UBS Wealth recommends buying gold near US$1,200 for insurance

[SINGAPORE] Gold will probably trade in a range of US$1,200 to US$1,300 an ounce in the short-term as the metal tracks US real interest rates, according to UBS Group AG's wealth management unit.

"We're not saying we have a bullish bias; we're not saying we have a bearish bias," Wayne Gordon, executive director for commodities and foreign exchange, said in an interview on Tuesday. "We're saying that tactically, people should be buying it somewhere near US$1,200 and selling it again somewhere near US$1,300, and it's because we have a view that real rates go sideways. So the pickup in nominal rates will be equally matched by the pickup in inflation." Bullion climbed almost 9 per cent in the first quarter, buoyed by worries over Donald Trump's presidency and geopolitical risks. Prices have since fallen and posted their first monthly decline this year in June. On Monday, the metal fell the most since November as equities and bond yields rallied, before North Korea's launch of what the US says is an intercontinental ballistic missile sparked a small rebound. The price was at US$1,227.18 on Wednesday.

If US unemployment keeps falling, and the Federal Reserve keeps raising interest rates no matter what the inflation data show, that will be negative for gold in the short term, Mr Gordon said. Still, solid demand this year and weaker output, coupled with a lower dollar, are positive for prices, he said. If equity valuations start to drop, investors could turn to gold too, he added.

Gold could also act as insurance if the labor market doesn't show further improvement in the US and inflation doesn't pick up, which would make the Fed pause on its tightening path, or if global growth slows, said Mr Gordon. "We like the insurance qualities for gold just from an unknown perspective at these sorts of levels," Mr Gordon said.

Bullion has risen 0.6 per cent in two days as North Korea's rocket launch revives geopolitical concerns. US Secretary of State Rex Tillerson called the act a "new escalation of the threat" and the United Nations Security Council plans a closed session later on Wednesday after the US requested a meeting.

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