Unseasonably Strong Gold Rally Defies Historical Trends, UBS Analysts Say - Is a Pullback Coming?
The gold market has seen a remarkable rally of over 5% in September, a behavior that goes against its historical trends for the month over the past decade, according to analysts at UBS. Recent conversations with market participants indicate a growing positive sentiment towards gold, although this has not yet been fully reflected in positions.
Investors are eagerly waiting for pullbacks to increase their exposure, but the lack of opportunities has led to sharp upward movements as investors chase higher prices. However, some traders are anticipating a potential cooling in gold's returns, especially if the Federal Reserve takes a more hawkish stance due to a re-acceleration in US growth, which could keep interest rates high and strengthen the dollar. Despite this, any downside is expected to be limited.
UBS analysts suggest that a period of consolidation in the market would be beneficial at this point, allowing weak long positions to be cleared out and long-term investors to enter at more favorable levels. Gold reached record highs in Asian trade on Tuesday, following a recent uptrend driven by a substantial rate cut by the Fed last week. The sentiment has also been boosted by expectations of further rate cuts later this year.
Several Fed officials have expressed support for the central bank's 50 basis point cut, but anticipate a slower pace of reductions in the coming months. Analysts at Citi predict at least 125 basis points of cuts by year-end. Lower interest rates are favorable for gold as they decrease the opportunity cost of investing in non-yielding assets. The dollar and Treasury yields declined after the Fed's decision, leading to further gains in gold.
In conclusion, the recent surge in gold prices has defied historical trends, but investors should be cautious of a potential pullback as the market may need a breather. Despite the positive sentiment and lower interest rates, there is always a possibility of market corrections. It is essential for investors to stay informed and make well-informed decisions to navigate the volatile gold market successfully.