UBS: Gold Faces Short-Term Headwinds From Hawkish Fed, But Long-Term Outlook Remains Bullish

Gold faces near-term headwinds following a hawkish interest rate hike by the U.S. Federal Reserve, but its 12-month outlook remains constructive, supported by expanding fiscal deficits and an expected long-term weakening of the U.S. dollar, according to an analysis from UBS.

Hawkish Fed Creates Near-Term Drag

The Federal Reserve raised its target interest rate range by 25 basis points to 3.75%-4.00% on September 16, citing robust economic activity and persistent inflation. UBS strategist Giovanni Staunovo characterized the move as a "hawkish hike, ending the previous long pause," noting that projections show most policymakers anticipate at least one more rate increase this year.

This environment "remains a headwind for gold in the short term," Staunovo stated in a note. Higher U.S. real yields and a stronger dollar increase the opportunity cost of holding the non-yielding precious metal. The bank warned that gold exchange-traded funds (ETFs), which saw significant inflows in August, could now face outflow pressure as the market digests the Fed's firm stance.

Long-Term Bull Case Remains Intact

Despite the immediate pressure, UBS believes the long-term investment case for gold is unshaken. The bank highlights several key factors expected to support investor demand over the next 12 months:

• Persistently rising global debt levels and fiscal deficits.
• Expectations for a weaker U.S. dollar over the long run.
• The potential for the Federal Reserve to begin cutting rates next year.
• Elevated geopolitical uncertainty.

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Staunovo also argued that gold's resilience during recent periods of rising real yields suggests that traditional valuation models based on interest rates "only reflect part of the real picture."

Central Bank Demand and Price Forecasts

Strong demand from central banks continues to be a crucial pillar of support. In August, the People's Bank of China added approximately 20 metric tons to its reserves, its 22nd consecutive month of purchases. The national banks of Poland and Uzbekistan also increased their holdings by about 8 metric tons each, according to the source.

UBS projects that annual central bank gold purchases will remain robust, between 750 and 1,000 metric tons, providing "significant structural support." The bank noted that concerns over sanction risks and fiscal sustainability are reinforcing demand for gold as a "non-liability asset" and driving diversification away from the U.S. dollar.

Reflecting this positive outlook, UBS forecasts gold will reach $4,600 per ounce by December 2026, rising to $5,000 by March 2027 and $5,400 by September 2027. Staunovo wrote that any price pullback toward the $4,000 level would offer "a good opportunity for investors to add exposure."