Despite Recent Performance, Gold Still Expected To Climb

Despite gold’s weak performance in recent weeks, UBS still expects gold to gain 20 percent from its current price this year.

Since the big selloff in January, gold has generally traded in a range between $4,600 and $5,200 an ounce. It got a little bump when the U.S. began military operations in Iran, but has since fallen to the lower end of that range, and even just below it here today.

Gold followed a similar pattern when it corrected last fall, trading sideways for a few months before taking off again.

While many may be surprised that gold has surged due to the war, war hasn’t typically had a long-term impact on the gold price. After an initial safe-haven bump at the onset of a war, other factors, particularly monetary policy, have driven the gold price in wartime.

In a note, UBS analysts noted that gold has not been able to break through resistance at $5,200 even with the geopolitical uncertainty of the Iran war, calling it “a contrast to its 65 percent rise last year, when heightened geopolitical risks served as a tailwind amid fundamental drivers such as lower real interest rates and debt concerns.”

However, they noted that gold seems to be following a familiar wartime pattern, with many investors using gold as a source of liquidity to manage stock and commodity price swings, pointing out that its latest performance mirrors historical behavior during such events, where investors seek liquidity and consider alternatives like energy assets.

UBS backed up their generalization of the wartime pattern by pointing out that gold behaved similarly during other recent military conflicts. Gold jumped 15 percent after the start of the Russia-Ukraine conflict in 2022, but then declined by 15-18 percent as the Federal Reserve raised rates. The same happened during the Gulf War and Iraq War – prices rose 17 percent and 19 percent, respectively, at the start but decreased as tensions eased.

Looking beyond the short-term impacts of the war, UBS analysts remain bullish on gold, forecasting the price to rise to between $5,900 and $6,200 by the end of the year, as the key drivers underpinning its strong rally remain fully in place.

"Given the macroeconomic and political uncertainties beyond the risks arising from the U.S.-Iran conflict, we continue to hold a positive view on gold and believe that the yellow metal remains an effective portfolio diversifier," UBS said.

They point out that investment demand remains robust, even as the metal trades rangebound. ETFs globally added 26 tonnes of gold in February, pushing total holdings to a record of 4,171 tonnes.

Analysts at the Swiss bank add that the factors driving the bull market before the war remain in place and may be exacerbated by the ongoing conflict. They write that gold is more of a hedge against the wider impact of conflicts than against direct wartime threats. Gold primarily insulates monetary risks such as currency devaluation, rising deficits, and economic slowdowns – that can result from geopolitical conflicts.

The UBS note cautioned that the war could cause short-term pressure on gold prices for investors. However, UBS analysts don’t think central banks will be inclined to hike rates.

In fact, the Federal Reserve is caught in a Catch-22 where it should hold rates higher for longer to battle rising inflation (war or no war), but can’t because the economy is being warped by a giant Debt Black Hole. In fact, further monetary easing seems far more likely than interest rate hikes.

The longer the war drags on, the greater the risk of negative economic impacts. Ultimately, we’re talking about an inflationary scenario, as the Fed will likely have to take steps to monetize the wartime debt. That means more money creation.

In other news, two members of Congress have just introduced the SILVER Act, a measure aimed at modernizing the nation’s precious metals storage framework and reducing systemic risks within U.S. financial markets.

Under current futures market exchange practices, storage facilities are confined to the Greater New York City area, creating what lawmakers and industry participants describe as a concentration risk with negative implications for market stability, national security, liquidity, and investor access.

This geographical concentration has raised concerns about vulnerability to disruptive events, including natural disasters, cyber incidents, or security threats that could impact a single region and ripple across global markets.

Supporters of the legislation, like Money Metals and several other major players in the precious metals industry, argue that expanding eligibility to include secure depositories in other regions – particularly in the Western United States, where much of the nation’s mining and refining activity occurs – would improve market resiliency and access. Significant supply and price dislocations across the global precious metals markets over the past year have uncovered vulnerabilities.

In addition to risk concerns, proponents say the current system limits competition and drives higher costs for investors. Storage fees at existing exchange-approved facilities are often at the maximum allowable rates, while comparable facilities outside the New York region may offer services at significantly lower costs.

The SILVER Act would direct the Commodity Futures Trading Commission (CFTC) to promote transparency in the depository selection process and encourage broader geographic participation.

The bill does not mandate the approval of specific facilities but aims to ensure a more open and competitive framework.

Industry stakeholders note that expanding the network of approved depositories could increase storage capacity, improve liquidity, and make it easier for investors, producers, and institutions to participate in the market without incurring unnecessary transportation and storage costs.

New York is no longer the center of the financial universe, and Wall Street powers continuing to act so short-sightedly could prove to be reckless. We will certainly keep you apprised of the progress of the SILVER Act, just as we do with other key precious metals legislation across the nation.

Gold and silver continue their slide here today to close out what will be a third straight week of losses. Gold is off nearly $500 since last Friday’s close now or 9.2% to come in at $4,567 an ounce. Silver is down more than $11 on the week and has fallen again below $70, at least as of this Friday late morning recording. The white metal checks in at $69.96 an ounce, suffering a 13.9% weekly decline.

Turning to the PGMs, platinum is off a more modest 2.7% to come in at $1,970. And finally, palladium is down about $125 or 8.1% to trade at $1,443.

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