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Economists at HSBC expect US inflation to ease later this year; if this contributes to lower yields and USD, it is gold positive. What’s more, monetary and fiscal policies continue to provide underlying support for the yellow metal.

Gold rallies on higher US CPI, as US Treasury yields and USD retreat

“The base inflation effects have started to lift US YoY CPI over the next couple of months, which could see US headline CPI inflation approaching nearly 4% in May. Nevertheless, we also expect inflation pressures in the US to moderate in the second half of the year. If the US inflation outlook unfolds in the manner expected, then US Treasury yields and possibly the USD could ease later in the year, allowing for gold gains.”

“Monetary and fiscal policies continue to provide underlying support for gold. As such, any further gold weakness over the near term should be modest. While evidence that fiscal spending supports gold is positive, it also depends on the broader interest rate climate.”

“As we continue to expect a modest USD decline this year, it is also potentially supportive of gold, as is any uptick in trade tensions or geopolitical risks. Possible financial market instability due to asset price appreciation could also spark renewed quality asset demand for gold.”