The table is basically set for Brexit results (late Thursday night), and we have Janet Yellen's two-day testimony to keep us busy until then. Yesterday's trading had the definite feeling of "wait and see" that we often get before much anticipated events, so it is interesting to see us breaking through the $1,280 support and stops level here.

The downside gaps are indicative of just how much length exists in this market currently as the slightest bit of profit taking cascades into stop losses and the cycle feeds on itself.

Bull Case

  • Brexit risks now likely underestimated. Though I'd peg the probability somewhere between 20 and 35 percent for a successful "leave" vote, the last few days of trading may have seen too much risk-on.
  • Gold ETFs continue to add at a measured pace, with another 70K oz. added yesterday. Will be interesting to see if they buy on this dip. Will know tomorrow as a test of will/conviction.
  • $10 trillion-plus of negative-yielding sovereign bonds are still out there. Even a slight rotation into a "positive-yielding" gold would be a massive boon for gold prices.
  • The general outlook for any OECD growth is terrible. I am perhaps more constructive, but have to be aware of the consensus view.
  • Headline risk remains to the upside for metals, with skittish risk tolerances abounding.
  • Yellen is about to begin a two-day testimony on Capitol Hill. That's usually good for some fireworks one way or another.
  • Soros: 20 percent GBP devaluation if the Brexit leave vote is successful. I think that would push more EUR and GBP assets into metal, but could be negated by stronger USD.

Bear Case

  • CFTC length shot back to a record last week. That print coincided with the prior top and failure at $1,300.
  • GCQ6 EFP has started to go left a bit. Off from $3 to $2.7 bid currently. Still 2 percent implied forward carry, which is way too high in this rate environment.
  • Platinum EFP (July) is event steeper and has come in quickly, off $1 or so to 1.0/1.5.
  • German 10-year yields have reversed course from their -5bps lows and are back to 7bps. It seems comical in absolute terms, but is significant relatively.
  • Both U.S. two- and 10-year yields have traded higher for the last week, which is an interesting indication on the back of not much great economic news.
  • Ever since the terrible Jo Cox attack and murder, the Brexit risks have been deemed to be coming off significantly, with many bettors moving to the "Bremain" camp.
  • Thursday's news of her passing started the steep selloff and goes to show just how much of the marginal gold bid is due to Brexit fears. Those trades may unwind either way post-vote as insurance/hedges.
  • Coin and bar sales weak. Producer hedging strong, particularly on any move over $1,290.

Chart 1

Brexit premium: Oddschecker average probability of Brexit implied from betting odds in white and gold prices in, well, gold. While the weekend interruption makes this a noisier data series, even the "eye-fit" test shows the reasonable correlations here.

The really interesting move here was, unfortunately, on June 17 with the murder of the British MP Jo Cox by a disturbed Brexit supporter.

Chart 2

A new Olympic record. The green line highlighted in the upper portion is the gross number of Spec longs in the market, which is making an all-time high as of last Tuesday's measurement.

Keep in mind that spot at the time was $1,305 and EFP was on either side of $3, so we have clearly seen some liquidations since then or shorts come in, but Open Interest (orange line, lower) shows it's not that much. As well as gold has held up here on the drop below $1,280 support, any liquidation after the Brexit vote is counted and fails could get ugly.

Coin Toss

The probability of a successful Brexit vote is low, but it's definitely not zero. Given the current chip stack, the bias is for long liquidation in metals and short covering in GBP, which can have some contraflow to each other.

Implied Vols will almost certainly come down after the initial move no matter what, and given that there has been a lot of call buying, you may see some delta and gamma unwind be the main movers. All this, of course, assumes the probable. Since it's a coin toss, after all, we go with the weighted probability result: lower.

Have a fun week. Unless "leave" wins, we'll expect a quiet balance of the summer until FOMC chatter begins anew. Yellen's preleased statement will be interesting, but unlikely to say anything novel as far as I can tell. Balance of risks, Brexit, data-dependent, etc.