Gold Volatility Ahead as Fed Hikes Rates, UBS Remains Bullish

UBS analysts are cautioning that gold prices may be volatile in the near term due to recent actions by the Federal Reserve. The Fed raised interest rates by 25 basis points to 3.75-4.00% on September 16, citing solid economic activity and still-elevated inflation. This move has been described as a 'hawkish hike' that increases the opportunity cost of holding non-yielding gold.

The UBS strategist Giovanni Staunovo notes that elevated US real yields and a stronger dollar will put pressure on gold prices in the short term. However, he emphasizes that this near-term headwind does not invalidate gold's longer-term investment case.

Staunovo points to rising global debt levels, his expectation of a weaker dollar over time, and the likelihood of Fed rate cuts next year as factors that should support investor demand for gold. Central bank demand remains another key source of structural support, with the People's Bank of China adding 20 metric tons of gold in August.

The UBS strategist also highlights concerns about reserve-accessibility, sanctions risk, and fiscal sustainability as factors reinforcing demand for an asset that is not another institution's liability. He notes that gold ETFs recorded solid inflows in August amid concerns about Fed independence and rising debt levels, but some of those holdings could see outflows following the rate decision.