Britons’ vote to leave the European Union has benefited gold as a haven from risk and could fuel longer-term gains if economic uncertainty sparks a broader shift in global monetary policy.
Gold is highly exposed to interest rates, particularly in the United States, as higher rates lift the opportunity cost of holding non-yielding assets and boost the dollar, in which gold is priced.
The prospect of Brexit, and consequent risks to the global economy, have traders thinking the formerly unthinkable — that rather than lifting rates, the Federal Reserve could opt to cut.
Ultra-low rates were a key factor driving the metal to record highs near $2,000 an ounce in the years after the 2008 financial crisis, and analysts say any expectations that the U.S. will keep rates on hold or even cut them in coming months would be a further catalyst for a gold price rise.
“There is definitely in our minds going to be a more 2008-style monetary policy pattern,” Marie Owens Thomsen, chief economist at Indosuez Wealth Management in Geneva, said.
“We no longer think the Fed will raise their rates in July, which we used to think had the UK voted to remain, and many other central banks might go deeper into negative rate territory.”
The metal had already rallied 18 percent prior to the Brexit vote, as expectations for further U.S. rate hikes dwindled.
Gold, now trading at $1,315 an ounce, has risen another 5 percent since the result of the referendum was announced on Friday, as investors sought a haven from risk.
However, it can whip-saw in times of high financial market volatility. In the wake of the collapse of Lehman Brothers in 2008, the metal dropped to its lowest in a year as traders sold the metal to offset losses elsewhere, before climbing.
The positive impact on gold of lower interest rates would likely lead to more stable gains for the metal than any uplift generated by market volatility.
Prior to the Brexit vote, interest rate futures implied that traders saw a 17 percent probability of a Fed rate hike in July, a roughly 1 in 4 chance of a hike in September and a 50 percent chance of an increase in December.
By Tuesday the CME FedWatch programme suggested traders saw a 15.8 percent chance of the Fed opting to lift rates in December — and a 14.1 percent chance that the U.S. central bank would instead opt to cut.
“U.S. real interest rates reacting to dovish Fed policy is largely what has driven the gold price to where it is now from below $1,200,” ICBC Standard Bank analyst Tom Kendall said.
“Can we say now that everything is priced in as far as the Fed is concerned? No, I don’t think so, because if the global economy slips into recession it won’t be sufficient for the Fed to just hold rates low, they might have to reverse course.”
French bank Natixis lifted its gold price forecasts by 8 percent in the wake of the British vote to an average $1,275 an ounce, citing the impact of Brexit on Fed policy.
“Repeatedly the Fed has said that it will look at performances across the global economy before making a decision to raise rates,” Natixis analyst Bernard Dahdah said.
“In our view, it is not as much about concern regarding the UK economy that will drive the Fed to wait until December as much as it is about market volatility and uncertainty around the European economy. The future of the European project is now more than ever in doubt.”