Early this year, UBS said it was expecting lower gold prices in 2015, adding to it that the magnitude of its previous price expectations was too aggressive and needed to be revised. The bank lowered its forecast for 2015 from $1,200 to $1,190 /oz. However, it did not change its price expectations for the next couple of years.
Here we are, 9 months later, and the same bank becomes more ‘constructive’ on the yellow metal. In a note to clients, UBS points out that mainly three factors contribute to their ‘more positive’ outlook on gold.
- First, based on internal models of UBS, it would appear that US equilibrium real rates may settle lower versus previous cycles and versus current market expectations.
- Second, the bank thinks that the bulk of the adjustment to the current and expected macro environment has already taken place.
- Third, supply and demand fundamentals suggest that the gold market is nearing equilibrium.
As the chart suggests, speculative positions in the gold futures market have cooled off. Our interpretation of the chart is that this opens the door for a new uptrend to take place, in an environment that has plenty of room to heat up (again). Chart courtesy: UBS Bank.
From the note of UBS: “Right now, investors are simply not engaged. It’s been a tough market to trade and there are other assets that are acting as alternative avenues to express macro views. While the lack of interest has meant that there is less urgency to buy dips, it also means that there is less selling firepower. In addition, the risk/reward of going short has deteriorated,” UBS argues.