HSBC: Gold's Drop Below $4,000 Reflects Margin Call Selling

Spot gold briefly fell below $4,000 per ounce during Friday's trading, affected by losses in the US stock market, according to a report published by Yahoo Finance Hong Kong. The metal had surpassed $5,000 per ounce earlier in the year, recording a record high, before its rally slowed and pulled back.

HSBC Asset Management strategists said in their latest report that rising oil prices, higher interest rates, and a surge in US Treasury yields are pressing on gold. They explained that the decline is due to liquidity pressures rather than the disappearance of safe-haven demand, as part of borrowed funds is concentrated in gold, and margin calls resulting from the stock decline may force investors to sell the metal to raise cash, damaging both equities and gold at the same time.

An HSBC report issued in July noted that gold did not rise significantly during the Middle East conflict and moved closely alongside equities. Yahoo Finance quoted Willem Sels, Global Chief Investment Officer, and Lucia Ku, Head of Global Wealth Insights, as saying that rising bond yields increase the opportunity cost of holding non-yielding gold. The bank expects gold to remain range-bound in the near term as high real yields and a strong dollar persist.

In the longer term, HSBC strategists believe that debt and inflation concerns, central bank reserve diversification, and ETF demand support gold, forecasting its rise by the end of the year. However, they stressed that this does not mean the metal protects portfolios in every shock, as the need for cash and interest rate changes may overcome safe-haven buying, as happened in gold's drop alongside stocks this time.

What do these terms mean?

Liquidity: The ease of converting an asset into cash without a significant loss in its value, and the need for it increases during market volatility.

Margin Call: A broker's demand for an investor to add funds or collateral when their position's losses exceed the available amount, which may force them to sell assets to raise cash.

Opportunity Cost: The return an investor foregoes when choosing an alternative asset, as holding non-yielding gold becomes less attractive when bond yields rise.

Real Yield: The return on an investment after deducting inflation, used to measure the actual purchasing power of the return, and its rise increases the attractiveness of bonds at the expense of gold.