Trading gold around the EU referendum

With the EU referendum approaching, the demand for gold will become intrinsically intertwined with risk sentiment as dictated by the expected and ultimate result of the vote.

Gold
Source: Bloomberg

After a weekend of renewed hope from the ‘remain’ campaign, it is now more evident than ever that this week will be dominated solely by swings in sentiment surrounding Thursday’s referendum.

While many will be focusing in on the impact this vote will have upon the pound and FTSE in particular, the commodities market is also going be highly volatile this week. Front and center of this will be the market for gold, which has been gaining heavily over the past two weeks, as polls indicated a growing lead for the Brexit camp.

However, with sentiment now seemingly turning, there is a good chance that we are at a particularly overbought area where those expecting a ‘remain’ vote will likely be looking to sell.

On the weekly chart, it is clear that we have seen gold consolidate for four months now. In particular, it is clear that the $1307 resistance area is of particular interest, given the two failed attempts to break through here.

Given the falling wedge throughout 2013-2015 period, the resolution would be expected to be a breakout to the upside and as such, a closed candle above $1307 could signify the bullish breakout many expect.

Should we see a Brexit, it is likely that we will see a flight to perceived safety, with a break through $1307 likely to look onwards towards $1345 and $1386 as the next major resistance levels.

The daily chart below highlights the fact that gold is currently trading within a broadening formation, where Thursday’s price action formed a highly bearish candle, failing to sustain price action above the crucial $1307 resistance level.

The stochastic oscillator has clearly turned lower from a level which has not been seen in over four months. The stochastic oscillator does not always work well, yet for sideways/rangebound markets they often do.

Finally, the 4 hour chart provides us with some granularity, with price failing to create a higher high and in doing so, has seemingly created the second shoulder to a head & shoulder formation.

Given the strong ascending trendline of support too, we are at a crucial area of support today. As such, a break and hourly close below $1276 should provide a strong signal that we are going to see a major downturn in the lead up to this referendum. 

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