UBS strategists Dominic Schnider and Giovanni Staunovo told clients in a note on Tuesday that pullbacks in the gold price toward $3,850 per ounce should be seen as chances to increase exposure rather than as a trigger for selling.
They identified a re-escalation of military tensions in the Middle East and an uptick in oil prices as factors creating renewed downward pressure on gold, citing signs of subdued investment demand and softer prices as evidence of those headwinds.
While the strategists note that central bank buying has resumed, they caution that such purchases alone are not sufficient to drive gold prices higher. UBS expects central bank acquisitions to remain elevated in a 750-1,000 metric ton range for the full year, but emphasizes those flows by themselves would not be enough to spur a broad price rally.
UBS also highlights the influence of monetary policy signals on the market. The bank says that the gold market is still processing hawkish messages from Fed Chair Kevin Warsh and fixed-income traders' expectations of higher U.S. policy rates. If economic activity surprises to the upside, UBS warned that the near-term outlook for gold would stay challenging and could push prices down to $3,850 per ounce or below.
To reverse that dynamic and lift prices, Schnider and Staunovo argue investment demand needs to increase materially. They estimate that roughly 500 metric tons of investment demand per quarter would likely be required to meaningfully boost gold prices. Achieving that level of investment interest would probably depend on a shift in the U.S. growth narrative toward a view that favors less restrictive monetary policy or on the emergence of a stagflation-type environment.
Looking beyond the near term, UBS maintains that the longer-term case for gold remains clear and supportive. The bank points to secular debt concerns and an elevated U.S. dollar, noting that global investors are overallocated to the dollar, as factors that underpin the metal's appeal. For investors focused on multi-generational horizons, UBS concludes that gold continues to merit a place in portfolios from a diversification perspective.
Key points
- UBS recommends buying gold on dips toward $3,850 per ounce rather than turning bearish.
- Near-term headwinds include renewed Middle East tensions and higher oil prices, which have coincided with weaker investment demand and softer prices.
- Central bank demand is expected to remain elevated at 750-1,000 metric tons for the year but is insufficient alone to push prices higher; roughly 500 metric tons of quarterly investment demand would be needed.
Risks and uncertainties
- Stronger-than-expected economic activity - could keep the near-term outlook for gold challenging and press prices toward or below $3,850 per ounce - impacting precious metals and fixed-income markets.
- Hawkish monetary signals - ongoing expectations for higher U.S. policy rates may continue to weigh on gold investment demand.
- Geopolitical developments - renewed military tensions could create market volatility that affects both commodity and safe-haven asset flows.