which reached a record before the vote, could indicate a period of consolidation with a deeper correction depending on the performance of other, riskier assets.
Having only retraced back to $1,305/oz, gold is still at risk of testing $1,292/oz or even $1,250/oz but with multiple drivers pointing towards continued support we suspect that longer term investors, just as in May, will use a potential correction as another buying opportunity.
We maintain the view that gold has made a $50-70 shift higher in range, which should see it attempt to making it back towards $1,400/oz, the 2014 high.
Ole Hansen is head of commodity strategy at Saxo Bank.