FX Spotlight 15 Oct 2021 | Gold: Balancing act among inflation, yields and USD | Article – HSBC VisionGo

Gold: Balancing act among inflation, yields and USD
Finance  ·    ·  6 mins read

  • Gold traded sharply higher, as US Treasury yields and the USD slipped after the US CPI release…
  • …but further gains over the near term may be limited, in our precious metals analyst’s view
  • A gradually stronger USD, following the Fed’s path towards normalisation, may weigh mildly on gold

Our precious metals analyst thinks that further gains for gold over the near term may be limited

The latest US CPI data indicates that the inflation level remained elevated in September, at 4.0% for core CPI and 5.5% for headline CPI, when comparing with the same period last year (source: US Department of Labor, 13 October 2021). On a positive note, average monthly increases in core CPI were much slower in Q3 (+0.2%) than in Q2 (+0.8%), based on our economists’ calculation. An initial spike in US Treasury yields faded – but not before depressing gold prices – and then dropped, aiding a turnaround in gold prices. The USD also eased, with the US Dollar Index (DXY) dropping 0.5%, lending support to gold which ended the day 1.9% higher (source: Bloomberg, 13 October 2021). In our precious metals analyst’s view, while the CPI data, in addition to easing in US Treasury yields and the USD, may be supportive of gold, the degree to which gold rallied is a little hard to explain. As such, further gains over the near term may be hard to come by, short of a steeper decline in US Treasury yields or the USD

Higher inflation or the threat of rising inflation is gold positive, but only if higher yields do not accompany inflation pressures, in our precious metals analyst’s view

There appears to be growing concern about inflation. Our economists think that the potential for an extended period of elevated rental increases is an important upside risk for US inflation, and prices for many household goods (such as furniture and appliances, and electronics) may also continue to see upward pressure from supply chain constraints. Earlier this week, the International Monetary Fund (IMF) Chief Economist Gita Gopinath said that while it was too early to talk about “stagflation”, central banks had to be “very, very vigilant” on inflation (source: Bloomberg, 12 October 2021). In our precious metals analyst’s view, comments on inflation from groups like the IMF may lend support to gold as they appear to be becoming more frequent. However, the scare over inflation could aid gold if US Treasury yields do not rise. Should yields move higher to offset inflation, the impact on gold would likely be more negative.

Gold faces gradual withdrawal of monetary and fiscal support

Our precious metals analyst thinks that global monetary and fiscal policies are no longer outright supportive of gold in the US or globally. With the era of ultra-loose monetary policies coming to an end and fiscal stimulus being pulled back, gold investment is down. The Federal Reserve (Fed) has shifted clearly towards a tapering path in the near future. This is negative for gold and will likely put up headwinds to rallies, but the market is already forewarned. The Federal Open Market Committee (FOMC) minutes of the 21-22 September policy meeting, released on 14 October 2am HKT, signalled the Fed could start reducing asset purchases in mid-November, and the 18 FOMC participants are now evenly split on a rate hike in 2022. 

We expect the USD to strengthen gradually

We still believe the USD is gradually transitioning to a stronger path due to the slowdown in global growth and the Fed’s path towards normalisation. A gradually stronger USD could be mildly negative for gold, according to our precious metals analyst.

Disclosure appendix

Important disclosures
This document is for information purposes only and it should not be regarded as an offer to sell or as a solicitation of an offer to buy the securities or other investment products mentioned in it and/or to participate in any trading strategy.  Information in this document is general and should not be construed as personal advice, given it has been prepared without taking account of the objectives, financial situation or needs of any particular investor.  Accordingly, investors should, before acting on it, consider the appropriateness of the information, having regard to their objectives, financial situation and needs. If necessary, seek professional investment and tax advice. 
Certain investment products mentioned in this document may not be eligible for sale in some states or countries, and they may not be suitable for all types of investors. Investors should consult with their HSBC representative regarding the suitability of the investment products mentioned in this document and take into account their specific investment objectives, financial situation or particular needs before making a commitment to purchase investment products.  
The value of and the income produced by the investment products mentioned in this document may fluctuate, so that an investor may get back less than originally invested.  Certain high-volatility investments can be subject to sudden and large falls in value that could equal or exceed the amount invested.   Value and income from investment products may be adversely affected by exchange rates, interest rates, or other factors.  Past performance of a particular investment product is not indicative of future results.
HSBC and its affiliates will from time to time sell to and buy from customers the securities/instruments (including derivatives) of companies covered in HSBC Research on a principal or agency basis. 
Whether, or in what time frame, an update of this analysis will be published is not determined in advance.
Additional disclosures
1. This report is dated as at 14 October 2021.
2. All market data included in this report are dated as at close 13 October 2021, unless a different date and/or a specific time of day is indicated in the report.
3. HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier procedures are in place between the Investment Banking, Principal Trading, and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner.
4. You are not permitted to use, for reference, any data in this document for the purpose of (i) determining the interest payable, or other sums due, under loan agreements or under other financial contracts or instruments, (ii) determining the price at which a financial instrument may be bought or sold or traded or redeemed, or the value of a financial instrument, and/or (iii) measuring the performance of a financial instrument or of an investment fund.


This document is prepared by The Hongkong and Shanghai Banking Corporation Limited (‘HBAP’), 1 Queen’s Road Central, Hong Kong. HBAP is incorporated in Hong Kong. This document is for general circulation and information purposes only. This document is not prepared with any particular customers or purposes in mind and does not take into account any investment objectives, financial situation or personal circumstances or needs of any particular customer. HBAP has prepared this document based on publicly available information at the time of preparation from sources it believes to be reliable but it has not independently verified such information. The contents of this document are subject to change without notice.
This document is not investment advice or recommendation nor is it intended to sell investments or services or solicit purchases or subscriptions for them. You SHOULD NOT use or rely on this document in making any investment decision or decision to buy or sell currency. HBAP is not responsible for such use or reliance by you. You SHOULD consult your professional advisor in your jurisdiction if you have any questions regarding the contents of this document.
You SHOULD NOT reproduce or further distribute the contents of this document to any person or entity, whether in whole or in part, for any purpose. This document may not be distributed to the US, Canada or Australia or any other jurisdiction where its distribution is unlawful.
Hong Kong
In Hong Kong, this document is distributed by HBAP to its customers for general reference only. HBAP is not responsible for any loss, damage or other consequences of any kind that you may incur or suffer as a result of, arising from or relating to your use or reliance of this document. HBAP gives no guarantee, representation or warranty as to the accuracy, timeliness or completeness of this document.
Notwithstanding this document is not investment advice, please be aware of the following for the sake of completeness. Past performance is not an indication of future performance. The value of any investment or income may go down as well as up and you may not get back the full amount invested. When an investment is denominated in a currency other than the local currency of an investor, changes in the exchange rates may have an adverse effect on the value, price or income of that investment. Where there is no recognised market for an investment, it may be difficult for an investor to sell the investment or to obtain reliable information about its value or the extent of the risk associated with it.
This document contains forward-looking statements which are, by their nature, subject to significant risks and uncertainties. Such statements are projections, do not represent any one investment and are used for illustration purpose only. Customers are reminded that there can be no assurance that economic conditions described herein will remain in the future. Actual results may differ materially from the forecasts/estimates. No assurance is given that those expectations reflected in those forward-looking statements will prove to have been correct or come to fruition, and you are cautioned not to place undue reliance on such statements. No obligation is undertaken to publicly update or revise any forward-looking statements contained in this document or any other related document whether as a result of new information, future events or otherwise.
The Hongkong and Shanghai Banking Corporation Limited, its affiliates and associates and their respective officers and/or employees, may have interests in any products referred to in this document by acting in various roles including as distributor, holder of principal positions, adviser or lender. The Hongkong and Shanghai Banking Corporation Limited, its affiliates and associates, and their respective officers and employees, may receive fees, brokerage or commissions for acting in those capacities. In addition, The Hongkong and Shanghai Banking Corporation Limited, its affiliates and associates, and their respective officers and/or employees, may buy or sell products as principal or agent and may effect transactions which are not consistent with the information set out in this document.
© Copyright 2021. The Hongkong and Shanghai Banking Corporation Limited, ALL RIGHTS RESERVED. No part of this document may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of The Hongkong and Shanghai Banking Corporation Limited.