UBS: Buy the dips in Gold

Buy the dips in gold!

That’s the recommendation of UBS analysts after the recent correction in the gold price.

After peaking near $4,400 an ounce, gold was hammered lower, falling to below $4,000. Since then, the price seems to have consolidated around $4,000, but volatility continues to dominate the market with significant daily price swings.

It’s important to put the recent sell-off in perspective. Even with the recent dip, gold is still up over 50 percent on the year.

UBS analysts said the pullback is temporary and they still like gold in the $4,200 ounce range.

In a research note, UBS analysts said, “The much-anticipated correction has taken a breather,” noting that they don’t see any fundamental reason for the downturn.

“Outside technical factors, we see no fundamental reason for the sell-off.”

UBS Global Wealth Management strategist Sagar Khandelwal said he sees an upside of $4,700 in the first quarter of next year due to falling real interest rates, a weaker dollar, rising government debt, and continued geopolitical uncertainty.

“While the scale and speed of the gold rally may mean volatility could pick up from here, we maintain the view that gold is a valuable component of a resilient investment strategy.”

Khandelwal said with the Fed apparently committed to looser monetary policy, real interest rates could flip negative.

“We believe this will further undermine the appeal of the U.S. dollar and therefore boost investment flows into bullion.” 

The UBS note emphasized that underlying demand remains strong, citing the World Gold Council’s third-quarter demand data. They say it confirmed “very strong and accelerated buying” by both central banks and individual investors.

Gold demand grew by 3 percent year-on-year in Q3, hitting 1,313 tonnes, the highest quarterly level in history.

Central banks alone have bought 634 tonnes of gold so far this year. UBS noted that while this is slower than last year’s pace, it is still on track to reach 900 to 950 tons. 

Meanwhile, ETFs reported inflows of 222 tonnes of gold, while bar and coin demand surged to over 300 tonnes in Q3.

And despite higher prices, “Jewelry demand was also not as weak as feared.”

Khandelwal said he thinks plenty of untapped investment demand remains.

“Coupled with still-elevated central bank purchases, global gold demand this year should, in our view, reach around 4,850 metric tons, the highest level since 2011. If private investors begin diversifying U.S. Treasury holdings into gold, which has been a trend among central banks, spot prices could be pushed even higher.”

UBS analysts say that even with the surge in demand, investors “remain underallocated” to the yellow metal.

“We like to buy the dip in gold.”

UBS analysts aren’t the only mainstream voices recommending more gold. In a seismic shift in investment strategy, Morgan Stanley CIO Michael Wilson recently recommended ditching the traditional 60/40 portfolio for a 60/20/20 ratio that allocates 20 percent to gold.

Charts and Parts Substack argued that this could lead the way to a broader institutional shift.

“Nobody likes to go first -- not in markets, not in start-ups, not in fashion. But once the ice breaks, the floodgates can open. … This isn’t the avalanche. It’s a snowflake. But snowflakes can start a slide. Morgan Stanley broke the 60/40. Capital tilts toward gold.”