UBS sees ‘short-lived’ strength for gold, expects prices to drop to $1,600 by year-end

The recent strength in gold prices is set to last for a short time, according to a report by a bank.

Gold prices have risen in recent weeks as investors look for safe-havens amid fears of a Russian invasion of Ukraine. Russian President Vladimir Putin ordered forces into eastern Ukraine after announcing he would recognize their independence.

In the morning of Asia trading hours on Tuesday, the spot gold price was at $1,908.46 per ounce. That is much higher than the levels seen in February.

Teves said the gold market is expected to return to focusing on macro drivers such as real rates, U.S. Federal Reserve policy as well as the growth outlook. By the end of 2022, gold prices are expected to fall to $1,600 per ounce.

The environment where real rates are rising and the Fed is tightening policy provides a negative backdrop for gold.

The Fed is expected to raise interest rates at its March meeting to cool inflationary pressures, and Teves said that it is likely to put pressure on gold.

Expectations for higher interest rates push yields of assets such as U.S. Treasurys higher.

She acknowledged that the upside risks for gold are rising.

If we start to see reallocation into gold, with the expectation that real rates are likely to remain in negative territory, and therefore an allocation to gold remains attractive, the strategist said.

As the Fed tightens policy, allocations to gold could start to rebuild.