Gold’s Strong Rally Expected to Persist as Interest Rates Are Cut, According to UBS

Recent months have seen a notable rally in the gold market, spurred by various macroeconomic factors and ongoing geopolitical uncertainties.

According to analysts at UBS, this upward trend is anticipated to continue as critical market conditions evolve. The main drivers behind this sustained rally include the expectation of interest rate cuts, a weakening U.S. dollar, and persistent geopolitical risks. UBS views gold as a favored hedge against these uncertainties, indicating that its robust performance is far from finished.

A significant factor supporting the rise of gold is the anticipated interest rate cuts by central banks, particularly the U.S. Federal Reserve. As inflationary pressures ease and fears about economic growth increase, central banks are expected to adopt a more accommodative monetary policy. The analysts stated, “We maintain the view that a 150-200bps shift in short-term yields across developed economies over the next 12-18 months will lead to greater investment in the year ahead.” Lower interest rates generally make gold more appealing to investors by decreasing the opportunity cost of holding non-yielding assets.

With indications that the Federal Reserve may pivot towards rate cuts, gold’s safe-haven appeal is likely to strengthen, which could drive further inflows into the market. Furthermore, the decline of the U.S. dollar plays a crucial role in gold’s recent performance. Gold prices typically have an inverse correlation with the dollar. As the dollar weakens, gold becomes more affordable in other currencies, boosting global demand. UBS anticipates that the dollar will continue to weaken due to monetary easing and a softening economy, further enhancing gold’s attractiveness, especially in emerging markets where currencies are under pressure from high U.S. interest rates.

In addition to macroeconomic influences, UBS analysts highlight ongoing geopolitical uncertainties as key contributors to gold price fluctuations. Risks such as the conflict in Ukraine and tensions in the Middle East are anticipated to persist, particularly as the U.S. presidential elections approach. These uncertainties bolster gold’s reputation as a safe-haven asset, especially for investors seeking to protect themselves against market volatility. UBS believes these geopolitical factors will likely drive additional investment demand for gold.

This increasing interest is evident in the rising inflows into gold-backed exchange-traded funds (ETFs), which have been strengthening over recent months. UBS has observed that inflows into these funds are gaining momentum, reversing earlier outflows and narrowing the year-to-date decline. As investors adopt a more risk-averse stance due to the uncertain global economic landscape, demand for gold ETFs is expected to grow.

Central banks have also emerged as a critical source of demand for gold as they continue to diversify their reserves away from the U.S. dollar. This trend, often referred to as “de-dollarization,” is set to further enhance gold prices. UBS analysts suggest that purchases of gold by central banks are likely to remain strong as countries work to lessen their dependency on the U.S. dollar amid rising global tensions.

Looking ahead, UBS forecasts that gold prices could reach new highs in the upcoming year, potentially hitting $2,700 per ounce by mid-2025. This projection is driven by the interplay of expected interest rate cuts, a declining dollar, and sustained geopolitical risks. The firm sees gold as having the potential to outperform other asset classes, especially as traditional equities may struggle amid a cooling global economy.