UBS says "gold prices have already fully priced in the Fed": a September rate hike would lead to a slight drop, while no rate hike would result in a significant rise!

The gold market is quietly shifting its pricing logic for Federal Reserve policies. A recent UBS research report points out that gold prices have become significantly less sensitive to the Fed's next move, with the market increasingly focusing on longer-term macroeconomic, policy, and geopolitical risks.

According to TrendFocus, UBS strategist Joni Teves stated in her "Global Precious Metals Review" released on September 9th that despite the significantly better-than-expected US non-farm payroll data in August, which raised the market's probability of a Fed rate hike in September to approximately 62%, the pullback in gold prices remained limited. This performance itself is a signal—the market has largely priced in tightening expectations, and investors are placing more weight on gold's strategic value as a long-term portfolio hedging tool.

The report explicitly states that if the Federal Reserve raises interest rates as expected in September, gold prices may experience a brief decline, but the drop is expected to be manageable; if the Fed chooses to hold rates steady, gold prices may see a stronger upward reaction. UBS believes that with seasonal physical demand approaching, continued buying by official sectors, and support from diversified investment channels, the risk-reward ratio for gold prices is increasingly tilting upward at the end of the year.

Resilience is a signal: Gold prices have fully priced in interest rate hike expectations.

Under normal circumstances, the strong August non-farm payroll data should have triggered a larger pullback in gold prices. Data showed that 162,000 new non-farm jobs were added in August, roughly three times the market expectation. However, gold prices reacted relatively mildly. UBS believes this does not indicate that interest rate factors have failed, but rather that the market has already largely priced in these expectations.

The report points out that investors remain focused on real interest rates and the dollar's trajectory, but they are also asking: What are the fundamental reasons driving interest rates upward? How sustainable is this trend? What does it mean for economic growth, fiscal credibility, and the broader policy framework? This distinction is crucial. If the backdrop for interest rate hikes is inflation driven by accelerating economic growth, it would put substantial pressure on gold; however, this is not the current situation.

UBS believes that gold's resilience also indicates that strategic investors are increasingly viewing price pullbacks as opportunities to improve entry costs rather than reasons to exit positions.

Risk asymmetry: The upside potential of not raising interest rates is greater than the downside risk of raising interest rates.

UBS has made clear judgments on the gold price trend under two scenarios and emphasized the significant asymmetry between them.

If the Federal Reserve raises interest rates in September, gold prices will likely initially decline – rising real interest rates and a stronger dollar will exert downward pressure. However, UBS expects the decline to be limited: improved seasonal physical demand, along with bargain hunting by institutional investors seeking strategic positions and government departments at lower levels, will provide support for gold prices. The end result may be a brief pullback that attracts market attention but is insufficient to change the overall trend.

In contrast, if the Federal Reserve chooses to pause interest rate hikes, the market reaction could be more pronounced. Investors might then chase gold prices higher, especially if the decision is interpreted as an increased risk of policy error or raises questions about the Fed's independence and credibility. In this scenario, the release of short-term interest rate pressures will combine with the long-term diversification logic of gold, driving gold prices higher than the potential decline under the interest rate hike scenario.

The report concludes that gold may still be vulnerable to hawkish surprises, but its sensitivity to positive catalysts is increasing.

Official buying continues, structural support remains unchanged.

Continued official gold purchases have provided significant structural support for gold prices. Latest data shows that global central banks made net purchases of approximately 23 tons of gold in July, bringing the year-to-date identifiable purchases to about 125 tons, lower than the approximately 182 tons in the same period last year. Despite the overall decline, UBS points out that reserve management institutions are still increasing their gold holdings at a historically substantial pace, exhibiting a pattern of increasing purchases when prices are low or relatively stable.

China added approximately 20 tons of gold to its reserves in August, bringing its total purchases this year to around 80 tons, the strongest monthly increase since the end of 2023. Poland remained the largest central bank to report gold purchases as of the end of July, with a cumulative total of 90 tons. Furthermore, Uruguay increased its gold reserves for the first time in about 30 years, further confirming the continued spread of official interest in gold purchases.

Also noteworthy is the Dutch Central Bank's (DNB) announcement that it will transfer approximately 85 tons of gold from the United States and Canada to London. UBS believes this move aligns with the overall trend in official sectors and will not have a direct impact on gold prices, but it reflects the increasingly cautious considerations central banks have regarding the location of their gold reserves, as well as their recognition of the effective use of gold in specific situations.

China's demand structure is diverging, with investment channels gradually taking over.

China's domestic gold market is showing signs of structural differentiation. Trading volumes in gold futures and forward contracts have rebounded in recent months, but physical spot trading volumes on the Shanghai Gold Exchange remain sluggish. Meanwhile, imports remain high, indicating that investment demand and inventory replenishment are playing a greater role than traditional jewelry consumption channels.

Chinese gold ETFs continue to attract inflows, with a net inflow of approximately 19 tons from July to August. This positive trend continued into early September, and total holdings are currently around 305 tons. UBS believes this indicates that Chinese gold demand is becoming more diversified, with a reduced reliance on a single channel.

From a longer-term perspective, Asia's role in global gold trading, investment, and physical distribution is becoming increasingly important, and it is expected to gradually enhance the region's influence on global gold price discovery, deepen market liquidity during Asian trading hours, and open up broader participation channels for investors. UBS believes that this trend is conducive to the continued growth of gold investment demand in the long run.

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