Downgrading gold to neutral within our global strategy – UBS

On Wednesday, gold was trading at USD 1,902/oz, down over 7% since its 2023 peak in May. Ahead of Fed Chair Jerome Powell’s Jackson Hole policy speech on Friday, CME fed fund futures suggest money markets are pricing roughly even chances of another rate hike by November.

The changing backdrop has pushed both nominal and real US yields higher, adding to dollar strength and undermining gold’s near-term appeal. But, we don’t think short-term headwinds erode the portfolio case for gold:

Higher gold prices are delayed, not canceled. We think the next potential leg up in prices will in part be driven by an anticipated revival in demand for exchange-traded funds (ETFs), from which there were outflows in the first half of 2023. A rise in ETF gold buying typically occurs just ahead of a US easing cycle—the timing of which we anticipate will become clearer by year-end as we get more data and the Fed decisions are behind us. Gold has also historically performed well when the USD softens, and we see another round of dollar weakness over the next 6–12 months.

Gold’s safe-haven benefits remain intact. Gold still looks attractive to us as a longer-term portfolio hedge—especially in the context of an uncertain global growth outlook, volatile equity market dynamics, and unsettled geopolitics. Our analysis shows that 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.

Central bank demand won’t disappear, either. Geopolitics are also a concern for central banks. The World Gold Council (WGC) reported central banks purchased a net total of 55 metric tons of gold in June, resuming purchases after three months of net selling. We maintain a full-year forecast of 700 metric tons, which would be the second-highest annual purchases since the mid-1960s—just behind the 1,110 metric tons bought in 2022.

So, with US recession risks now fading and dollar strength back, we have cut our year-end gold forecast slightly to USD 1,950/oz and downgraded the precious metal to neutral within our global strategy. We still recommend investors build gold into their portfolios and to broadly diversify USD holdings. Investors with portfolios based in the British pound, euro, or the Swiss franc can consider tactically strengthening their home bias.

Main contributors – Solita Marcelli, Mark Haefele, Jon Gordon, Wayne Gordon, Christopher Swann, Vincent Heaney

Original report – Gold’s portfolio role as the backdrop shifts, 23 August 2023.