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Deflationary Environment Could Be Good For Gold - HSBC

By Kitco News
Wednesday March 25, 2015 4:30 PM

(Kitco News) - Although the current deflationary environment has been negative for gold, one bank thinks that this might not always be the case as deflation forces central banks to introduce negative interest rates.

“Deflation, while ostensibly negative for gold, also makes negative interest rates more likely as central banks move to combat falling prices. Negative rates in turn encourage the holding of some hard assets, such as gold, as investors will be reluctant to have holdings in the non-cash financial system,” said commodity analysts at HSBC in a report published Tuesday.

Photy by Timothy Valentine

“Negative interest rates also wipe away any opportunity cost to gold and may be a rival of financial assets,” they added.

The analysts reaffirmed their optimistic outlook on gold as they expect prices to trade between $1,120 and $1,306 an ounce, with an average price of $1,234 an ounce.

Inflation forecasts have been dropping across the board as the global economy deals with lower energy prices. HSBC noted that deflationary concerns are growing in the U.S., European Union, China and Japan.

It its latest economic projections, the Federal Reserve significantly lowered its inflation expectations. The central bank said it expects headline Personal Consumtion Expenditures (PCE) to fall between 0.6% and 0.8% in 2015, down from December’s range of 1.0% to 1.6%. It expects core PCE to fall to between 1.3% and 1.4% this year, down from December’s forecast of 1.5% to 1.8%.

Also on Tuesday, the Office for National Statistics in the U.K. said that inflation fell to zero on an annualized basis for the first time on record. The European Central Bank said at its last monetary policy meeting that it expects inflation to be 0.0% in 2015, down from its previous forecast of 0.7%.

The analysts at HSBC said gold’s role in a deflationary environment is not as well understood as in a rising inflation environment/backdrop. However, they noted that the yellow metal remains a good safe-haven alternative and a portfolio diversifier, which attracts investors in uncertain economic times.

“Change and uncertainty may trigger a shift into gold,” they said.

In hypothesizing the difference between rising inflation in the 1970s to today’s deflationary environment, the anaslyts asked: “if inflation played a role in prompting a bull market in the 1970s, are deflationary pressures currently weighing on gold?”

The analysts also questioned that if deflation is the mirror opposite of inflation, and if gold fell from the ‘70s highs because of aggressive central banks rate hikes, then could investors reasonably expect “As the solution to deflation is found, gold prices may rise, or at least stabilize?”

By Neils Christensen of Kitco News; nchristensen@kitco.com
Follow Neils Christensen @neils_C



Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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