There is still room for strategic gold allocations to rise and this should keep driving gold prices higher
FinTech BizNews Service
Mumbai, 21 November, 2024: Joni Teves, Precious Metals Strategist, UBS Investment Bank, provides useful insights on the gold outlook:
Gold to stay the course
We maintain our bullish gold outlook and expect to see new highs in 2025, though year-
on-year gains are likely to be slower than 2024. There is still room for strategic gold
allocations to rise and this should keep driving gold prices higher. The market is likely to
remain supported by official sector purchases continuing at historically elevated levels and
resilient physical demand. We have now brought our forecasts more in line with our
previously published US Red Sweep scenario. In our new baseline, we see gold prices
slightly lower than what we had previously assumed, to take into account headwinds from
a stronger dollar and market concerns about the potential for higher rates amid more US
fiscal stimulus. However, our current forecasts are somewhat higher than our Red Sweep
scenario, as we anticipate an acceleration in investor concerns as the growth-inflation mix
deteriorates against the backdrop of higher macro volatility and persistent geopolitical
risks.
A period of consolidation
In the near term, we think there is scope for gold prices to consolidate, albeit with an
upside bias to end the year modestly higher than current spot levels, with our end-2024
target at $2700. This would correspond with markets contemplating the macro outlook for
the year ahead as we slowly get more insights on what US policies are probably going to
look like. As we get closer to year-end, thinner volumes as investors become increasingly
protective of year-to-date performance as well as the potential for profit-taking could also
contribute to some choppy price action. Overall, we think a breather would be healthy for
the market in the long run. These lower price levels would bode well for physical buyers,
especially as we head into peak demand season in China ahead of the Lunar New Year
holidays at the end of January/early February. We expect investors as well as the official
sector to also take advantage of cheaper gold prices to build positions. There’s probably a
bit of room to be more patient and picky on entry levels for now.
Is gold too expensive?
Focusing purely on these traditional macro drivers, market participants may start to get
concerned that gold has become too expensive. Our simple gold model, which uses these
two factors and a measure of uncertainty (average of MOVE and VIX indices), shows that
gold spot prices have been trading at a record high premium over “fair value”. However,
we think other aspects that cannot be captured in quantitative models have been
legitimately contributing to gold’s positive performance. Diversification and safe haven
flows have been key to gold’s strong move higher, in our view.
Is the market too crowded?
Given the extent of gold’s rally and the rise in its popularity this year, another concern
among investors is whether or not the trade has become overly crowded. We don't think
so. We look at the value of gold held in ETFs and Comex as a ratio to funds’ total assets
and assess how this has evolved over time, paying particular attention to previous periods
when gold was similarly en vogue. Currently, levels are still lower than during the COVID
pandemic and well below the peak in 2012/2013 during gold’s previous multi-year bull-
run.
