Gold stays afloat despite risk on markets

Wednesday was another “risk-on” day for the global financial markets, extending Tuesday’s bullish reversal as Brexit worries continued to abate. US and UK stocks surged sharply as crude oil spiked up on a much larger-than-expected draw in US crude oil inventories (-4.1-million-barrel draw vs. -2.3 million expected) as reported by the US Energy Information Administration. Meanwhile, sterling and euro extended their respective rebounds from Tuesday, only days after both currencies plummeted when Brexit voters emerged narrowly victorious from last week’s EU referendum.

As these market rebounds occurred on Wednesday, the Japanese yen pulled back further as its safe haven appeal was largely diminished in the new risk-on market environment. The US dollar, similarly considered a safe haven against other currencies, also pulled back.

At the same time, perhaps the most widely-regarded safe haven asset, dollar-denominated gold, was weighed down but supported on Wednesday by the drop in the US dollar. Potentially providing further support for gold as a non-interest-bearing asset has been the plunge in expectations for a Federal Reserve interest rate hike this year. Although there is still a distinct possibility of a 2016 Fed rate hike, especially if next week’s US employment numbers recover from last month’s dismal showing, a much-lowered probability of such a hike due to potential Brexit consequences could help to boost gold even more.

From a technical perspective, gold has made a moderate pullback to form a potentially bullish flag-pattern after having spiked up above key $1300 resistance on last week’s Brexit outcome. This occurs within the larger context of an uptrend that has been in place since the $1050-area lows late last year. The sizeable breakout above the noted $1300 resistance level last week went on to hit a new two-year intraday high of $1358, confirming a continuation of the entrenched uptrend, before paring some of its gains.

Currently, the $1300 level can be considered a key support area for this flag pattern, where it had previously served as resistance before last week’s breakout. Only if gold remains trading above $1300, a key technical event to watch for would be a flag pattern breakout to the upside, currently around the $1330 level. In the event of this breakout, the next major upside targets on a short-to-medium term horizon are at the $1350, $1390, and $1420 resistance levels.