Gold is undergoing a correction driven by hawkish expectations from the Federal Reserve. UBS believes the worst may be over. (AFP)
[Financial Channel/Comprehensive Report] International gold prices have retreated significantly recently, falling by about 5% since the beginning of September, from more than US$4,400 per ounce to around US$4,140. The report pointed out that rising U.S. Treasury yields, a stronger U.S. dollar, and rising expectations that the Federal Reserve may further raise interest rates have put gold under considerable pressure. However, UBS believes that the negative factors of the market turning hawkish on monetary policy may have been mostly reflected in gold prices. As the U.S. labor market shows signs of cooling, buying opportunities for gold are gradually emerging.
According to "The Wall Street Journal" citing a research report released by UBS on October 12, recent U.S. economic data have been better than expected, coupled with continued inflationary pressure, causing the market to re-evaluate the Federal Reserve's interest rate policy. The U.S. 10-year Treasury bond yield has climbed from about 4.8% in early September to over 5.3%, and the U.S. dollar index has also risen from about 100 to over 102, causing gold, which does not yield interest rates, to become less attractive.
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UBS pointed out that this wave of market correction is similar to the situation after Federal Reserve Chairman Kevin Warsh issued a hawkish speech at the end of August. Gold prices came under pressure as investors renewed their bets that interest rates could remain high for longer and even raise interest rates further, prompting funds to shift toward the dollar and U.S. Treasuries.
However, UBS believes that most of the recent hawkish expectations have been reflected in market prices, and the pressure for gold to fall further may gradually lessen. Especially as U.S. labor market data weakens, market expectations for an interest rate hike in October have cooled, and gold prices have begun to seek support around $4,140 to $4,200 per ounce.
UBS said that these changes are not enough to prove that gold has hit the bottom, but at least it shows that market risks are improving, and the original situation that was obviously biased towards the decline is gradually changing.
It is worth noting that UBS reviewed the performance of gold after U.S. Treasury yields fell back from highs in the past three times and found that gold prices rebounded to a certain extent. After U.S. bond yields peaked in October 2023, gold rose 5.9% within 69 days; after yields peaked in April 2024, gold rose 11.4% within 144 days; in January 2025, within 81 days after the peak yields occurred, gold rebounded 14.4%.
Although the backgrounds of these three gold price increases are different, the common factor is that the market has begun to reassess U.S. monetary policy. The end of 2023 will be mainly affected by weakening economic data. In 2024, the labor market will cool down and expectations of interest rate cuts will rise. In early 2025, it will be driven by slowing economic growth and increasing policy uncertainty. As U.S. bond yields fall, the opportunity cost of holding gold decreases, which also provides support for gold prices.
UBS believes that the next key lies in the U.S. labor market and oil price trends. If the job market continues to cool and oil prices gradually stabilize, the need for the Fed to further raise interest rates may decrease. Once market expectations for interest rate hikes weaken, U.S. bond yields begin to fall continuously, which will help confirm gold buying opportunities.
As for the technical aspect, UBS sees $3,990 to $4,030 per ounce as an important support range for gold prices in the near future. If it falls below $4,000, it means that the adjustment may further expand; on the other hand, if it can continue to stand between $4,280 and $4,320, it means that short-term momentum has improved and gold prices have the opportunity to continue the upward trend. However, UBS also reminded that gold is still below the short-term moving average and the market momentum has not yet fully strengthened.
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