HSBC PB asks: Has gold lost some of its shine?

Esty Dwek of HSBC Private Bank’s investment strategy team looks at the factors influencing the price of gold, and asks whether the price is set to trade in a limited range for the time being.

While we remain constructive on the long-term outlook for gold, we believe that prices may remain range-bound in the short term, as a number of factors are likely to act as a cap on prices. First, the significant improvement in investor sentiment we have witnessed in recent months is impacting demand for safe havens in general – as witnessed in the rise in bond yields and the fall in JPY – and demand for gold as a safe haven. Indeed, fears of a global recession have decreased in recent months, as economic data releases, in particular out of the US, have proven resilient. Accompanying this improving outlook has been a reduction in expectations for further quantitative easing (QE), which had typically supported gold prices. In our view, the risk reduction we have seen recently is likely to continue in the short term, weighing on gold as a result.

Another important factor for gold’s recent performance has been USD strength. The dollar has strengthened over the past few months, starting in September during the market turmoil, but more recently during periods of improving risk appetite. In our view, the dollar will remain strong in the coming months as growth and yield differentials come back as drivers, supporting USD, especially against other major currencies. Even when economic news has been disappointing in the past few weeks, USD has benefited to gold’s detriment. USD strength is likely to continue to act as a hurdle for gold, as their negative correlation remains relatively high.

The downward trend that we are seeing in inflation is another negative factor for gold, which is typically perceived as a good inflation hedge, even though this is more accurate from a short-term perspective than over the long run. Given the slowdown in global growth, we believe that inflation will continue to fall in the coming months, although it could pick up again further out given rising oil prices and the recent uptick in commodity prices across the board. In addition, the massive liquidity injections by the major central banks are likely to lead to higher inflation, although we believe it may take some time for this to materialise given the relatively fragile economic backdrop we still have. For now though, commodity price inflation has fallen from its highs and we believe that ongoing uncertainties about the global outlook should put a lid on appreciation. As a result, gold may lose some short-term support as inflation fears have disappeared.

From a technical perspective, gold is unlikely to see any support either. Gold is currently trading below its 200-day moving average and sentiment on gold has suffered in recent months, turning more negative, especially since gold price volatility has increased significantly since last autumn. Further, physical demand has been weaker than expected since the start of the year, especially out of India given the jeweller protests, which are fighting an increase in the import tax on gold and keeping the local market closed. China’s physical demand has been somewhat sluggish as well.

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