HSBC: 2016′s gold rally is here to stay

The rally that has seen the price of gold gain more than 16% since the middle of December could extend for a long time yet, according to analysts at HSBC.

HSBC points out that historically, after the US Federal Reserve has hiked interest rates and entered into a tightening cycle, gold has rallied for roughly 100 trading days after the decision, before sliding again.

Janet Yellen and the FOMC hiked on December 16 last year, and we’re now around two thirds of the way through the traditional rally period.

However, the bank argues that this time things will be different, and gold could keep rising long after 100 days have passed.

Here’s HSBC’s chief precious metals analyst James Steel (emphasis ours):

Looking at the previous four Fed tightening cycles, gold prices have weakened going into them, but then rallied over the first 100 trading days after the first hike. While we seem to be in well into this period, given that rate hike expectations continue to be pushed into the future (HSBC economists expect the next hike in June), we expect the rally may last longer than it has historically.

HSBC argues that there are three fundamental reasons why gold’s rally is likely to extend well beyond 100 days, and keep rising, despite financial markets stabilising in recent weeks.
• The Fed is hugely dovish right now.
• Investors are bearish on the dollar.
• Negative interest rates from central banks across the world are here to stay.

At its latest meeting this week, the Fed’s FOMC left rates untouched, and signalled that any further rate hikes will be pushed further into the future. It also cut its forecasts for the amount of hikes it will implement this year from four to two. That, HSBC says, is great news for gold (emphasis ours):

A major plank in our thesis that gold is likely to remain reasonably well-bid rests on our view that the gold market is adjusting to fewer potential Fed rate hikes and, in totality, a very shallow hiking cycle. This week’s scaling back by the FOMC of its forecasts for lifting interest rates later this year triggered a gold rally and the ratcheting down of rate hike expectations to two 25bp point increases from four previously, is likely to keep the market buoyant. Simply put, the longer the Fed holds fire in raising rates, the better for gold.

HSBC’s second argument for a continuing gold rally centres on the idea that a dovish fed signals growing weakness in the dollar. The dollar went on an incredible bull run over the past couple of years and is now 20% stronger than in 2014. However it has weakened from recent highs, and if that continues, that’s a big thumbs up for gold. HSBC’s James Steel again:

Given that this week’s FOMC meeting was more dovish than expectations means it could spur on the broader theme of USD weakness that HSBC’s FX strategists have highlighted was already getting traction. This is bullish for gold.

The US Fed has revised its rate projections lower, while the ECB and Bank of Japan are no longer chasing their currencies lower. HSBC FX research continues to expect EUR-USD to finish the year at 1.20, which supports our view of firm gold prices.

Finally, HSBC argues that continuing negative rates from central banks are bullish for gold. The ECB, Sweden, Japan, Switzerland, and others are already in negative territory, and Norway on Thursday signalled it could go below zero. Here’s James Steel one last time:

With an increasing number of central banks implementing a negative rates policy, and this reflecting continued economic weakness, we expect gold to be supported by this backdrop. Negative rates are a sign of distress, which may increase flight-to-quality demand for gold. They lower the opportunity cost of owning gold and therefore encourage purchases.

So there we have it. A dovish fed, a weakening dollar, and continuing negative interest rates all over the world. All great news for gold.