Gold offers no near-term protection in equity sell-offs, HSBC says, though long-run case holds

Thursday saw spot gold drop below $4,040 an ounce, leaving it at its lowest since August and roughly a quarter under the January peak. At the same time, the Nasdaq fell by more than 2.5%, the simultaneous decline HSBC has described. Pressure flows mainly through oil: with Brent crude above $110 a barrel, inflation worries build, expectations of more Fed tightening rise, Treasury yields and the dollar climb, and the cost of owning an asset that pays no interest grows accordingly. The near-term path for gold likely rests on equities regaining their footing, margin pressure abating and yields backing away from current peaks. Central banks have kept buying at a steady pace, which may put a floor under prices, but that demand has not by itself turned the trend around.

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In HSBC's view, gold's long-run role in portfolios remains valid. The bank warns, however, that once equities slide, heavily leveraged positions force holders to treat bullion as a way to raise cash rather than as shelter.

Summary:

• According to HSBC Asset Management strategists, the metal's bull run — one that carried it well beyond $5,000 an ounce in the first part of this year — has come to a halt, with prices off and volatility up.
• In their assessment, gold has not cushioned portfolios during the latest stock drops, since leveraged holdings in the metal are sold to satisfy margin calls.
• The strategic argument for owning gold remains intact at HSBC, resting on the debasement trade, reserve diversification by central banks and geopolitical fragmentation.
• No price objective appears in the newest report. Last July, HSBC envisioned gold moving within a range over the near term, named US yields the key influence and forecast additional upside by the close of the year.
• The bank's chief precious metals analyst argued in May that bullion's drop during the Iran conflict demonstrated its function as a liquidity provider, not a breakdown in its safe-haven role.
• Thursday saw spot gold trading near $4,040 an ounce, its weakest reading since August, with prices lower still as of this writing.

HSBC Asset Management strategists regard gold as a long-run portfolio holding, yet they caution that it is no cushion for near-term equity declines. Again and again, leveraged investors have been forced to sell, and gold has fallen in step with stocks.

Writing recently, the strategists described gold's powerful run — one that in the early part of this year sent prices far above $5,000 an ounce — as having stalled, with declines in price and a rise in volatility. The metal has trailed off since that strong start, weighed down by sharply higher oil, climbing interest rates and firmer bond yields. The long-term case for owning gold, they still contend, is undamaged, thanks to geopolitical fragmentation and reserve diversification at central banks. Fears over debt and inflation should likewise keep the debasement trade alive, the strategy of shifting money into hard assets. Higher volatility, they acknowledged, is still within historical norms.

The sharpest warning is about how gold behaves in an equity downturn. With so much leveraged capital crowded into bullion, any steep drop in stocks forces margin calls, and holders unload gold to free up cash. HSBC's conclusion: gold may still be a reliable hedge against systemic risk in a multipolar world, but it cannot be relied on to curb short-term volatility. No single asset can guard against every kind of stress, the strategists said, so investors should spread the very assets they use for diversification.

Thursday offered a live example. The Nasdaq dropped over 2.5% on a wide decline in chip shares, and spot gold slipped to roughly $4,050 an ounce, its weakest since August, that same day.

One notable feature of the newest report is that it delivers no price forecast. That stands in sharp contrast to July, when HSBC spoke with more assurance; at the time, Global Chief Investment Officer Willem Sels and Global Head of Wealth Insights Lucia Ku argued that US Treasury yields were steering gold prices. They observed then that bullion had not advanced during the Middle East conflict and had largely moved alongside stocks. Their expectation was for gold to remain rangebound near term, held back by high real yields and a firm dollar, though they still looked for year-end gains via diversification demand, central bank buying and regular ETF inflows. Given gold's current level, roughly a quarter under its January peak, the lack of any target reads as extra caution.

A different take on the same pattern came in May from James Steel, HSBC's chief precious metals analyst. He dismissed the view that bullion's decline following the strikes on Iran meant the metal had failed as a haven. Instead, higher oil prices brought inflation fears back, yields and the dollar firmed, equities dropped, and investors needing cash found it in gold. The liquidation, he believed, reflected stress in the broader financial system — investors were cashing in an insurance policy rather than abandoning it. Steel added that gold's traditional positive relationship with oil had broken, leaving a correlation that is weak and sometimes negative.

Asia, he said, provides structural support: rule changes there have opened bullion ownership to major Chinese insurers and Indian asset managers. Chinese buying, as a result, has gravitated to large institutional bars and away from jewellery and coins. A growing number of asset managers with no prior exposure to gold are adding it as an alternative asset, he noted, because it combines hard-asset status with deep liquidity.

Looked at as a whole, HSBC's remarks show a market pulled in two directions: structural demand for the long term, and a near-term reaction to yields, the dollar and forced liquidation tied to equity moves. The second of those forces probably prevails until Treasury yields fall back or stock market turmoil subsides.