Gold expected to trend higher, says HSBC PB’s Esty Dwek

Esty Dwek, investment strategist at HSBC Private Bank, says that recent moves by central banks to ease policy will force investors into seeking out assets such as gold, which will lead to the gold price rising.

In our view, aggressive central bank actions – leading to a boost in investor sentiment and higher inflation expectations – and a weaker USD are likely to lead to a search for hard assets, with gold being the main beneficiary. We believe that strengthening emerging market currencies will also lead to increasing gold demand, as prices in local currency terms start to fall. As a result, we expect gold prices to continue to trend higher.

Following nearly a year of range-trading, gold is on its way up again, thanks mainly to the Federal Reserve (Fed) and what is being called QE infinity (the third round of quantitative easing which is unlimited in time and scope). Aggressive action by the European Central Bank, the Bank of England and the Bank of Japan are also supporting gold prices, in our view, for a number of reasons.

Clearing the hurdles

In recent months, gold has been trading alongside EUR and riskier assets. Indeed, gold has even been trading quite closely with the Spanish equities index, showing its close link to risk assets. As a result, the boost to risk appetite in expectation of the September central bank announcements was the spark that ignited the recent gold rally.

Since the Fed’s announcement a couple weeks ago, gold has consolidated its recent gains rather than making new highs. In our view, this is due to two factors: Spain’s apparent reticence in asking for European assistance; and concerns about a political deadlock with regards to the US fiscal cliff. In our view, these may limit immediate gold price appreciation, although we still expect gold to trend higher, even in the short term.

An important side-effect of the central bank interventions is the weakness in USD, both as a result of currency debasement by the Fed’s ongoing printing and reduced tail risk in Europe, which is waning off demand for safe havens and USD in particular and supporting EUR. In our view, USD strength had been one of the main hurdles for gold prices, but should no longer be. Indeed, gold and USD tend to be strongly negatively correlated, except in times of extreme risk aversion.

To a large extent, this is because USD weakness makes the price of gold in local currency terms cheaper for emerging market (EM) buyers. We believe that EM currencies will rise against USD as a result of the improving investment environment and the debasement of USD, which should support demand for gold as well.

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