UBS Identifies Three Structural Reasons in Favor of Gold
The comments below are an edited and abridged synopsis of an article by Frank Holmes
The best-performing precious metal last week was silver, up 2.02% largely on improved sentiment across the precious metals space, except for palladium, with the Fed minutes indicating a more moderate interest rate path ahead.
This week, UBS identified three structural reasons in favour of gold:
1. Long-term investors and the official sector are gradually building gold allocations. Central banks have been net buyers of gold for more than a decade now, amid a broader trend of diversifying dollar-denominated reserves. This year, the Russia—Ukraine war and corresponding sanctions reinforced this theme. Net official sector buying to 3Q22 is already higher than previous full-year highs.
2. The proportion of gold holdings relative to overall assets held by institutional investors remains light, and UBS thinks it is likely held more for diversification and portfolio protection rather than expectations of outright material price appreciation. This implies more resilient core positions and scope for allocations to grow.
3. Strong physical demand has been a key factor affecting the relationship between gold and real rates. Key physical gold markets India and China have continued to buy large volumes of gold this year, helped by cheaper prices as gold came under pressure from macro forces.
Holmes discuss strengths, weaknesses, opportunities and threats with respect to the precious metals markets.