The big market moving event is here. In a few hours, Britain will vote on whether to stay in or leave the European Union (EU). The past couple of weeks has seen increased anxiety, especially after some polls showed an edge for the Leave campaign. Gold has benefited from BREXIT worries. The daily price chart for the SPDR Gold Trust ETF (NYSEARCA:GLD) shows a spike last week.
The big question is what happens to gold and the Market Vectors Gold Miners ETF (NYSEARCA:GDX) after the referendum. GDX has had a phenomenal year so far, gaining more than 86% as gold has staged a comeback. However, if gold prices strengthen then GDX could see further upside. As the five-year chart for GDX shows, we are still well below the levels in early 2013.
Of course, where GDX goes from here will depend on what happens with gold prices. Following the Federal Reserve's monetary policy statement last week, the medium-term outlook for gold is bullish. In the short-term, gold's price action will be decided by the outcome of Thursday's referendum.
Short Term Outlook For GDX
The year-to-date price chart for GDX shows that there was a slight pullback in mid-May.
This was after the minutes of the Federal Reserve's April monetary policy meeting showed that the central bank was considering a summer rate hike. We saw a spike at the start of June. This was after the weak jobs report for the month of May, which delayed the potential rate hike. GDX has held on to its gains since and this is mainly due to Brexit fears, which has boosted the appeal of safe haven assets such as gold.
If Britain votes to stay in the European Union, an outcome latest polls and bookmakers suggest is more likely, there will be a pullback in gold and GDX in the near-term, given the recent run. Risk assets rallied at the start of this week but in general markets have been in risk off mode over the last two weeks on Brexit fears. I expect a correction in the near-term in GDX in case the Remain camp prevails.
In case, Britain votes to leave the EU, gold is likely to see a huge rally. A vote to leave the EU will create great deal of uncertainty. Remember that at this stage, no one knows what the terms of an exit would be. Also, the negotiations to exit the EU will itself take at least two years. For several U.S. businesses that are based in Britain that translates to significant uncertainty. Also, it would mean that the Fed, in all likelihood, restrain from a rate hike this year.
Long Term Outlook
While the near-term sentiment on GDX will be driven by the Brexit vote, the longer term outlook remains dependent to a large extent on what the Fed does with interest rates. The central bank's latest statement suggests that it is dovish. The Fed has pared back its rate forecasts for 2017 and 2018. Also, the Fed has never raised rates ahead of an election. I believe that a victory for the remain camp in Thursday's referendum could lead to a pullback in GDX. However, this will be temporary. Given the long-term outlook, the correction would be an opportunity to enter GDX at lower levels. The mid-to long-term outlook for gold will only change if the economic data over the next few months suggests that the May jobs report was an exception and that the U.S. economic recovery remains on track. Given that the Fed is data dependent that would lead to a change in its stance although I continue to believe that we will not see a rate hike before the elections.
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