Gold Price Cools Since U.S. Election, But UBS Says Hedge Demand Remains

Despite the price of gold cooling since the U.S. election, UBS anticipate demand for hedges will return and believe any price under US$2,600/oz provides a dip buying opportunity.

Analysts at the bank view the change since the election to come from market participants assuming Trump's campaign rhetoric won’t fully translate into policy. In terms of narrative and investor sentiment, the election result resolves some near-term concerns such as a contested election result, a debt ceiling standoff, a government shutdown, corporate tax increases, and increased regulation. There is also a sense of more world peace on the horizon thanks to Trump’s anti-war and anti-interventionist stance. Adding to the mix is the sharp rise in the USD in reaction to the election result, which often moves in opposition to gold, particularly in short-term moves.

UBS analysts still target US$2,900/oz over the next 12 months and recommends buying any dip below US$2,600/oz for some key reasons. They expect inflows to gold-backed ETFs to continue as the Fed continues to cut rates and longer-term risks (such as the sharp increase in U.S. fiscal deficit) in addition to ongoing demand from central banks and the impact of potential tariffs on the economy and USD will drive buyers back to a hedge.

Not only that but what happens if Trump and his colleagues really attack the Federal Reserve? As we discussed yesterday, Jerome Powell was resolute in stating that the new President can’t fire him from his position as head of the Fed. There have previously been suggestions by Trump’s team that the Fed should be dismantled and any ongoing friction between the President and the Fed could introduce a whole new element of risk to the market.

One of the key factors that will determine the trajectory of gold’s price is the attitude of countries not aligned with the West (BRICS and others) and their attitude towards the international financial system. This confidence was lost when the West confiscated almost US$300 billion dollars in financial assets that Russia had abroad.

If these countries regain confidence in the existing international financial system, then gold could reverse its current uptrend, but this isn't very likely to happen anytime soon, if ever. Let’s not forget, Trump is in charge for 4 years and the next U.S. administration could change the rules of the game again.

These countries have likely lost confidence in the current financial system and will never regain it, so their central banks will continue to accumulate gold in large quantities.