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UBS looking at what happens after gold price breaks $1,800

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(Kitco News) - Gold prices have room to push above $1,800 an ounce in the near-term but investors should use some cautious when investing at these levels, according to one international bank.

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.

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