‘Leave’ Vote Reminds Us Why Sentiment Is King For Gold



The Brexit referendum is, of course, the only thing that the market is presently concerning itself with and the “leave” vote has sent much of the market into damage control mode. Consequently, the process is once again highlighting gold’s link to fear and uncertainty. Just as polling data in the lead up to the referendum saw gold slide, the swell of uncertainty and surprising strength of the “leave” campaign has seen the metal surge.

Gold has always moved to reflect the ebb and flow of market fears and uncertainty, this is illustrated perfectly by the current referendum. Specifically, in the lead up to the vote, pollsters began to predict a lead for the “remain” campaign and this saw the metal begin to slide lower. Moreover, the second that the referendum results began to be released and undermine the predictions, fear and uncertainty surged which rallied gold prices.

The metal holds a special place in the hearts and minds of traders as, to them at least, it represents the safest of havens. Regardless if this is true or not, it is undeniable that in the face of uncertainty gold thrives and this makes gauging sentiment more important than technical analysis for the commodity. Attempting to predict sentiment is no easy task as it draws on not only fundamental analysis but also the ability to broadly sense the mood of the market.

Whilst it’s all well and good to talk about fear and uncertainty in a general “gut-feel” sense, there are some measures available which can be used to gauge sentiment more empirically. Specifically, the VIX:IND provides a strong bellwether for gold as it captures the uncertainty in an easy to handle figure. For instance, a 17.86% slip in the index since the Brexit referendum results began rolling in has seen gold rally strongly and erode much of the recent bearishness.

In addition to the VIX:IND, the CNN Fear and Greed index can be a useful tool in sensing market sentiment and predicting gold’s movements. Whilst the measure isn’t tied directly to gold, the readings are a good measure of market sentiment which is vital in making the decision to be bullish or bearish on the metal.

When the barometer swings towards “extreme greed” it usually means that the market is about to take a risk off approach and return to gold. Eventually, the surge in gold buying will move the instrument into the “extreme fear” territory once the metal reaches a new high.

Ultimately, gold remains deeply connected with our psychology and as a result it tends to mirror our sentiments. As shown, events such as the Brexit referendum bring the metal to the forefront as uncertainty and fear take over. As a result, measuring these emotions is key in trading gold and is an art in of itself. However, indicators such as the VIX:IND and CNN Fear And Greed index can simplify the task to some degree.

News Source: http://www.investing.com/