UBS thinks some gold buyers have gotten ahead of themselves and some near-term price consolidation could be in store. That said, downside will likely be contained and could present a buying opportunity.
In the firm’s view, the price of gold is dictated primarily by safe-haven investment demand and inflation hedging. They believe the direction of the gold price will be a function of investor belief in the two dominant opposing narratives that we see in the market today:
“The first narrative is somewhat status quo (and the UBS view): global economic growth will be modest (but high enough to avoid disaster), US monetary policy will continue to normalize, and easy monetary policy in the EU and emerging markets will allow hard landings to be avoided. The second narrative is more black sky: the economy is not strong enough to withstand tighter monetary policy, no economy can tighten in isolation, and hence further QE will be required.”
The firm said gold flows demonstrate that narrative #2 is gaining adopters, or at least insurance buyers.
UBS sees average 2016 gold price of $1,225/oz and long-term price of $1,300/oz (current spot gold price = $1218.70).
UBS is constructive on gold in the medium-to-long term given still low investor positioning and risks to the global macro view. In the near-term UBS gold strategist Joni Teves notes that some price consolidation could be healthy for gold, however downside is likely to be contained and could present a buying opportunity.
On North American gold equities, the firm downgraded three stocks to Neutral from Buy today on valuation: Goldcorp (NYSE: GG), Agnico-Eagle (NYSE: AEM) and Franco-Nevada (NYSE: FNV). Meanwhile the firm prefers Buy-rated Silver Wheaton (NYSE: SLW) and Royal Gold (NASDAQ: RGLD).