UBS Says 'Gold Prices Have Fully Priced in the Fed'

In the face of significantly better-than-expected non-farm data, the decline in gold prices remains limited—this is not a failure of interest rate logic; the market has completed its re-pricing of expectations.

Written by: Zhao Ying, Wall Street Insights

The gold market is quietly changing its pricing logic regarding Federal Reserve policy. UBS's latest research report indicates that the sensitivity of gold prices to the Fed's next actions has significantly decreased, with the market increasingly focusing on longer-term macroeconomic, policy, and geopolitical risks.

According to the Wind Trading Desk, UBS strategist Joni Teves stated in the "Global Precious Metals Review" published on September 9 that despite the U.S. August non-farm employment data significantly exceeding expectations, the market's probability of a Fed rate hike in September has risen to about 62%, but the pullback in gold prices remains limited. This performance itself is a signal—market participants have largely digested the tightening expectations, and investors are placing more weight on gold's strategic value as a long-term portfolio hedge.

The report clearly states that if the Fed raises 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 steady, gold prices may see a stronger upward reaction. UBS believes that as seasonal physical demand approaches, official sector purchases continue, and diverse investment channels remain supportive, the risk-reward ratio for gold prices at the end of the year is increasingly skewed to the upside.

Resilience as a Signal: Gold Prices Have Fully Digested Rate Hike Expectations

Under conventional logic, the strong performance of the August non-farm employment data should have triggered a larger pullback in gold prices. Data shows that 162,000 new non-farm jobs were added in August, about three times the market expectation. However, the reaction of gold prices has been relatively mild, which UBS believes is not a failure of interest rate factors, but rather indicates that the market has completed a significant re-pricing of expectations.

The report points out that investors are still focused on real interest rates and the dollar's movements, but they are also questioning: what are the fundamental reasons driving interest rates up? 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 background for rate hikes is inflation driven by accelerated economic growth, it would exert substantial pressure on gold; however, the current situation is not the case.

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

Asymmetric Risks: The Upside Potential of Not Raising Rates Exceeds the Downside Risks of Raising Rates

UBS has made clear judgments on gold price movements under two scenarios and emphasizes the significant asymmetry between the two.

If the Fed raises rates in September, the first reaction of gold prices is likely to be downward—rising real interest rates and a strengthening dollar will create dual pressure. However, UBS expects the decline to be limited: improvements in seasonal physical demand and institutional investors and official sectors seeking strategic entry points will collectively support gold prices. The final outcome may be a brief pullback that attracts market attention but is insufficient to change the overall direction.

In contrast, if the Fed chooses to pause rate hikes, the market reaction may be more pronounced. Investors may chase gold, especially if this decision is interpreted as an increased risk of policy missteps or raises doubts 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, pushing the upward movement of gold prices beyond the potential decline in the rate hike scenario.

The report concludes that while gold may still be somewhat vulnerable to hawkish surprises, its sensitivity to positive catalysts is increasingly strengthening.

Official Sector Purchases Continue, Structural Support Remains Unchanged

The continued purchases of gold by official sectors provide important structural support for gold prices. The latest data shows that in July, global central banks net purchased about 23 tons of gold, with identifiable purchases reaching about 125 tons year-to-date, down from about 182 tons in the same period last year. Although the total volume has decreased, UBS points out that reserve management institutions are still increasing their gold holdings at historically significant rates, showing a pattern of increasing purchases when prices are low or relatively stable.

China again increased its gold holdings by about 20 tons in August, bringing its total purchases this year to about 80 tons, with the purchase volume over the past two months being the strongest since the end of 2023. Poland remains the central bank with the largest reported gold purchases as of the end of July, totaling 90 tons. Additionally, Uruguay has increased its gold reserves for the first time in about 30 years, further confirming the continued spread of interest in gold purchases by official sectors.

Notably, the Dutch central bank (DNB) announced the transfer of about 85 tons of gold from the U.S. and Canada to London. UBS believes this move aligns with the overall trend of official sectors and will not have a direct impact on gold prices, but reflects the increasing caution of central banks regarding the locations of gold storage and the recognition of gold's effective usability in specific scenarios.

China's Demand Structure Diversifies, Investment Channels Gradually Take Over

China's domestic gold market shows structural differentiation. The trading volume of gold futures and forward contracts has recently rebounded, but the physical spot trading volume on the Shanghai Gold Exchange remains sluggish; meanwhile, import volumes remain high, indicating that investment demand and inventory replenishment are playing a larger role, rather than traditional jewelry consumption channels.

China's gold ETFs continue to attract inflows, with a net inflow of about 19 tons from July to August, and this positive trend has continued into early September, with total holdings currently around 305 tons. UBS believes this combination indicates that China's gold demand is becoming more diversified, with a decreasing 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, which is expected to gradually enhance the region's influence on global gold price discovery and deepen market liquidity during Asian trading hours, opening up broader participation channels for investors. UBS believes this trend will be beneficial for the sustained growth of gold investment demand.