UBS recommends adding gold exposure on pullbacks at this price

Investing.com -- UBS strategists Dominic Schnider and Giovanni Staunovo told investors in a note Tuesday that they should view pullbacks in gold toward $3,850 per ounce as opportunities to add exposure rather than reasons to turn bearish.

Schnider and Staunovo said re-escalating military tensions in the Middle East and higher oil prices are creating renewed headwinds for gold, evidenced by subdued investment demand and weaker prices.

While central bank demand has picked up again, the bank believes "it is not enough to push prices higher alone."

The gold market is still digesting hawkish signals from Fed Chair Kevin Warsh and fixed income markets' expectations for higher U.S. policy rates.

Should economic activity surprise to the upside, UBS said "the near-term outlook for gold would remain challenging," potentially pushing prices to $3,850 per ounce or lower.

UBS expects central bank purchases to remain elevated, within the 750-1,000 metric ton range for the full year, but said these flows alone are "insufficient to drive prices higher."

Instead, Schnider and Staunovo believe investment demand of around 500 metric tons a quarter is needed to boost gold prices, which would likely require the U.S. growth narrative to favor less restrictive monetary policy or a stagflation-type environment.

Looking further out, UBS said the longer-term narrative for gold "remains clear and supportive," citing secular debt concerns and an elevated U.S. dollar with global investors overallocated to it.

Gold "remains worth holding from a diversification perspective," particularly for investors with a multi-generational outlook, UBS concluded.

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