Brexit: Gold glitters as investors look for safe haven

Investors who bet on gold were a happy lot on Friday. The yellow metal zoomed to a high of $1359/ounce and traded around $1320-1325 in the evening trade, up 5.4 per cent. With Britain choosing to leave EU, the heightened uncertainty led to a frenzied rush for safe haven and both the US dollar and gold rallied sharply.

All other commodities, including oil and metals, took a beating.

The rally in gold prices was fuelled an increased demand from investors. Reports suggest that demand for gold bars and coins from Royal Mint zoomed. In June, the transaction on the mint’s trading platform is reported to have increased 30 per cent from the previous month and revenue rising by 150 per cent.

With negative outlook on bond yields and equities, gold is the only asset class to act as a safe harbour for investors. Also, with lower chances for a Federal Reserve rate hike in the near term now, gold appears a relatively better choice compared to government treasuries.

In the domestic market, gold prices rallied even higher thanks to a weak rupee. The gold futures contract in MCX ended at ₹31,490, up five per cent on Friday.

Though rally in gold prices is rewarding investors, it is feared that it might cap consumption in price-sensitive markets. Gold prices have rallied 24 per cent so far this year in dollar terms. With not much change in rupee vis-à-vis dollar, rupee returns for gold investors have also been the same.

Oil prices plummeted in the market on Friday. Brent crude was down five per cent to $48.37/barrel.

But, since the UK accounts for only two per cent of the global demand for oil, the dramatic price movement in oil prices yesterday can only be called a knee-jerk reaction to the Brexit news. Even in industrial metals such as copper and zinc, the UK consumes just 0.6-1 per cent of global demand. So, fundamentals for all these commodities remain unchanged. The drop in commodity prices can thus be explained only by the risk aversion among investors and the strength in the US dollar. As oil and other commodities are priced in the US dollars, a rally in US dollar makes these commodities expensive for importing nations. The US dollar index gained 2.5 per cent on Friday.