Macroeconomic pressures related to the Middle East conflict have interrupted a multi-month rally in the precious metals market, with robust inflation data revising monetary policy expectations.
Investors are now betting that the Federal Reserve will keep interest rates high for longer, which will boost real yields and increase the opportunity cost of holding non-interest-bearing gold, wrote Michael Bolliger, Chief Investment Officer at UBS Switzerland, in a note to clients on Friday.
The recent price correction clearly demonstrates how sensitive commodities are to changes in borrowing costs. "High real yields have been weighing on gold prices in recent months, but this headwind should ease as the Fed resumes rate cuts this year," Bolliger noted.
If macroeconomic conditions soften and allow policymakers to shift to more accommodative policies, Bolliger expects a significant structural recovery. UBS's baseline scenario sees the precious metal eventually rise to $5,500 per ounce by the end of 2026.
A reliable price floor at current levels is provided by robust non-cyclical institutional demand, Bolliger believes. Central banks are estimated to have absorbed approximately 244 tonnes of gold in the first quarter of 2026, and the pace of sovereign purchases is the fourth-highest annual rate since 1950.
Large institutional buyers are basing their positions on shifting macroeconomic paradigms rather than short-term price dynamics. According to the research note, sovereign reserve managers are systematically increasing their gold holdings because it "carries no counterparty risk" and is "perceived as politically neutral" amid rising international tensions. An additional factor driving this structural shift is growing concerns about Western fiscal policy and growing government deficits. If traditional fixed-income portfolios provide less reliable protection against equity volatility in the future, real assets will likely experience increased demand.
Bolliger recommends that investors adjust their long-term view of gold given the profound structural changes in the global financial architecture. Portfolios focused on protecting against systemic inflation and sovereign debt risks can view this asset as a "strategic diversifier," the chief investment officer concluded.