Central bank demand underpins UBS's long-term bullish stance on gold

UBS is drawing a clear line between short-term price swings in gold and the metal's longer-term role in a portfolio. The recent retreat, in the bank's view, stems from a repricing of Federal Reserve policy expectations, not from any weakening of the structural case. If that assessment is correct, sell-offs driven by rising yields or a firmer dollar would be seen by strategic allocators as entry points rather than reasons to cut exposure. UBS has revised its Fed call to a 50 basis point hike this year; should that come through, real yields and the dollar would probably remain near-term headwinds, and a tactical recovery in bullion may have to be driven by a shift in the rate picture, not just by geopolitical news.

---

Earlier:

• Gold's Iran-war paradox: why bullion keeps stumbling as the conflict widens

---

The message UBS is sending clients is straightforward: the sell-off in gold belongs to the rates story, and it does not justify abandoning the metal as a long-term diversifier.

Summary:

• Bullion is down 5.5% over the last fortnight, surrendering a slice of the 15% advance it posted in the first three weeks of August, with US Treasury yields moving higher at the same time as Fed Chair Kevin Warsh struck a hawkish tone and payroll data came in above forecasts.
• The bank has updated its own Fed call to a 50 basis point hike this year and expects the knock-on effect of higher real yields and a firmer dollar to weigh on gold in the short term.
• UBS contends that the Fed's near-term path does not weaken gold's medium-term strategic argument, comparing the situation to its unchanged positive stance on equities even with the same rate environment.
• China's central bank added 650,000 ounces of bullion to its reserves in August, compared with 640,000 ounces in July, the biggest monthly purchase since October 2023 and a continuation of a 22-month run of buying.
• A World Gold Council survey that UBS points to showed close to 90% of central banks anticipating an increase in total official gold reserves over the coming 12 months, while 45% expect their own reserves to grow.
• UBS still projects central bank buying of 750 to 1,000 metric tons per year and believes investors with lighter gold positions could take advantage of the soft patch to add strategic exposure.

The bank tells clients that the recent drop in gold is a product of shifting Fed expectations, not a break in the metal's longer-term investment logic. Dips caused by rates, UBS argues, are opportunities to build positions, not warnings to leave the trade.

Over the past two weeks, gold has dropped 5.5%, retracing a portion of the 15% run-up from the first three weeks of August. US Treasury yields climbed during that stretch alongside hawkish remarks from Fed Chair Kevin Warsh and a string of payroll reports that beat expectations. UBS has adjusted its own outlook accordingly, pricing in a 50 basis point rate increase from the Fed this year; the bank says the resulting upward pressure on real yields and the US dollar will probably keep acting as a short-term drag on the metal.

UBS makes an explicit analogy with equities. The same way near-term Fed decisions do not shake its medium-term optimism on global stocks — a view underpinned by spending on artificial intelligence, solid economic activity and widespread earnings growth — the pressure from rates in the short term does not, in UBS's view, lessen gold's strategic place in a diversified portfolio.

Central bank purchases form the backbone of UBS's longer-term case. The bank highlights that China's central bank acquired 650,000 ounces of gold in August, up from 640,000 ounces in July, marking the largest monthly addition since October 2023 and extending Beijing's run of buying to 22 months in a row. UBS further cites a World Gold Council survey indicating that almost 90% of central banks expect official gold reserves worldwide to expand in the next year and 45% expect their own reserves to climb. It maintains a forecast for annual central bank buying of 750 to 1,000 metric tons, calling that a structural underpinning for gold.

Fiscal factors make up the second leg of UBS's long-term argument. While higher US rates and sturdy growth are supporting the dollar for now, the bank says persistent worries about fiscal sustainability and high government debt may limit how much further the currency can appreciate over time. That would reinforce a gradual move away from heavy dollar holdings, which UBS expects to benefit gold as an alternative store of value. A softer dollar over the medium to long term would add to demand for bullion, according to the bank.

Gold's traditional roles also appear in the UBS note, with the metal described as an inflation hedge and a cushion against geopolitical uncertainty, reasons institutions keep listing it as a portfolio diversifier. The bank points to gold's record in past crises and to Global Investment Returns Yearbook data showing that real returns on gold and commodities have moved in step with inflation since 1900.

Overall, UBS regards gold not as a wager on what the Fed does at its next meeting but as a structural hedge and diversifier. Investors who are still underweight the metal, the bank suggests, could use the current softness to raise their strategic exposure as part of a wider portfolio.