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.

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