Despite facing dual pressure from rising US Treasury yields and a strengthening dollar, which have capped short-term upside potential for the gold market, HSBC maintains that growing demand for asset diversification, continued central bank gold purchases, and ETF inflows will be key drivers pushing gold prices higher by the end of 2026. Against the backdrop of high real yields and a strong dollar, gold prices may remain range-bound in the near term, but demand for portfolio diversification will provide solid support in the medium term.
Market data indicates that US Treasury yields have become the core variable influencing gold trends. When yields rise, the opportunity cost of holding non-yielding gold increases, thereby exerting pressure on prices. Meanwhile, gold's effectiveness as a hedge against equities has declined recently, with its movements largely moving in tandem with the stock market. However, HSBC maintains a constructive view on gold, believing that investor demand for portfolio diversification, global central bank buying, and stable ETF inflows will continue to support the medium-term outlook, with further price increases expected by the end of the year.
In terms of specific demand, performance in the Chinese market is particularly noteworthy. The premium on the Shanghai Gold Exchange is approximately $20 per ounce, indicating strong domestic demand. Unlike previous demand driven largely by jewelry, coins, and small bars, this round is concentrated on large bars and the institutional side. This is linked to regulatory reforms in China and India allowing major insurance companies and asset management firms to allocate gold. Additionally, latest central bank data shows the People's Bank of China purchased 8.1 tons of gold last month, further highlighting official sector demand.
Addressing market skepticism that gold failed to surge during geopolitical conflicts, implying a loss of safe-haven attributes, analysts point out that gold is not failing as a safe haven but rather fulfilling its insurance function. As rising oil prices reignite inflation concerns, alongside rising bond yields, a stronger dollar, and falling stocks, the market needs cash that can be quickly liquidated, which gold provides. Liquidations in the gold market are primarily a reaction to financial market stress, where investors sell gold for liquidity under pressure, but this does not necessarily indicate a failure of its safe-haven function.
Notably, the historical relationship between gold and oil prices has changed significantly. The two were positively correlated in the 1970s, but entering the 1990s, as oil's importance in the global economy declined, the correlation began to weaken. Currently, the correlation is only about 0.15, sometimes even turning negative, which explains why the oil price shock during this round of Middle East conflicts did not push gold higher directly as in the past.
Regarding gold's positioning in a portfolio, it is seen as an alternative asset combining hard asset characteristics with high liquidity. In the long run, gold usually does not correlate highly with tech stocks; in contrast, other hard assets cannot be liquidated quickly. Gold's advantage lies in being both a hard asset and a highly liquid, heavily traded asset. More asset managers who previously never included gold in their portfolios are beginning to allocate to it as they search for alternative assets.
HSBC noted as early as April that although gold has performed poorly recently, rising cross-asset correlation makes gold's value as a portfolio diversification tool more important. Inflation concerns have led to increased interest rate volatility and driven market repricing of monetary policy expectations. While policymakers may maintain current interest rates for a period before turning to easing, with rising cross-asset correlation, the bank will use gold and alternative assets to enhance diversification. HSBC continues to maintain a constructive view on gold for the next six months and keeps an overweight stance, believing that despite pressure from recent pullbacks, mid-to-long-term fundamentals still support gold, especially against the backdrop of geopolitical uncertainty, continued central bank buying, and de-dollarization trends.
