Gold could go to $2,200; Don’t be fooled by selloff on U.S. debt deal - UBS

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Investing.com - Gold investors running for the door on the likelihood of a U.S. debt ceiling deal being struck by the weekend should stop and consider the longer-term benefits of owning the yellow metal, analysts at UBS said on Thursday.

“We continue to see gold hitting $2,100/oz by year-end and $2,200/ oz by March 2024, and retain our most-preferred rating on gold alongside our positive stance on broad commodities,” the analysts said.

“We think gold should remain a hedge within a portfolio context, with our analysis showing that around a mid-single-digit percentage allocation to gold in a balanced USD-based portfolio would have improved risk-adjusted returns and lessened drawdowns over recent decades.”

There are three reasons to buy gold now, UBS’ research team said.

“The gold price has come off from its recent high as U.S. President Joe Biden expressed confidence in avoiding a government default amid progress in debt ceiling negotiations, better U.S, data, and hawkish comments by some Fed Members,” said the team, which noted the market was at least 4% lower than the record high of around $2,080 reached earlier this month.

But the UBS analysts also pointed out that the yellow metal remains around 8% above where it began the year.

“We think it’s likely to break its all-time high later this year with multiple mid- to longer-term drivers,” they added.

Among the factors girding for higher gold prices was central bank demand, UBS’ research team said.

“Last year marked the 13th consecutive year of net gold purchases by global central banks and the highest level of annual demand on record dating back to 1950,” the analysts said. “At 1,078 metric tons in 2022, central banks’ buying of gold more than doubled from 450 metric tons in 2021.”

The note said that based on first quarter data from the World Gold Council, central banks are on track to buy around 700 metric tons of gold this year, much higher than the average since 2010 of below 500 metric tons.

“We think this trend of central bank buying is likely to continue amid heightened geopolitical risks and elevated inflation,” the analysts said. “In fact, the US decision to freeze Russian foreign exchange reserves in the aftermath of the war in Ukraine may have led to a long-term impact on the behavior of central banks.”

Broad dollar weakness also supports gold, the UBS research team said.

“The direction of a weakening dollar is clear, with the U.S. Fed having signaled a pause in its current tightening cycle after 500 basis points of rate hikes over the past 14 months. Other major central banks, meanwhile, remain on track to do more to fight inflation. With European Central Bank President Christine Lagarde saying there was “more ground to cover,” we believe the reduction in US yield carry will continue to
weigh on the greenback.”

Gold has historically performed well when the dollar softens due to the strong negative correlation between the two, the UBS analysts noted.

“We see another round of dollar weakness over the next 6–12 months. Rising US recession risks may prompt safe-haven flows. While U.S. retail sales in April rebounded from two months of declines and new home starts rose last month, falling building permits signal a slower pace of construction ahead.”

“Overall, recent data coming out of the U.S. showed the country’s growth is slowing, with weaker-than-expected 1Q GDP, six consecutive months of contracting manufacturing activity, and the weakest consumer sentiment since November. Tighter credit conditions, evidenced by the Fed’s latest Senior Loan Officer Opinion Survey, are also likely to weigh on growth and corporate profits. Based on data since 1980, gold’s relative performance versus the S&P 500 improved significantly during U.S. recessions.”