Gold: Expect moderately higher prices - HSBC

James Steel, Chief Precious Metals Analyst at HSBC, expects moderately higher gold prices buoyed by a weaker USD with tighter monetary policy creating bearish headwinds.

Key Quotes

“We anticipate moderately higher gold prices this year and in 2018 based mostly on USD weakness, but expect tighter monetary policies and low inflation globally to create headwinds to rallies, a stop-and-go path. We highlight the following drivers: 

• A weaker USD

Gold has a longstanding inverse relationship to the USD. Likely declines in the USD in 2H, notably against the EUR, according to HSBC FX research, stand to aid gold. This view reflects likely rising disappointment regarding the ability of US policies to deliver reflation. Additionally, French elections provided the catalyst for a shift away from political negatives and towards structural and cyclical positives in Europe.

• Tighter monetary policies and geopolitical and other risks 

The tightening actions by the Fed and other major central banks create a negative backdrop for gold prices. Increased financial market volatility and sustained equity weakness would encourage safe haven gold demand. Geopolitical risks and policy uncertainty associated with the US administration may further boost gold purchases.

• Investment mixed, physical demand weak 

ETF demand has been positive this year but is running below 2016 levels; long positions on the Comex are up. We look for both to build further in 2H. Jewelry purchases are mixed, but coin and bar demand are weak. Mine output may be plateauing and scrap supply looks limited. We leave our average price forecasts unchanged for 2017, 2018, 2019, and the long term.”