Investing.com — In August 2024, costs reached document highs, surpassing $2,500. Regardless of this, UBS analysts imagine the gold market shouldn’t be overvalued.
The analysts think about macroeconomic elements, investor positioning, and market dynamics to conclude that there’s potential for additional value will increase.
The latest rally in gold costs has been largely pushed by a positive macroeconomic atmosphere. UBS analysts level to a number of elements which have aligned to help the dear steel’s ascent.
“Dovish Fed expectations – with UBS economists now forecasting three 25bp price cuts this 12 months – the transfer decrease in actual charges, and a weaker US greenback have all been optimistic for the gold value,” the analysts stated.
Such financial easing is anticipated to bolster gold by reducing actual rates of interest and weakening the U.S. greenback, each of which historically help greater gold costs.
Along with financial coverage, geopolitical dangers and the upcoming U.S. elections have heightened uncertainty, additional enhancing gold’s attraction as a safe-haven asset. Furthermore, the U.S. greenback’s latest weak point, which frequently strikes inversely to gold, has supplied a further tailwind for the steel’s value rise.
Whereas the precise catalyst for the newest surge in gold costs shouldn’t be instantly clear, UBS emphasizes that the broader macroeconomic backdrop has been extremely conducive to this upward motion.
Regardless of the rise in gold costs, UBS asserts that market positioning doesn’t appear overextended. This angle is supported by a number of indicators that paint an image of a market that’s removed from overcrowded.
As an illustration, whereas web lengthy positions on Comex have risen considerably, they continue to be under historic highs. This implies that there’s nonetheless appreciable room for added allocations to gold with out the chance of making an excessively leveraged market.
Additional supporting this view are the sustained inflows into gold exchange-traded funds (ETFs). UBS analysts spotlight that these inflows replicate a continued robust curiosity in gold as an funding.
They count on that these traits will persist, particularly because the Federal Reserve begins to chop charges, thereby decreasing the price of holding gold positions.
These elements point out that buyers will not be excessively leveraged in gold, leaving the market well-positioned to soak up additional investments with out the chance of a major pullback.
UBS analysts have additionally noticed a reestablishment of historic macroeconomic relationships which have historically influenced gold costs. One key remark is the stabilization of gold’s unfavourable correlation with U.S. actual rates of interest.
This unfavourable beta is a optimistic signal for gold’s continued energy, because it means that the steel will proceed to profit from a decrease price atmosphere.
Moreover, gold’s twin position as each a protected haven and a correlated asset with threat markets has develop into more and more evident. Whereas gold has moved in tandem with threat belongings because of shifting Fed expectations, its safe-haven attraction has restricted its draw back during times of market stress.
This distinctive positioning within the present financial panorama additional helps UBS’s view that gold’s ascent is well-grounded.
On the bodily demand facet, UBS notes some weak point, significantly in main markets like China and India. “Mixed imports to China and India in July had been down 58% y/y, although the YTD volumes are nonetheless up by 5% given the robust begin to the 12 months,” the analysts stated.
Nevertheless, on a year-to-date foundation, volumes stay barely up, because of a powerful begin earlier within the 12 months. UBS expects that seasonal elements, significantly in India forward of main festivals like Dussehra and Diwali, will help a rebound in bodily demand regardless of the upper world costs.
The official sector has continued to buy gold, albeit at a slower tempo. International locations corresponding to India, Poland, and Uzbekistan have added to their reserves, whereas China has maintained its holdings for a number of months.
UBS believes that many rising market central banks will proceed to be web patrons of gold, as their gold holdings relative to complete reserves stay low in comparison with their friends.
