The firm’s new one-month price target is $1050, reflecting, the firm said, the downside risks currently posed by both gold fundamental and macro factors – especially the run up to the FOMC meeting in September and expectations that the Fed will begin its rate hiking program.
According to the bank, there is currently a lot of focus on the $1050 level, which suggests that there is a considerable risk that the market will test it in the near-term.
“Psychologically, the market seems to need to get this price out of its system. Given current sentiment, the possibility that the market overshoots on the downside also cannot be ruled out with certainty,” it said.
However, while it is bearish in the near term, it does not see a three digit gold price as sustainable, especially with the traditional pickup in seasonal buying from Asia expected.
Indeed, UBS said, a test of $1050 would be likely to attract attention from physical markets, which, if convincing, “should reassure investors and help create a price floor”.
“Once gold manages to form a more solid foundation built on fundamentals, we expect elevated short positioning to correct. We therefore anticipate a gold recovery towards $1125 over a three-month horizon,” it added.
Sentiment on gold has turned considerably bearish in recent months after having been largely ignored for much of the year. But, this increased bearishness could be a positive feature, the bank argues.
“Net long positions on Comex are the lightest they’ve been in more than a decade and prices are back to levels last seen in 2010. While there is scope for further adjustments on the downside over the coming weeks, positioning suggests that gold has already done a lot in terms of going through the necessary fine-tuning.”
According to UBS, with gross short positions in the market already very elevated, it would require high levels of conviction to aggressively add to short positions, which lowers the risk-reward calculation.
“Gold would need to fall towards $770 in order to get the same kind of price declines as 2013,” it said, adding: “Ultimately, we are not convinced that gold deserves to suffer the same fate as it did two years ago, especially given the adjustments that have already taken place since then.”
However, it pointed out, market participation rates have significantly lower than there have been in recent years, which could impact the market in one of two ways.
“On the one hand, this suggests relatively more limited selling firepower than there was two years ago, which is in a sense reflected in the less aggressive selloffs. But on the other hand, this suggests that although current gold prices may start to look attractive, it’s also harder to find that marginal buyer.”
