Gold’s drop under $2,000 is a buying opportunity, say UBS and other analysts
Story by Barbara Kollmeyer • 13h ago
Gold’s drop under $2,000 is a buying opportunity, say UBS and other analysts© AFP via Getty Images
A string of recent losses has seen gold walk back from the $2,000-plus level, but Swiss bank UBS is among those who see a buying opportunity and a return to that price range.
Gold is now sitting 4% below its year-to-date high reached earlier this month, noted a team of UBS strategists led by Wayne Gordon. Closing at its weakest since a late March low on Thursday, gold is set for the worst week since October last year, dogged by a strong U.S. dollar and optimism around a debt-ceiling deal in Congress.
But the commodity is still up 7.7% on the year, hovering at around $1,966 per ounce on Friday.
In a note dated Thursday, Gordon and the team said investors shouldn’t be too surprised by the consolidation seen in gold after such a strong rally. Their forecasts are unchanged — $2,050 per ounce by end September, $2,100 by the end of the year, $2,200 by end March 2024 and a new June 2024 target of $2,250.
UBS sees three reasons to buy gold right now and the first is that central bank gold demand should stay robust. “Last year marked the 13th consecutive year of net gold purchases by global central banks and the highest level of annual demand on record,” said Gordon and his colleagues.
Based on first-quarter World Gold Council data and driven by geopolitical risks and diversification desires, UBS expects central banks will buy around 700 metric tons of gold this year, which would be vastly higher than the last decade’s average.
Broad U.S. dollar weakness is a second reason to buy, and investors should expect headwinds for the greenback to intensify as a Federal Reserve pivot to lower interest rates looks possible, maybe in the second half of the year, said UBS, which added that the European Central Bank will likely keep tightening monetary policy by contrast.
A final reason to buy gold is rising U.S. recession risks that could drive safe haven flows, notably via gold-themed exchange-traded funds and physical demand.
Also weighing in on gold’s prospects Friday was fund manager Wisdom Tree whose head of commodities and macroeconomic research, Nitesh Shah, expects a new all-time nominal gold high by the end of 2023.
Shah noted that investors have been hedging in gold futures since the collapse of the California’s Silicon Valley Bank earlier this year, with positioning weak in the run-up to that crisis. Flows into exchange-traded-products have been less dramatic, but the analyst said an investor return to those “in significant force” could provide a major push to gold.
Gold has also been outpacing gains in the bond market, and he also sees central bank buying continuing, as many were spooked by sanctions on Russia due to its war on Ukraine.
And Shah said demand for gold as a hedge remains as investors watch the U.S. debt-ceiling debate in Congress. If the U.S. runs out of money and faces either a sovereign default or harsh spending cuts in June, hopes for a soft landing for the economy would quickly fade. “Even an 11th hour deal may see a lot of damage as nervous investors may pull back on risk in the fear of an accident,” he said.
He set up three scenarios for gold prices.
His bull case involves a faster pivot on interest rates for the Fed and monetary expansion by summer 2023 which would mean falling bond yields and pressure on the dollar. Inflation would stay elevated in this case and more investors would pile into gold. He’s targeting $2,420 per ounce by the fourth quarter of this year and $2,517 by the first quarter of 2024.
Read: If the Fed cuts interest rates during a recession, it would be ‘the worst of all possible worlds’
Shah’s bear case sees inflation falling below the Fed’s target to 1.8%, meaning the central bank has overdone its monetary tightening. He said while that scenario would raise recession risks, perhaps drawing investors into gold as a hedge, “for the sake of building scenarios, we cut the speculative positioning in gold futures down to 50,000.” This scenario would see gold fall to $1,730 per once by end 2023, and $1,725 an ounce by the first quarter of next year, bringing it back to November 2022 levels.
WisdomTree’s consensus scenario for gold sees the precious metal reaching $2,008 per ounce by the third quarter of 2023, $2,260 per ounce by the fourth quarter and $2,285 by the first quarter of 2024.
“The risk is clearly to the upside this year if a recession or financial dislocation materializes. Gold is a highly sought after asset in times of economic and financial stress, and so a recession could drive sentiment for the metal even higher,” said Shah, adding that consensus views are calling for falling inflation, a weaker dollar and falling bond yields. |
