Take it from the Swiss!
UBS, the Swiss banking giant, has a “most preferred” rating on gold. Now, in a report entitled “Three Reasons to Buy Gold Now,” its Chief Investment Office says that it expects gold to break its all-time high later this year, and has offered three specific reasons for its forecast of higher gold prices.
1. Central bank demand should remain robust.
“Last year marked the 13th consecutive year of net gold purchases by global central banks and the highest level of annual demand on record dating back to 1950…. We think this trend of central bank buying is likely to continue amid heightened geopolitical risks and elevated inflation. In fact, the US decision to freeze Russian foreign exchange reserves in the aftermath of the war in Ukraine may have led to a long-term impact on the behavior of central banks.”
We concur. In a recent post, China Keeps Buying Gold, we reported that in April China added to its gold reserves for a sixth consecutive month. Poland’s central bank added 14.8 tons of gold in April as well, its biggest addition in three years.
The National Bank of Poland’s governor, Adam Glapinski said it is in 2021 that Poland was preparing for “the most unfavorable circumstances.”
“Why does the central bank own gold?” asked Glapinski. “Because gold will retain its value even when someone cuts off the power to the global financial system. Of course, we do not assume that this will happen. But as the saying goes – forewarned is always insured. And the central bank is required to be prepared for even the most unfavorable circumstances.”
2. Broad US dollar weakness supports gold.
UBS says it sees see another round of dollar weakness over the next 6–12 months. “The direction of a weakening dollar is clear, with the US Fed having signaled a pause in its current tightening cycle after 500 basis points of rate hikes over the past 14 months…. We believe the reduction in US yield carry will continue to weigh on the greenback.”
3. Rising US recession risks may prompt safe-haven flows.
“Overall, recent data coming out of the US showed the country’s growth is slowing, with weaker-than-expected 1Q GDP, six consecutive months of contracting manufacturing activity, and the weakest consumer sentiment since November. Tighter credit conditions, evidenced by the Fed’s latest Senior Loan Officer Opinion Survey, are also likely to weigh on growth and corporate profits. Based on data since 1980, gold’s relative performance versus the S&P 500 improved significantly during US recessions.”
UBS is the world’s largest private bank.
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