UBS Sees Gold Pullbacks as Buying Opportunities Amid Near-Term Headwinds

Strategists at UBS are advising clients to view price declines in gold as opportunities to add exposure, arguing that the long-term case for the precious metal remains strong despite current market pressures. In a note to investors Tuesday, the bank outlined the near-term challenges and long-term supportive factors shaping the outlook for gold.

Near-Term Challenges

UBS strategists Dominic Schnider and Giovanni Staunovo identified several headwinds currently weighing on gold prices. These include hawkish signals from the Federal Reserve and market expectations for higher U.S. policy rates, which tend to dampen the appeal of non-yielding assets like gold.

The note stated that subdued investment demand, alongside geopolitical tensions in the Middle East and higher oil prices, are creating a challenging environment. Should U.S. economic activity surprise to the upside, the strategists said the near-term outlook for gold could remain difficult.

Demand Drivers in Focus

While central bank demand for gold has picked up, UBS believes these flows alone are "insufficient to drive prices higher." The bank expects central bank purchases to remain elevated for the full year, within a range of 750 to 1,000 metric tons.

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For a significant price rally, UBS contends that a resurgence in investment demand is necessary. The strategists estimate that demand of around 500 metric tons a quarter from this segment would be needed to meaningfully boost gold. Such a shift would likely require a change in the U.S. economic narrative that favors less restrictive monetary policy or the emergence of a stagflationary environment, the note explained.

Long-Term Outlook Remains Supportive

Looking beyond the current environment, UBS said the longer-term narrative for gold "remains clear and supportive." The strategists pointed to secular concerns over sovereign debt and an elevated U.S. dollar, to which they believe global investors are overallocated.

Given these factors, the bank concluded that gold "remains worth holding from a diversification perspective." This is particularly true for investors with a long-term, or "multi-generational," investment horizon, according to the note.