1. Newsroom
  2. Gold : risks for small downside correction
Menu
Insight 23.09.2019

Gold : risks for small downside correction

Gold : risks for small downside correction

Gold prices have stabilised around USD 1,500 per ounce, following the US Federal Reserve's decision to cut interest rates by 0.25%, bringing its key rate to 2.00%.


Gold displays a negative correlation to US real interest rates, meaning that lower Fed interest rates are supportive for the gold price. The Fed's latest decision was not unanimous, which means that further rate cuts are not a given. At the margin this is a mild negative for gold prices and it means they may dip in the short term.

US–China trade relations have stopped deteriorating; US President Donald Trump did not implement the latest tariff increase that was scheduled and the two sides are negotiating once again. This suggests that there is little aggressive upside pressure for gold price increases in the short term. If the US and China come to a trade agreement before the end of the year, this can lead to a drop in gold prices to levels of around USD 1,420 per ounce. We believe this will be a good buying opportunity for longer-term investors as the outlook for gold remains highly constructive. The price is being further supported by the fact that central bank gold reserves as a percentage of total reserves are at multi-decade lows. Also, interest rates around the world have declined and will likely continue to do so. We note the ECB cut its deposit rate to -0.5% at its September meeting and indicated that it will increase its QE programme if it deems this necessary.

The combination of negative deposit rates and the prospect of further QE is highly supportive for the gold price. Indeed, if retail banks begin to charge depositors to hold cash we believe this will lead to significant retail client interest in gold over the coming months and years.

Gold will also benefit from any increase in geopolitical risks, of which there are many. The US–China trade quarrel is one aspect in a broader US policy of trying to contain China, and this is unlikely to be the last time we see friction between the two countries. Furthermore, if tensions in the Middle East continue to deteriorate then gold should perform well as a safe-haven asset. Consequently, it makes a lot of sense to have gold in any portfolio, despite the short-term risk of a modest decline in the gold price.

Our expertise

Peter_Kinsella_150x150.jpg

Peter Kinsella
Global Head of Forex Strategy

Expertise

Global equities

Invest in companies with superior and sustainable value creation.


Further reading

Insight 12.04.2024

UBP House View - April 2024

The unexpected interest rate cut by the Swiss National Bank marks the beginning of a new cycle of global easing, paving the way for new investment opportunities in the broader market. This has bolstered the Bank’s confidence in the Swiss and UK markets, which have been lagging behind the US indices. In addition, we have locked in gains on gold, which was the top performer in March.

Insight 05.04.2024

Private Debt: A Time-Honoured Market Perspective

Our experts explore the origins of private debt—a market with a history spanning over 4,000 years, set to provide the next wave of opportunities for investors.

Insight 27.03.2024

Four reasons to consider global SMID caps in 2024

As the “Magnificent 7” generate risks in the segment, diversification within equities becomes key. Global small- and mid-cap (SMID) stocks, represented by the MSCI World SMID Cap Index, are emerging as a compelling option.