Last week, spot gold fell below the US$4,000 level for the first time since November last year. A stronger US dollar and rising market expectations for Federal Reserve rate hikes both increased the opportunity cost of holding gold, placing significant downward pressure on prices. Following this latest decline, gold has retreated by more than 26% from the record high reached in January this year.

UBS noted that, based on price momentum and various technical indicators, gold is likely to fluctuate repeatedly within the US$3,850–US$4,000 range in the near term. Persistently higher US real Treasury yields and a firm US dollar are expected to continue reducing the attractiveness of precious metals as an investment allocation, thereby limiting the strength of any rebound in gold prices.

However, UBS remains optimistic about gold's medium- to long-term outlook. The bank forecasts that gold could rise to US$5,200 over the next 12 months and believes current prices represent a relatively low level. For investors who are underallocated to gold, UBS considers the current environment an appropriate window to gradually build positions through phased purchases.

US core PCE inflation rose to 3.4% year-on-year in May, marking more than five consecutive years above the Federal Reserve's 2% inflation target and reinforcing market pricing for additional Fed rate hikes this year. Nevertheless, UBS stated that Federal Reserve Chair Waller places greater emphasis on indicators such as trimmed mean inflation and market-based breakeven inflation expectations, both of which are moderating at a pace more consistent with the 2% target. In addition, the one-off price increases caused by tariffs are gradually fading, which should allow overall inflation to continue easing.

UBS's base-case scenario is that the Federal Reserve will keep interest rates unchanged throughout 2026, before shifting to rate cuts in 2027. As the market gradually scales back expectations for further Fed rate hikes, gold prices are expected to receive meaningful support. Looking ahead to next year, a gradual reduction in fiscal stimulus and slower economic growth are also expected to create a macroeconomic environment that is favourable for gold. Furthermore, UBS believes the US dollar only has short-term cyclical support, with long US dollar positioning already extremely crowded, leaving very limited room for the currency to rally substantially further.

From a longer-term perspective, UBS argues that structural challenges such as the United States' large fiscal deficit and current account deficit are unlikely to be resolved. Combined with the fact that global investors already hold relatively high allocations to US dollar-denominated assets, the factors supporting continued US dollar strength are expected to diminish over time. Historically, periods of US dollar weakness have often served as a strong catalyst for gold prices.

UBS also pointed out that continued gold purchases by central banks remain the key structural pillar supporting gold prices. Preliminary data for May showed renewed buying momentum among several central banks, with Poland purchasing 18 tonnes of gold and China adding 10 tonnes. UBS expects total global central bank gold purchases this year to reach 750–1,000 tonnes. While central bank demand alone may not be sufficient to drive a sharp rally in gold prices, it provides a solid price floor for the gold market and significantly reduces the risk of a deep decline.

Market Insight:

On the 4-hour chart, gold has resumed its pullback, with both the MACD lines and histogram expanding around the zero line. Gold's medium- to long-term investment thesis remains firmly intact. During periods of sharp equity market corrections, escalating geopolitical tensions, stronger-than-expected inflation, or weakening confidence in fiat currencies, gold continues to serve as an effective diversification and hedging asset.