Gold faces upside test from higher yields – HSBC

Analysts at HSBC suggest that higher yields will constrain further gold gains and while the gold rally has recently come under pressure, they certainty do not believe it is reversed

Key Quotes

“The whipsaw action in the financial markets after ECB officials rushed to clarify Mr. Draghi’s comments shows how sensitive monetary officials are to what they may view as overreactions in the financial markets. Still further EUR gains versus the USD would likely support gold and HSBC forex strategists remain generally bearish on the USD versus the EUR as well against most other currencies. Gradual USD weakness will likely bolster gold. But US yields are also higher.”

“The demand for gold in India, the world’s second largest consumer of bullion, is an important factor in the market. Gold premiums have risen to USD5/oz in most gold trading centers. Domestic demand has been brisk, as reported by local merchants and dealers. Earlier this month, the GST Council fixed the rate of tax on gold at 3%, keeping it close to the current tax incidence of about 2% on the precious metals across most states in the country. We expect a more quiet market in the immediate aftermath of the tax increase. But it is likely that demand will recovery thereafter, as the 3% increase in GST was at the low end of expectations.”