Gold Steady as Brexit Could Force Fed to Hold Rate Hike This Year

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.

via Reuters

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza