The British voters' decision to leave the EU has badly shaken markets– although the dollar remained relatively calm while investors rushed into the safety of gold. Gold prices reached the long-term resistance target projection level of $1,340 before retreating. This is a rally within the context of a longer-term uptrend breakout.
Technically, this breakout is strong and there is a strong probability gold will move above $1,340 and move towards resistance near $1,580. However, there are important changes in the structure of the gold market that make the move above $1,350 and towards $1,580 more hazardous and volatile.
U.S.-listed gold exchange traded funds (ETFs) now own massive amounts of physical gold. Only seven sovereign nations own more physical gold than the U.S. gold ETFs. Add to this the physical gold held by gold ETFs listed in the UK, Australia and Europe and we can see a significant shift in the way physical gold is held and traded.
This structural change in the market means gold demand is now also closely linked to brokerage account margin calls as ETFs are a derivative trading instrument. Such high exposure to margin calls is a great concern during periods of high market volatility. It means that the gold price may react much more quickly in either direction than the fundamentals might suggest. It means that price targets are reached more quickly, and that retreats are more sudden and severe.