Gold: Caught between higher yields and weaker USD – HSBC

Gold prices are caught between bull influence of weak USD and bearish  influence of higher yields, but it should begin to edge higher as further equity market weakness has potential to trigger “safe-haven” purchases, according to James Steel, Chief Precious Metals Analyst at HSBC.

Key quotes

“Gold is under considerable pressure as central bankers have essentially signaled the end of years of ultra-loose monetary policies. Climbing yields traditionally bring an end to gold rallies. The yield on the US 10-year Treasury hit 2.297% on Thursday from 2.223% previously and 2.144% at the beginning of the last week. Even considering that the market had already anticipated rising rates, the increase undercut gold. Financial market developments are not all negative for bullion, however. The USD fell to 14-month lows vs the EUR at one point, before the EUR partially recovered. This was an effective lifeline to gold and helped stabilize prices. It is quite possible that the bearish impact of higher yields continues to be offset, or be mitigated by a weaker USD.”  

“The President of the St Louis Fed said he does not believe the Fed needs do too much more on interest rates, but believes the next natural step is to trim the balance sheet. He also said the Fed should have a regular review of inflation targets. Simply put, this may be a signal that the Fed is starting to unwind the balance sheet, which is ostensibly gold-bearish. But investors largely expected the move, so the reaction by gold may be modest. This may mean that ongoing balance sheet reduction, if done gradually, may not impact gold too much. What has risen considerably is volatility, with the VIX moving up to 14% on Thursday, after averaging 10% for the past month. Gold usually responds positively to this measure of uncertainty, but has not yet done so. If equities remain on the defensive, gold should finally be the recipient of greater “safe-haven” buying, even if yields edge higher.”