A worker removes cooled 12 kg gold bars from their molds in the foundry at the Prioksky non-ferrous metals plant in Kasimov, Russia, on Thursday, December 9, 2021.
Andrey Rudakov | Bloomberg | beautiful pictures
Yellow prices have remained resilient in recent weeks in the face of widespread market volatility, decoupling somewhat of its typical price drivers – bond yields and dollar.
Even like 10-year Treasury yield and US Dollar Index up from a year low in late January, the precious metal held above $1,800 an ounce. As of Friday afternoon, spot gold is still trading around the $1,800/oz mark.
Despite the challenging macro backdrop of supply chain issues, rising inflation and lingering pandemic risks, Bank of America Strategists have noted that some of the inflows into gold have been very steady.
BofA analysts said in a research report in late January.
Also an important factor for the resilience of gold, according to UBSis a combination of heightened demand for portfolio hedging funds and a belief that the Federal Reserve is “behind the curve” in addressing inflation or excessive tightening, causing growth slowed down.
In a note on Friday, UBS Investment Bureau strategists emphasized that gold’s “tried and tested hedging characteristics” have once again manifested through diversified instruments. other conventional portfolios, including digital assets such as bitcoin.
“On the other hand, its overall stability in the face of a hawkish Fed pivot, the diversion of money market participants to robust prices with more US rate hikes in 2022 and the US real exchange rate proxies are higher such as US 10-year TIPS bond surprised some people,” the note said.
“Otherwise, however, the yellow metal’s resilience is generally in line with our estimates generated by our fair value model – it currently indicates a value around 1,750 USD/oz, which is a modest $50/oz discount from spot.”
UBS models show higher levels of market volatility so far this year, as signaled by Index VIXis a key support pillar for the gold price.
“For example, if we plug in the VIX’s longer-term average at 19.5 (all equal), this would signal a gold price of around $1,575/oz. So as we were argues, in 1Q22, demand on UBS Strategists Wayne Gordon, Giovanni Staunovo and Dominic Schnider said our forecast is $1,800/oz.
However, UBS maintains its expectations for gold to fall to $1,650-1,700/oz in the second half of 2022. The Swiss lender’s view predicts risk sentiment to improve as dual threats mount of the Covid-19 omicron variant and inflation eased.
“We recommend clients reduce their tactical allocations and hedge the downside of strategic holdings,” they added.
For gold to break further above the $1,800/oz mark, markets may need to lose a bit of faith in the plans, according to Russ Mold, chief investment officer of UK stockbroking platform AJ Bell. tightening central bank policy.
In a note on Tuesday, Mold hinted that this could happen if the economy slips into a recession “as the combination of global debt and higher interest rates proves overwhelming and planners will not be able to do so.” Policymakers must return to cutting borrowing costs and adding QE (quantitative easing) before inflation is contained.”
