While the gold market still does not look quite the same in terms of positioning as it did at the height of the bull run, the bank said, participation in the yellow metal’s $120 rally so far this year has been fairly “broad based”.
It added: “There hasn't been a clear seachange as yet, no critical mass returning to gold for now. Instead it's been a gradual yet persistent increase in interest – a trend that could continue, and even accelerate, should investor concerns be justified by data prints up ahead.”
For UBS, the real question for now, however is less about the existence of improved sentiment and more about whether or not the drive higher is sustainable; whether or not recent soft data and investor nervousness are enough to “materially alter Fed policy expectations.”
The bank notes: “It is always difficult to anticipate inflection points in the market. In spite of wider concerns on growth anddeflation/disinflation, Fed policy continues to be an important driver of gold price direction – unless the thinking around this changes significantly, there is bound to be some hesitation on gold's part.”
However, there is another element that could affect prices in the short term – the likely announcement this afternoon of a sizable quantitative easing programme by the ECB.
According to the bank, “a credible and sufficiently large QE package would be positive [for gold], but the upside would be dampened as the euro weakens against the dollar on the back of it.
Should the ECB deliver a substantially larger package of QE, investors in the yellow metal might overlook the currency impact and focus on the ECB’s balance sheet expansion.
“This holds relatively more upside potential for gold, particularly if a larger-than expected QE package is accompanied by the ECB sounding considerably concerned about the outlook for the Eurozone, which would extend gold's safe haven appeal.”
If the ECB underwhelms expectation, however, it should still be gold-supportive at the margin, but the effects are probably going to play out over time, the bank said.
