Gold has fallen 5.5% over two weeks, but UBS argues this is not a breakdown of the bull market thesis, rather a pullback triggered by interest rates.
Pressured by mounting Fed rate hike expectations, higher real US Treasury yields and a stronger US dollar, gold has recently retreated, erASIng part of its roughly 15% gain registered in the first three weeks of August. However, UBS judges the current decline mainly reflects shifting monetary policy expectations instead of a deterioration in gold’s long-term allocation logic.
More importantly, the core buyers supporting gold’s long-term rally have not stepped away. The People’s Bank of China added about 650,000 ounces of gold in August, marking the 22nd consecutive month of reserve increases. UBS estimates global central banks may still purchase 750 to 1,000 tons of gold over the next year. In the bank’s view, as long as official gold purchases, fiscal risks and reserve diveRSIfication trends peRSIst, gold’s medium and long-term support remains intact.
Therefore, UBS draws a clear conclusion: watch out for the Fed and strong dollar in the short run, yet pullbacks over the long term represent buying opportunities rather than exit signals.
Over the past two weeks, gold has declined by around 5.5%, giving back part of the roughly 15% rally from the first three weeks of August. Meanwhile, US Treasury yields kept climbing, Fed Governor Kevin Warsh delivered hawkish remarks, and stronger-than-expected employment data pushed markets to reprice further Fed monetary tightening.
UBS has accordingly revised up its outlook for the Fed policy path and now expects a total of 50 bASIs points of rate hikes this year. The bank believes higher real yields and a stronger US dollar will continue weighing on gold in the near term.
Nevertheless, UBS stresses this short-term headwind from interest rates does not erode gold’s medium-to-long term allocation value.
Short-Term Focus on Rates, Long-Term Focus on Structural Demand
UBS states the core contradiction for gold prices now lies in the tug-of-war between short-term monetary policy and long-term structural demand.
If the Fed keeps sending hawkish signals, real yields rise further and the US dollar stays strong, gold may remain under pressure in the short term. But over the medium and long term, gold’s role as a portfolio diveRSIfier, inflation hedge and buffer against fiscal and geopolitical risks remains unchanged.
UBS draws an analogy with its view on global equities. It notes even if the near-term rate environment weighs on stocks, this does not alter its positive outlook for global equities over the medium term, supported by AI spending, economic resilience and corporate earnings growth.
Likewise, gold being suppressed by interest rates at present does not mean its long-term allocation logic has failed.
The PBoC Raises Gold Reserves for 22 Straight Months
Central bank gold buying remains one of UBS’s core arguments for being bullish on gold over the long run.
Data shows the PBoC added approximately 650,000 ounces of gold in August, up from 640,000 ounces in July and representing the largest monthly increase since October 2023. This means the PBoC has lifted its gold reserves for 22 consecutive months.
UBS argues this sustained official demand provides important structural support for gold.
The bank also cites a survey by the World Gold Council, showing nearly 90% of central banks expect global official gold reserves to keep rising over the next 12 months, while roughly 45% anticipate further increases in their own gold holdings.
UBS projects global central bank gold purchases will stay within the range of 750 to 1,000 tons in the coming year. This volume of official demand will continue to act as solid downside support for gold prices.
Fiscal Risks Are the Second Major Long-Term Driver
Apart from central bank buying, UBS identifies fiscal sustainability concerns as another major factor supporting gold’s long-term prospects.
Currently, relatively high US interest rates and robust economic growth are underpinning the US dollar. However, over a longer horizon, widening fiscal deficits and elevated government debt may cap further US dollar appreciation.
UBS believes gold will keep benefiting from the trend of reserve diveRSIfication as investors and official entities gradually reduce concentrated exposure to dollar assets.
A weaker US dollar over the medium and long term will further boost gold’s appeal to global investors.
Gold Remains a Key Hedge Against Inflation and Risks
UBS also points out gold’s two traditional functions — hedging inflation and geopolitical risks — still carry great significance.
Historical data shows gold tends to deliver strong asset protection during crises.
Figures from the Global Investment Returns Yearbook demonstrate that real returns on gold and commodities have been positively correlated with inflation since 1900. That is why institutional investors still regard gold as an important asset allocation tool even when the near-term interest rate backdrop is unfavourable.