Bullish sentiment on gold is strong! UBS Group AG: Next target is $2900, any pullback will be "short-lived"

Gold prices have repeatedly hit new highs. Despite the recent soft physical demand, the bullish sentiment remains strong, with Wall Street calling for $3000.

UBS summarized in a report on the 21st, based on observations at the London Bullion Market Association (LBMA) precious metals conference, that the current bullish atmosphere is strong, with bears remaining silent. There is still room for further increase in gold prices. Conference representatives predict that gold prices will rise to over $2900 in the next 12 months, and any pullback will be "short-lived".

UBS further pointed out that the conference specifically mentioned global geopolitical risks and the uncertainty of the US election. UBS predicts that under the "blue wave" (Democratic victory), gold prices are generally higher than under the "red wave", as the expectation is for a weaker dollar environment and increased likelihood of further rate cuts by the Federal Reserve.

A recession in the US is the most favorable scenario for gold, while premature easing by global central banks leading to an economic "soft landing" is the most bearish scenario for gold.

Furthermore, UBS also noted that there is increasing market interest in gold mining stocks. If mining companies can continue to provide guidance and generate cash flow, it may improve investor sentiment. The lack of capital expenditure and projects in a silent period within the industry may lead to increased merger and acquisition activities.

Strong bullish sentiment, bears remain silent, is gold still undervalued?

Regarding the trend of gold prices, UBS stated that despite concerns about current soft physical demand, the strong bullish outlook in the medium to long term remains unchanged.

Representatives are very bullish on gold, expecting prices to rise to over $2900 in the next 12 months. Discussions confirmed this bullish sentiment, despite the market having already risen significantly and current soft physical demand. It is acknowledged that there may be some room for pullbacks, although any pullback is expected to be shallow.

Recent soft physical demand for gold, with gold imports in China and India down 22% and 20% respectively, but demand for 1-ounce gold bars in the US has increased. Despite an overall 25% decline in the US market demand in the first half of the year, purchases of gold bars and coins have dropped by 45%, but remain at a high level over the past decade.

Furthermore, UBS stated that it is currently difficult to find reasons to be bearish on gold:

Market participants seem increasingly unable to find reasons to push gold into a bear market. The current lack of gold shorts may reflect the short-term stability of the Federal Reserve's direction and the resolution of geopolitical risks. In addition, there is growing concern about the US fiscal situation, with expectations of further deterioration in the deficit.

Overall, UBS stated that gold is still under-allocated, with room for investors to increase their gold allocations, which will be a key driver for price increases in the next 12 months:

Despite the significant rise in gold prices, the gold market is not overcrowded. In the current loose monetary policy environment, not only the Federal Reserve but other central banks are also implementing loose policies, and investors have a great interest in holding gold for portfolio diversification. Geopolitical risks and uncertainty surrounding the US election have also increased the likelihood of investors increasing their holdings

Despite an increase in short-term speculative positions, indicators suggest that the broader market positions are still relatively low, with the average gold allocation estimated to be between 1-3%. This indicates that there is still significant room for growth.

Uncertainty Supports Gold

UBS stated that the focus of the meeting was on global geopolitical risks and the uncertainty of the U.S. election, which are known unknowns that currently support gold as a safe-haven asset.

For gold, in the two scenarios related to the U.S. election, we expect the "blue wave" to lead to generally higher gold prices than the "red wave". This is because of the expected weaker dollar environment and the possibility of further rate cuts by the Federal Reserve.

In the "red wave" scenario, the reaction function of gold will have more uncertainty, and the market's view on the impact of the outcome on inflation and the Fed's response is crucial for gold trading.

Historically, on average, regardless of the outcome, the price of gold in the 12 months following a U.S. presidential election does not differ significantly.

UBS also pointed out the most bullish and bearish scenarios for gold prices:

A recession in the U.S. would be the most favorable scenario for gold. With a significant rate cut by the Federal Reserve, real interest rates would sharply decline, leading to strong investor inflows. A substantial weakening of the U.S. dollar should also provide additional momentum for gold.

Conversely, global central banks prematurely easing and avoiding an economic "landing" would be the most bearish scenario for gold, as the Fed's rate cuts may be relatively less than what the market has priced in. Given the high cost of holding gold, investors would find it difficult to maintain gold positions. The return of "U.S. exceptionalism" and a stronger dollar should also put pressure on gold prices