investing.com -- Gold has taken a breather, but is likely to return to winning ways as the dollar’s fightback against the bears isn’t likely to last very long, with the Fed expected to cut rates later this year and ongoing central bank demand.
“We think the greenback is short-term oversold, and expect a period of consolidation in the near term… Over the medium term, however, we believe the trend of dollar weakness is likely to resume," UBS analysts said in a recent note. "Bullion, meanwhile, should stay well supported by ‘safe-haven’ demand and structural buying.”
Gold’s 3% pullback from recent record highs hasn’t dented analyst optimism, as central bank demand for the yellow metal and exchange-traded fund inflows are likely to continue.
UBS is forecasting central banks to buy around 1,000 metric tons in 2025, in line with purchases seen at around this level over the last three consecutive years. The bank also raised its expectation for ETF net buying in 2025 to 450 metric tons, up from 300 metric tons.
While trade war volatility, which played a key role in driving investors to the arms of safe-haven gold, could ebb amid signs from the White House to strike deals and reduce tariffs, the analysts expect underlying geopolitical risks to continue to reinforce gold’s appeal as a hedge.
"Improving headlines on potential trade deals are likely to cap gold’s upside after an impressive run on safe-haven demand, but we have also seen signs of a more structural shift in gold allocation," UBS said.
"With ongoing tariff and geopolitical uncertainties, we believe gold should stay well supported toward our base case target of USD 3,500/oz," they added.
Monetary policy easing is also expected to help the yellow metal continue its shine. The analysts expect the Fed to resume rate cuts in the second half of the year, lowering rates by 75–100 basis points as growth slows and inflation pressures ease. “Lower rates will support gold prices as the opportunity cost of holding bullion is reduced," they added.
Gold remains an "effective portfolio diversifier and hedge, and we recommend around a 5% allocation to the yellow metal," UBS added.