UBS Group AG: The market is gradually adapting to the $2500 gold price, with room for further allocation increases ahead

After the price of gold reached $2500, it showed signs of fatigue. However, UBS believes that with an imminent interest rate cut by the Federal Reserve and strong central bank demand, there is still room for gold prices to rise in the future.

On Thursday local time, Joni Teves, global precious metals strategist at UBS, released a report stating that as gold prices continue to hit new historical highs, the market is gradually adapting to prices above $2500 per ounce. The short-term trend of gold prices will mainly depend on the policy signals released by Powell at the Jackson Hole meeting later this week, with the possibility of a brief pullback.

Teves mentioned in the report that although the recent rise in gold prices did not have a clear catalyst, the macroeconomic environment in recent times has been generally favorable for gold. Expectations of loose monetary policy by the Federal Reserve, declining real interest rates, and a weakening US dollar are all important factors driving the rise in gold prices. In addition, the ongoing geopolitical risks and the upcoming US election and its potential impact on fiscal policy have also increased investors' interest in gold.

Wall Street CN previously mentioned that over the past year, despite a gold-buying frenzy among Asian investors, Western investors have been on the sidelines. Now, with the Federal Reserve's interest rate cut approaching, Western investors have also joined the gold-buying frenzy.

Data from the World Gold Council shows that since May, the holdings of physical gold ETFs have increased by 90.4 tons, equivalent to $7.3 billion, with seven out of the past eight weeks seeing positive net inflows.

The UBS report also points out that although net long positions on the New York Commodity Exchange (Comex) have increased recently, the level is still below historical highs, indicating that the overall market pricing is still relatively light, and investors still have ample room to increase their gold allocations.

UBS expects that as the Federal Reserve begins to cut interest rates, the cost of holding gold will decrease, leading to further inflows into gold ETFs.

In terms of physical demand, UBS observes that with the continuous rise in gold prices, physical gold demand is indeed facing some pressure. In July, the total gold imports of China and India decreased by 58% year-on-year, although due to strong performance earlier in the year, total imports since the beginning of the year have still increased by 5%.

However, with the arrival of seasonal demand, UBS expects physical demand in China and India to rebound. In India, the wedding and festival season is approaching, which is usually a key period for gold consumption, and lower import taxes and strong economic prospects indicate growth in gold demand.

Furthermore, global central banks—the key drivers of the previous rounds of gold price increases—are still buying gold. India's gold reserves increased by 5 tons in July, while China maintained its gold reserves unchanged for the third consecutive month

UBS Group AG pointed out that although the pace of central bank gold purchases has slowed down in recent months, they will still be net buyers of gold. The gold holdings of many emerging market central banks are still relatively low compared to total reserve assets, indicating that these central banks still have room to increase their gold holdings.