Gold prices will climb to $2,075 next year on the back of six key variables, UBS said Friday in a report on the precious metal.
1. U.S. interest rates
The cost of American money is the single-most important variable in gauging gold's upward mobility, UBS says. Federal Reserve Chairman Ben Bernanke's promise to keep U.S. interest rates on hold until 2013 means gold won't have to compete with other assets that offer yield. The European Central Bank is likely to cut rates and Brazil's central bank recently completed a surprise rate cut. Together these variables indicate the accommodative nature of the global monetary policy.
2. Economic growth prospects
Robust business activity is no friend of gold, as it promotes a risk-on sentiment among investors. At present, though, that hardly presents a challenge to the yellow metal. Economic growth expectations globally are underwhelming and high debt burdens in Europe will continue to hamper growth, UBS says. Our core view is that ongoing global macroeconomic disappointments, the inevitability of further negative turns in the European sovereign debt crisis, and low business, consumer and investor confidence will lead to gold being increasingly used as the line of defence against negative market outcomes.
3. Alternative safe-haven investments
Investors seeking a safe place to put their money have - in the past - had choices. Recently, though, the number of choices has declined. Both the Swiss franc and the Japanese yen have been subject to price-damping intervention, making them less attractive to safe-haven investors.
The fourth quarter is typically the strongest for Indian buyers, due to the country's festival season, and this year the nation is on course to top last year's gold buying. Physical sales to India so far in 2011 are 10 percent higher than in the same period of 2010. That demand is higher this year despite a rising gold price highlights the impressive adaptability of Indian physical buying interest, UBS says. We think that demand from India will be resilient to higher gold prices for the remainder of the year on the back of seasonality and increased investment interest.
UBS is looking for Chinese gold buying to rise in the fourth quarter. Chinese typically accelerate their gold purchases in the run-up to the start of the Lunar New Year, which this year falls on Jan. 23, 2012. Shanghai Gold Exchange (SGE) data indicate that this year's seasonal run-up in gold purchases has already begun.
6. Hybrid Space
Gold is no longer viewed exclusively as the anti-risk trade, UBS says. Instead, gold has been moving in positive correlation with risk assets of late. This suggests that there is hybrid space that gold will occupy in the months ahead - one which benefits from a degree of increasing cyclical risk and a sufficient dose of sovereign risk, although at times that balance may become difficult to fathom.