Investing.com -- UBS warned this week that a Federal Reserve rate hike this month could trigger a short-term drop in gold prices, though it expects any decline to be contained.

Strategist Joni Teves told investors that gold's resilience after the recent employment report does not mean rates no longer matter, but rather that the market has already absorbed a large tightening in expectations.

"We would expect a September hike to generate a knee-jerk correction, but not to derail the broader recovery," she wrote, adding that "a hold would likely deliver a stronger upside response."

If the Fed raises rates, the first move in gold is likely to be lower as real rates and the dollar respond, Teves said, but seasonal physical demand and buying by institutional and official-sector investors at lower prices should limit the fall.

Under a no-hike outcome, she said investors would likely chase the metal higher, particularly if the decision revived questions around Fed independence.

Teves said risks are two-sided but skewed to the upside. "Gold may still be vulnerable to hawkish surprises, but it appears increasingly more sensitive to positive catalysts," she wrote.

Central-bank buying remains intact, she added, with China adding about 20 tonnes in August to bring its purchases to roughly 80 tonnes this year, the strongest run since late 2023.

UBS also pointed to gradually rebuilding gold ETFs, improving Chinese trading activity and approaching seasonal demand in India as supportive, leaving the risk-reward into year-end skewed higher.