As gold scaled a two-year high and settled up 4.7% on Friday after Brtain chose to exit the EU, far outperforming a drop of 3.6% in S&P 500, 2.2% in Sensex and 2.5% in the CRB Commodity index, analysts were quick to wager on a rally in the precious metal in the coming months, reports Banikinkar Pattanayak in New Delhi. But while gold has consolidated its position as a safe-haven asset — at least in the short term — during most of the crises over the years, there are instances when its price movement defied this conventional wisdom. Gold retreated some 10% in the first six months after the third round of quantitative easing by the US in September 2012.
This is in a stark contrast with a jump of 16% and 12%, respectively, in the first six months after the QE1 and QE2. Such a retreat shattered the notion that improved liquidity and rock-bottom interest rates always created the stage for a bull run in the precious metal. Gold has also recorded a decline since the US credit rating was downgraded by Standard & Poor’s in August 2011.
Nevertheless, odds are in favour of a rally in gold this time around, analysts said, adding the precious metal could cross $1,350 per troy ounce in the next one week from $1,320 on Friday.
Already, the Bank of England has stated it would take whatever action is necessary. If other central banks also follow suit, interest rates may move further into the negative territory in parts of the world, and a hike in the US interest rate is likely to be postponed. Also, though Britain has a two-year window to wrap up its pullout terms, considerable amount of uncertainties on contours of the exit will continue to exist even after the negotiations with the EU begin. Also, there are concerns, with the Brexit, some other nations in the EU may also be tempted to leave the bloc as well. These are positive for gold, considered a safe-haven asset and a hedge against inflation.
No wonder, trading volumes at the Shanghai Gold Exchange more than tripled on Friday, touching 346 tonnes against a daily average of close to 100 tonne since the beginning of this year, as uncertainties about the terms of the Brexit persisted.
Gold started moving up almost steadily since the first rate hike in close to a decade by the US Federal Reserve in December 2015, after witnessing a drop in the last three years. Gold has risen close to 25% in 2016.
“We expect to see strong and sustained inflows into the gold market…. Gold ETF holdings have also been increasing sharply, a trend we expect to see accelerate, as both retail and institutional investors re-allocate funds to gold. Purchases of gold coins by small retail investors, which were already up sharply in the months running up to the vote, should accelerate further,” said a spokesperson with London-based World Gold Council, a miners’ body.