Gold should remain a hedge within a portfolio context, and remains Most Preferred in our global strategy. (UBS)

Gold's spot price is about USD 35/oz shy of its all-time high of about USD 2,075/oz, which was achieved in June 2020. The rally has been driven by a combination of ongoing US banking system woes, uncertainties over US debt ceiling negotiations, and signals from Federal Reserve Chair Jerome Powell that this hiking cycle is as good as done. Outside of these, broad US dollar weakness, rising US recession risks, and solid central bank buying have also been supportive of the yellow metal. A key feature of the recent rally is the return of financial investors, with exchange-traded funds (ETFs) as well as futures and options markets all recording the strongest demand in over a year. We note that net inflows into ETFs in March were the first in almost 12 months.

Following such a strong rally, we see gold as more sensitive to any short-term reversals in interest rate expectations, wider reaching deposit guarantees, and US dollar strength. But, gold should remain a hedge within a portfolio context, and remains most preferred in our global strategy. Our analysis shows that for a balanced USD portfolio, adding around a mid-single-digit percentage allocation to gold would have improved risk-adjusted returns and lessened drawdowns over recent decades. We target a gold price of USD 2,200/oz by end-1Q24, with the underlying assumptions of a Fed rate cut by year-end and further broad USD weakness. Additionally, we like to sell downside price risks in gold.

Main contributors - Wayne Gordon, Giovanni Staunovo, Dominic Schnider

Content is a product of the Chief Investment Office (CIO).

Original report - Gold: As good as gold, 5 May 2023.