Investing.com -- Gold has seen a rally in recent months, driven by a combination of macroeconomic factors and geopolitical uncertainty.
As per analysts at UBS, this upward trend is expected to persist as key market conditions continue to evolve. The primary catalysts for this sustained rally include impending interest rate cuts, a weakening U.S. dollar, and persistent geopolitical risks.
UBS sees gold as a preferred hedge against these uncertainties, suggesting that its strong performance is far from over.
One of the key factors supporting gold’s rally is the expectation of future interest rate cuts by central banks, particularly the U.S. Federal Reserve.
As inflationary pressures ease and concerns over economic growth rise, central banks are expected to shift towards a more accommodative monetary policy.
“We retain the view that a 150-200bps shift in short-term yields across developed economies over the next 12-18 months will lead to greater investment in the year ahead,” the analysts said.
Lower interest rates tend to make gold more attractive to investors, as it reduces the opportunity cost of holding non-yielding assets like gold.
With the U.S. Federal Reserve signaling a possible pivot towards rate cuts, gold’s safe-haven appeal is likely to strengthen, driving further inflows into the market.
The decline of the U.S. dollar is another critical factor in gold’s recent performance. Historically, gold prices and the U.S. dollar have an inverse relationship.
As the dollar weakens, the price of gold in other currencies becomes more affordable, increasing global demand.
UBS expects the U.S. dollar to continue losing strength as a result of monetary easing and a softening U.S. economy. This weakening trend is expected to amplify gold’s allure, particularly in emerging markets, where currencies have been under pressure due to high U.S. interest rates.
In addition to macroeconomic factors, UBS analysts point to ongoing geopolitical uncertainties as a key driver of gold prices.
Geopolitical risks, such as the conflict in Ukraine and tensions in the Middle East, are expected to persist beyond the U.S. presidential elections.
These uncertainties enhance gold’s role as a safe-haven asset, particularly for investors seeking protection from market volatility.
UBS believes that these geopolitical factors will likely fuel further investment demand for gold.
This is reflected in the increasing inflows into gold-backed exchange-traded funds (ETFs), which have been rising steadily over the past few months.
Investment demand, particularly through gold ETFs, is set to be a significant driver of gold’s next rally. UBS notes that inflows into these funds have gained momentum, reversing earlier outflows and narrowing the year-to-date decline.
As investors turn more risk-averse in light of the uncertain global economic outlook, gold ETFs are expected to attract increased interest.
Another critical source of demand for gold has been central banks, which continue to diversify their reserves away from the U.S. dollar. This trend, often termed "de-dollarization," is expected to further boost gold prices.
UBS analysts suggest that central bank purchases of gold are likely to remain robust as countries seek to reduce their reliance on the U.S. dollar amid heightened global tensions.
UBS forecasts that gold’s price could reach new heights in the coming year, with a target price of $2,700 per ounce by mid-2025. This outlook is driven by the convergence of interest rate cuts, a weakening dollar, and sustained geopolitical risks.
The brokerage sees the potential for gold to outperform other asset classes, particularly as traditional equities face headwinds from a cooling global economy.