UBS says there's plenty of interest on the sidelines to buy this dip in gold price

Investing.com -- Sideline interest to buy the current dip in gold prices is strong, according to UBS strategist Joni Teves.

Gold had climbed over 20% since the beginning of the year but saw a decline of approximately $200 from its record high of around $3,168, which was reached just last week. The downturn came despite the U.S. tariff outcome being worse than anticipated.

However, Teves believes that the macroeconomic environment should support a higher gold price, citing escalating tariff tensions, persistent uncertainty, and growing fears of recession or stagflation, which could boost demand for the yellow metal as a safe haven asset.

Still, the strategist recognizes several reasons for the near-term downward market reaction. These include expected profit-taking post-announcement, the use of gold as a source of liquidity for meeting margin calls due to significant equity declines, and relief provided by the exemption of gold from the new tariffs.

UBS maintains a positive long-term outlook for gold, considering the current consolidation period as an opportunity for investors to engage at more favorable price points.

“Price action has been very choppy and generally thinner liquidity conditions have likely also amplified price action. There seems to be support emerging below the $3,000 mark. Physical markets may also perk up with these lower prices,” Teves said.

The strategist anticipates a seasonal increase in demand from India, along with a necessity for China to replenish reduced onshore gold inventories.

The Shanghai Gold Exchange premium over global spot has reached a nine-month high, and trading volumes are at their peak in a year, indicating a potential surge in Chinese investment demand.

“The potential for stronger physical demand in China (driven by investment) could exacerbate liquidity issues and further exaggerate price action,” Teves continued.

During a recent visit to China, UBS observed strong bullish sentiment towards gold among onshore investors, viewing it as a viable alternative asset amidst economic and currency uncertainties.

Some insurance companies, now permitted to allocate up to 1% of assets under management to gold, have commenced test trades, signaling promising demand prospects from this sector.

Although it may take time for substantial volumes to materialize, the brokerage expects these developments to foster positive sentiment and bolster gold demand in the long run.

This optimism is mirrored in the sharp increase in gold exchange-traded fund (ETF) holdings since the beginning of 2023, preceding the positive inflows into global ETFs.