UBS looking at what happens after gold price breaks $1,800
In a report published last week, Joni Teves, precious metals strategist at UBS, said that the pullback in gold after pushing to its highest level since 2011 was a natural function of the market as investor sentiment has improved with better-than-expected economic data.
However, Teves added that economists at UBS don’t see any new scenario for sharp global economic recovery. This environment will remain supportive for gold, she added.
“US real rates have fallen deeper into negative territory -- US 5y and 10y TIPS have declined as much as 40+ bp since the highs in early June. With infection rates flaring up in the US, the implications on growth and corresponding policy response are reinforcing the argument to add gold to investor portfolios as a hedge and diversifier,” said Teves. “UBS's U.S. economists continue to expect that short-end yield curve control would be introduced in September as well as more clarity on asset purchases.”
However, with UBS seeing gold’s push above $1,800 an ounce as only a matter of time, Teves said that the real question is what happens next? The comments come as gold prices continue to flirt within striking distance of the long-term resistance level. August gold futures last traded at $1,793.50 an ounce, up 0.20% on the day.
“Does the market currently have the energy to extend the move even further towards the all-time highs; or will investors who have been long gold for some time take the opportunity to take some profits off the table? We think the risk-reward at this point probably favors the latter,” she said.
In the near term, Teves said that the risks for financial markets is how much bad news is already priced in.
“Real rates are already around the lowest levels in seven years – this raises the risk that any bounce from recent lows takes a bit of shine off gold, triggering some unwinding at least in the near-term,” she said.
Despite any short-term volatility, Teves said that she remains bullish on gold in the long-term. She added that investors will see any drop in the gold price as a buying opportunity.
“As long as real yields remain negative, it is deemed sufficient to warrant an allocation to gold in this environment,” she said.