Gold prices have remained resilient in recent weeks in the face of broad market volatility, decoupling somewhat from its typical price drivers — bond yields and the dollar.
Even as 10-year Treasury yields and the U.S. dollar index rose from intra-year lows toward the end of January, the precious metal held above $1,800 per troy ounce. As of Friday afternoon, spot gold was still trading around that $1,800/oz marker.
Despite the challenging macro backdrop of supply chain issues, surging inflation and lingering pandemic risks, Bank of America strategists have noted that some of the investment flows into gold have been very resilient.
“There are significant dislocations buried beneath headline inflation, interest rates and currency moves, raising the appeal of holding the yellow metal in a portfolio and supporting our $1,925/oz average gold price forecast for 2022,” BofA analysts said in a research note at the end of January.
Also central to gold’s resilience, according to UBS, is a combination of elevated demand for portfolio hedges and a belief either that the Federal Reserve “stays behind the curve” on tackling inflation or overtightens, causing growth to falter.
In a note Friday, UBS Chief Investment Office strategists highlighted that gold’s “tried-and-tested insurance characteristics” had again shone through versus other common portfolio diversifiers, including digital assets such as bitcoin.
“On the one hand, its overall stability in the face of a hawkish pivot by the Fed, money market participants’ shift to aggressively price numerous U.S. rate hikes in 2022 and higher U.S. real rate proxies like U.S. 10-year TIPS bonds has surprised some,” the note said.
“But, alternatively, the yellow metal’s resilience is broadly in line with our estimate generated by our fair-value model — currently it indicates a value of around USD 1,750/oz, which is a modest USD 50/oz discount to spot.”
UBS’ models indicate that higher market volatility so far this year, as signaled by the VIX index, is a key support pillar for gold prices.
“For example, if we plug in the longer-term average value of the VIX at 19.5 (all else equal) this would signal a gold price of around USD 1,575/oz. Hence, as we have argued, in 1Q22, elevated demand for portfolio hedges is supportive of our forecast of USD 1,800/oz,” said UBS strategists Wayne Gordon, Giovanni Staunovo and Dominic Schnider.
However, UBS maintains its expectation for gold to fall to the $1,650-1,700/oz range in the second half of 2022. The Swiss lender’s house view anticipates risk sentiment will improve as the dual threats of the omicron Covid-19 variant and inflation ease.
“We recommend clients to reduce tactical allocations and protect the downside of strategic holdings,” they added.
In order for gold to break further above the $1,800/oz mark, markets may need to lose a little faith in central bank policy tightening plans, according to Russ Mould, investment director at British stockbroking platform AJ Bell.
In a note Tuesday, Mould suggested that this could happen if the economy tips into recession “as the combination of global debts and higher interest rates proves too much and policy makers have to return to cutting borrowing costs and adding to QE (quantitative easing) well before inflation is reined in.”