HSBC halves strategic gold allocation as inflation allure fades

LONDON (REUTERS) - HSBC halved the allocation of gold in its strategic portfolio in favour of equities and treasury inflation-protected securities (TIPS) to reduce volatility, the bank said in a report, taking a much less favourable view of the metal as an inflation hedge.

The bank cut gold's weight in its three-year strategic portfolio by 8 per cent to 7 per cent and by 9 per cent to 7 per cent in its tactical portfolio.

As the relationship between gold and United States inflation has slightly broken down over the past year, HSBC now sees TIPS providing a more reliable hedge against inflationary pressures.

Although economic headwinds remain, with ongoing US debt ceiling negotiations and euro zone growth woes, major tail risks that the global economy faced at the start of last year have retreated considerably, it said.

The bank said it no longer views gold as a "sound investment" should the global economy fall back into recession, as this would not now be driven by a major systematic event such as a sovereign default.

"Given the much lower risk of such a disaster taking place, we now forecast that the gold price would fall to US$1,600 (S$1,970) an ounce in a recession rather than rising to US$2,200 (as previously forecast)," it said.

"This change means that we now expect gold to return -3.6 per cent in a recession rather than the 32 per cent that we forecast back in September," it added.

A Reuters poll published earlier this week showed that gold could see record average highs this year and next, but its 12-year long bull run may be reaching a plateau.