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FX Viewpoint: Gold hit record highs, despite a firm USD

22 Apr 2024

Key takeaways

  • After hitting record highs, gold prices may stay strong on safe haven demand amid geopolitical risks…

  • …but positive real rates and a resilient USD would eventually weigh on gold prices later in the year.

  • High gold prices could also curb demand for jewellery, coins and bars, while central bank demand may moderate.

Geopolitics takes on elevated importance for gold prices in this major election year

Gold prices hit record highs in April 2024, fuelled by safe haven demand amid growing geopolitical risks. Indeed, geopolitics is taking on elevated importance for gold prices this year, not only because of ongoing geopolitical unrest, but also the 75 elections scheduled for 2024, with these outcomes affecting at least half of the world’s total population. Many of these elections have already taken place, while a host of important ones, including India, the EU Parliament, Mexico, UK and, most importantly, the US, have yet to be held. Until the results of these elections are known, geopolitical uncertainty and by extension safe haven demand for gold will probably stay high, in our precious metal analyst’s view.

A firmer USD would eventually be negative for gold, in our precious metal analyst’s view

In the near term, an escalation in the Middle East conflict could send gold prices higher, even if the USD also rallies. While gold being priced in USD generally moves inversely to the USD, such relationship could be broken, especially in the period of growing geopolitical risks (Chart 1). As recently discussed in “FX Viewpoint – A resilient USD (12 April 2024)”, we see the broad USD remaining strong through the course of the year. Our precious metal analyst thinks that a firmer USD would be negative for gold, should the inverse relationship between gold prices and USD restore later in the year.

Source: Bloomberg, HSBC
Source: Bloomberg, HSBC

Positive US real rates could also weigh on gold later in 2024

Apart from the USD, gold is historically sensitive to US real rates, and while there has been a notable disconnect in this relationship, our precious metals analyst thinks that positive US real rates could be a headwind for gold later this year (Chart 2).

Both physical demand and central bank demand may moderate at price levels above USD2,200 per ounce

With high gold prices, mine output and recycling levels are set to increase this year and next, resulting in greater gold supply. At the same time, physical demand for gold coins and bars and jewellery might be curbed at price levels above USD2,2000 per ounce. Central bank demand remains historically strong, triggered by geopolitical risks and portfolio needs but may not be fully sustained at these price levels. Weaker demand could play a role in eventually restraining gold prices.

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