Investing.com – Gold has shown stronger-than-expected resilience over the summer, with prices rebounding above $2,400 following weaker-than-expected U.S. inflation data, according to UBS.
The investment bank notes that the precious metal has been trading broadly within a $100 range, with $2,400 acting as a ceiling. Attempts to break below $2,300 have been short-lived and shallow. They believe that investor interest in “buying the dip” has been prevalent, supported by strong sentiment towards gold and dovish expectations from the Federal Reserve.
UBS analysts point out that the market remains just above the psychological level of $2,400, indicating that risks are skewed to the upside. UBS says: “Positions remain thin and there is room for investors to build exposure to gold.”
UBS also discusses the impact of commodity trading advisor activity (CTA) on the gold market. They explain that based on Nicolas Le Roux’s forecasting model, there are more scenarios in which commodity trading advisors will buy gold, but their volumes are expected to be small.
In contrast, there are said to be fewer sell-off scenarios, but UBS believes volumes will be higher. This probability-weighted analysis points to moderate negative CTA flows in July.
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The bank says the key levels to watch for gold are $2,450 on the upside, where CTA longs will max out and stop contributing to flows, and $2,250/$2,300 on the downside, where selling and profit-taking will accelerate.
UBS expects physical demand to pick up at these low levels, driven by investor interest and underlying support from seasonal demand in markets such as India and China as they restock for the peak season.
“The seasonality of physical demand should provide key support to the market as buyers in India and China restock for the peak season,” UBS concludes, highlighting the importance of this factor in maintaining stability despite potential sell-offs by commodity trading advisors.
Gold Prices Show Resilience: UBS Highlights Positive Outlook
Gold prices demonstrated impressive resilience during the summer, rebounding above $2,400 following weaker-than-expected U.S. inflation data, according to UBS. The investment bank attributes this strength to a confluence of factors, including investor confidence, a dovish stance from the Federal Reserve, and robust physical demand.
Stable Trading Range
UBS notes that gold has traded within a relatively tight $100 range, with $2,400 serving as a ceiling. While attempts to breach the $2,300 support level have been brief and shallow, the investment bank observes a strong “buy the dip” sentiment among investors. This positive sentiment is fueled by a combination of factors, including the perception of gold as a safe haven asset and expectations of a more accommodative Federal Reserve monetary policy.
Investor Interest and Dovish Fed
The prevailing investor interest in gold is a key driver of its resilience. UBS emphasizes the importance of this sentiment, pointing out that positions in gold remain relatively thin, allowing for further investor participation in the market.
“Positions remain thin and there is room for investors to build exposure to gold,” UBS states.
The expectation of a more dovish Fed policy, which suggests potential interest rate cuts or pauses, further bolsters investor confidence in gold’s attractiveness. In a less aggressive interest rate environment, the opportunity cost of holding non-yielding assets like gold is reduced, making it a more appealing investment.
Commodity Trading Advisor (CTA) Activity
UBS also delves into the impact of commodity trading advisor (CTA) activity on the gold market. According to Nicolas Le Roux’s forecasting model, the bank anticipates a higher probability of CTA buying gold in the near future, albeit with relatively modest volumes. Conversely, the bank predicts lower probabilities of CTAs selling gold, although volumes in such scenarios are expected to be larger.
Taking these probabilities into account, UBS projects moderate negative CTA flows in July. This suggests that while CTAs may contribute to some selling pressure, the overall impact on gold prices is likely to be limited.
Key Levels to Watch
UBS highlights specific price levels to watch closely in the gold market:
- $2,450 (Upside): Above this level, CTA long positions are expected to reach their maximum, limiting further buying pressure.
- $2,250/$2,300 (Downside): Should gold decline below this range, selling and profit-taking activities are likely to intensify.
Robust Physical Demand
While the potential for sell-offs from CTAs exists, UBS emphasizes the crucial role of physical gold demand in providing support to the market.
“The seasonality of physical demand should provide key support to the market as buyers in India and China restock for the peak season,” UBS concludes.
This seasonal demand, particularly from India and China, is expected to bolster gold prices at lower levels. As these markets prepare for their peak seasons, a surge in demand for physical gold is anticipated, offsetting any potential selling pressure from CTAs.
Summary
In summary, UBS maintains a positive outlook for gold prices, citing the following key factors:
- Strong investor interest and “buy the dip” sentiment
- Dovish expectations from the Federal Reserve
- Limited CTA selling pressure, with potential offsetting physical demand
These factors suggest that gold prices are likely to remain stable, with a potential for upside momentum. However, investors should remain vigilant regarding the key price levels highlighted by UBS.
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