Gold prices reacted the only way they know how to huge market fluctuations Friday, jumping 8%, or over $100, to a 2.5-year high of $1,359/oz overnight on the UK's decision to leave the EU, before easing to $1,320/oz at 1130 GMT.
Clearly living up to its reputation as a safe haven asset following a plunge in the FTSE 100 by up to 5%, the Eurofirst 300 7% lower, gold soared in the early hours as it became clear the referendum result was heading against nearly all market expectations.
"The market was completely unprepared for the UK voting to leave the EU," Saxo Bank's head of commodity strategy Ole Hansen said Friday morning.
In pound terms, gold jumped as high as 20% close to a three-year high of GBP1,000/oz, as the pound lost over 10% against the dollar to hit its lowest in over 30 years.
"The heavy losses suffered on the stock markets and the decline in 10-year yields on the back of the 'Brexit' decision also point to a higher gold price," Commerzbank said in its morning note Friday.
"Even though the situation is likely to calm down gradually following the first reaction, the 'Brexit' issue is bound to preoccupy the markets for some time to come." While the immediate impact is a race to safe haven assets, the longer term effect on the global economy may provide more support to gold.
"The result of the referendum creates a period of heightened global financial market and economic uncertainty, which suggests potential for a dovish shift in policy," UBS precious metals analyst Joni Teves said Friday, who had a forecast this week of $1,365-$1,475/oz under a "Brexit" scenario. As a non-yielding asset gold benefits from a low-interest rate environment and prices already gained this month from the decision by the US Federal Reserve not to raise interest rates, citing global economic concerns.
"Our economists now expect the Fed to keep rates on hold in September; the BOE to cut policy rates to zero and make further asset purchases; and the ECB to stand ready to inject extra liquidity in the weeks ahead," UBS added.
Investment demand in gold-backed exchange-traded funds are currently at three-year highs, and bullish positions on US commodity exchange COMEX are at their most bullish position since 2006, revealing the already high level of investment demand in the market.
A lower interest rate environment on the back of elevated economic and financial market uncertainty, has a "more fundamental and sustainable positive impact" on gold, Teves said.
Physical demand continues to be reported low, meanwhile, with the Platts 995 India gold assessment at minus $50/oz Friday, the steepest discount on record.
Small premiums of $1-$3/oz have been reported in Dubai, China and Turkey this week, as high prices deter investors.
The London Bullion Market Association Gold Price settled at $1,313.85/oz Friday morning, up $51.70 from Thursday's close.
