UBS: Gold still has room to rise, but silver is expected to perform better

Recently, the international gold price has regained momentum and once again broken through the $2400 per ounce mark. With comprehensive cooling of inflation in the United States and rising expectations of interest rate cuts, UBS remains bullish on gold.

UBS's latest research report on July 12th pointed out that investors' interest in "buying on dips" for gold remains strong, indicating that gold still has room for upside and recommends increasing allocation to gold. However, compared to gold, silver may offer a higher cost-performance ratio. UBS stated that for investors who missed out on the gold market, silver provides a trading opportunity for chasing gains, believing that silver has greater potential to outperform the broader market.

Interest Rate Cuts and Gold's Upside Potential

On July 11th, the US June CPI turned negative for the first time in four years, with core year-on-year growth hitting a new three-year low, while market pricing increased bets on the Fed starting rate cuts in September. Following the data release on that day, spot gold broke through the $2400 per ounce mark. With US inflation cooling down, gold has been climbing in recent days, almost erasing the decline since the end of May this summer. According to UBS, overall, during the summer months, the gold price has been more resilient than expected, with fluctuations of around $100, although $2400 is seen as a "temporary ceiling" for gold, the number of times gold has fallen below $2300 is very few.

UBS believes that gold positions are still relatively low, and investors still have room to build positions in gold. Gold ETFs have started to see inflows, and as the Fed's rate cuts approach, the gold market will undergo a significant turning point. UBS recommends adding gold to the investment portfolio or increasing allocation to gold. The bank expects the Fed to see more rate cuts, and investors' expectations for lower arbitrage costs for holding gold are becoming clearer.

Regarding seasonal factors, UBS expects physical gold demand to rebound from the third quarter of 2024 to the first quarter of 2025. During the peak season, spot demand will provide support for the gold market and lay a good foundation for the next phase of gold price increases.

Furthermore, despite the fact that the People's Bank of China has not increased its gold reserves in the past two months, UBS still expects that official departments of various countries will continue to make gold purchases.

UBS also pays attention to the movements of CTA funds. CTA funds, which target assets such as gold and crude oil futures, have been bullish on gold since November last year, and have been long on gold throughout this year. UBS stated that CTA funds slightly reduced their gold positions in February this year, increased them again in March, and reached their maximum long positions in April and May. By July, CTA fund investment funds in gold have turned into mild outflows In this regard, UBS reminds that during the downward phase of the gold price, attention should be paid to the key levels of $2250 or $2300, which often trigger profit-taking selling by CTA funds. However, in UBS's view, the profit-taking actions of CTA funds are not due to a reversal in the gold price trend, but rather because the trading time within the consolidation range has been too long, leading to a weakening of investor confidence. UBS believes that at the price levels of $2250 or $2300, investors will regain interest in "buying on dips" for gold, and with the seasonal increase in physical gold demand, the gold price still has good support.

It is worth noting that this is UBS once again firmly bullish on gold. In May of this year, UBS commodity analysts predicted in their research report that the international gold price would rise to $2500 in September and reach $2600 by the end of the year. At the same time, UBS expects the gold price to rise to $2700 by June 2025.

Silver Offers Better Value

While gold still has room to rise, UBS believes that silver will perform even better.

In recent weeks, the price of silver has consistently lagged behind gold. UBS observes that the key resistance level for silver is at $33 per ounce. When this level is reached, the long positions of CTA funds reach their maximum, and fund inflows stop. Subsequently, profit-taking selling by CTA funds will cause silver to fall back to $27.5 or $28.

However, UBS states that investors have started to show interest in silver because it is a "high beta coefficient gold trade" and is attracted by the convincing supply and demand fundamentals of silver. Given that the trend of silver is positively correlated with gold and has higher volatility, the strong belief in bullish gold is prompting investors to turn to silver. For investors who may have missed out on the gold rally, silver also provides an opportunity for chasing the trend.

UBS believes that silver has more room to outperform the broader market. The bank expects the relative performance of silver to gold to further improve in the coming quarters. Rising gold prices, loose Fed policies, and favorable supply and demand conditions will make silver outperform gold. In addition, silver is under supply and demand pressure, with a focus on strong industrial demand for silver, especially in the solar energy industry