HSBC says downside risks for gold are looking ‘increasingly limited’

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Gold has been in the wars recently, undermined by persistently low global inflationary pressures and the prospect of tighter monetary policy from several leading central banks.

As seen in the chart below, from the year-to-date high of $1,295.97 an ounce struck on June 6, the spot price has fallen over 6%, briefly touching the lowest level since mid-March earlier this week before rebounding in recent trade.

Gold Futures Daily Chart

While the recent price action has been anything but stellar, James Steel, chief precious metals analyst at HSBC, doesn’t think the recent trend will last, suggesting that further downside risks appear “increasingly limited”.

“We think gold may trade sideways for now, holding above $US1,200 an ounce but not garnering enough buying interest to break decisively higher,” he says.

In his opinion, market positioning, a potential stabilisation in global crude prices and renewed demand from emerging markets should limit the downside from here.

“Long positions have been cut and leave the market open to a short covering rally. Physical demand in some important emerging market consumer nations also appears to be positive, notably India, and oil prices, if they stabilise, could help steady gold,” he says.

Steel believes that continued geopolitical concerns on the Korean Peninsula are also likely to underpin prices as investors look to take out insurance on a potential escalation in tensions.

“Gold has been unresponsive to geopolitical risks including those on the Korean peninsula, but we believe tensions are high enough globally that safe haven demand could eventually be triggered,” he says.