UBS Predicts Gold Prices Will Surge as Central Banks Ramp Up Purchases
Gold prices continue to overshadow the S&P 500, maintaining a 29% increase since the beginning of the year. Analysts forecast that gold will keep increasing its gains until 2025, as central banks are expected to continue accumulating gold while diversifying their reserves.
The latest data from the International Monetary Fund shows that global central banks recorded the highest net gold purchases of the year in October. The institution's historical tendency to underreport gold purchases has led to an upward revision of the official sector's expectation of buying 982 metric tons of gold this year, compared to the previous estimate of 900 metric tons.
Although this figure is below the purchase levels of the past two years, it is well above the annual average purchase of 500 metric tons since 2011. This strong purchasing momentum is anticipated to persist, as efforts to move away from dollarization continue, with central banks expected to buy at least another 900 metric tons of gold by 2025.
In the context of ongoing geopolitical uncertainties, such as the Russia-Ukraine conflict and tensions in the Middle East, an increase in demand for gold as a portfolio hedge is expected. This environment is likely to boost the flow of capital into gold exchange-traded funds as investors seek protective instruments.
Interest rate dynamics are also expected to enhance gold's appeal. The Federal Reserve is expected to cut rates by 25 basis points on Wednesday and to implement further easing next year. Low interest rates reduce the opportunity cost of holding non-yielding assets like gold.
Moreover, expectations of a weakened US dollar in the medium term due to low interest rates and concerns about the US government's debt trajectory should also support gold prices. A weak US dollar makes gold more affordable for investors using other currencies, thereby increasing demand.
Analysts maintaining a bullish outlook for gold over the next 12 months predict that the price of the precious metal will reach $2,900 per ounce by the end of next year. They recommend a 5% allocation in a USD-based balanced portfolio for diversification purposes.
Beyond gold, there is optimism regarding long-term opportunities for copper and other transition metals, anticipated to rise due to increased investments in power generation, storage, and electric transportation.