Gold prices stabilized around $2,650 an ounce this week as recent strength in the dollar, rising U.S. Treasury yields and improved risk appetite for U.S. stocks kept prices range-bound. Gold prices have fallen more than 4.7% since hitting an all-time high in late October.
However, gold prices are still nearly 29% higher than at the beginning of the year, outperforming the S&P 500 index. UBS pointed out in its latest report that it continues to be optimistic about the trend of gold in the next 12 months.
UBS pointed out that central banks should continue to increase their gold holdings to diversify their reserves. The latest data from the International Monetary Fund (IMF) showed that global central banks' net gold purchases in October reached the highest monthly level this year.
Based on the agency's past practice of underreporting this data, UBS now anticipates that central banks will purchase 982 tons of gold this year, an increase from its previous forecast of 900 tons, driven by de-dollarization.
Although this figure is lower than the central banks' purchases over the past two years, it represents a significant increase compared to the average level of about 500 tons purchased annually since 2011.
Furthermore, UBS also points out that the demand for gold as a key portfolio hedging tool is expected to rise. While the policy agenda of the incoming U.S. President Trump has been widely publicized, uncertainties remain in fiscal, trade, and geopolitical matters, especially considering his transactional approach. With the ongoing Russia-Ukraine conflict and the similarly complex situation in the Middle East, UBS believes that investor demand for safe-haven assets will further increase, driving inflows into gold exchange-traded funds.
Additionally, UBS believes that lower interest rates may support investors' reasons to continue holding gold. UBS expects the Federal Reserve to cut interest rates by 25 basis points on Thursday and to further ease monetary policy over the next year, which should lower the opportunity cost of holding this non-yielding metal. The mid-term weakening of the dollar, due to falling interest rates and concerns over the trajectory of U.S. government debt, should also support gold prices.
Therefore, UBS maintains a bullish outlook on gold for the next 12 months, expecting this precious metal to reach $2,900 per ounce by the end of next year. UBS suggests allocating about 5% of a dollar-denominated balanced portfolio to gold as a diversification investment. More broadly, UBS is also optimistic about long-term opportunities in copper and other transition metals, as global demand for these metals is increasing with rising investments in power generation, energy storage, and electric transportation.
Article reposted from: Jin Shi Data