Gold likely to remain under pressure as year draws to close - UBS

(Alliance News) - It will not be until around this time next year that gold prices begin to recover, analysts at UBS predicted on Monday, as the precious metal continues to be capped by a stronger dollar.

An ounce of gold traded at USD1,641.25 on Monday afternoon in London, down 21% from its year-to-date high of USD2,069.94 achieved in early March. Since the end of last year, gold is down some 10%.

Gold has steadily fallen since then, and save for recently topping the USD1,700 mark, the USD1,600 range is looking like its long-term fate.

A stronger dollar and rising bond yields, boosted by hawkish Federal Reserve expectations, have damped gold's value in recent months.

High bond yields tend to dim gold's attractiveness because the precious metal does not earn interest when held. In addition, gold has an inverse relationship with the dollar.

Analysts at UBS commented: "The gold price, in US dollar terms, has declined by 9% year-to-date. The yellow metal has added to portfolio diversification, outperforming risk assets like the S&P 500, which has fallen 20%. Furthermore, it has held its value or increased in non-USD terms. But as a hedge against heightened financial volatility, it has disappointed. And, empirically, gold should have fallen more."

According to the Swiss bank's modelling, gold should "empirically" be trading at around USD1,350 an ounce, so it is higher than where modelling suggests it would.

UBS added: "We have modelled gold historically against a change in key variables like the USD, US real interest rates, money supply, measures of market volatility, and momentum. In the past two decades, we have not seen a disconnect between these drivers and the yellow metal of this magnitude, albeit we acknowledge milder deviations have taken up to 3–6 months to correct."

"In our view, the main reason for the ongoing disconnect is a combination of an elevated geopolitical risk premium, sticky inflation, and limited alternatives such as high-grade bonds, which have been under pressure alongside risk assets. These have altered the yellow metal's sensitivity to its underlying variables, while global outflows from exchange trade funds have been temporarily offset by non-exchange physical demand for jewellery, bars, and coins."

Gold's fate is heavily-tied to Federal Reserve policy, UBS added. The Swiss bank sees downside risks to gold before the year-end, stabilisation in the first half of next year, before a slight revival by the end of 2023.

UBS is expecting the dollar to peak in the first quarter of 2023, with the Fed pausing its hiking cycle in the second quarter.

By Eric Cunha; [email protected]

Copyright 2022 Alliance News Limited. All Rights Reserved.