UBS has warned that a Federal Reserve rate increase in September could trigger a near-term correction in gold, though the bank expects such a move to be limited and not derail the metal's broader recovery.
Joni Teves, a strategist at UBS, told investors that recent resilience in gold following the latest employment report does not imply that interest rates have ceased to matter. Rather, she said, the market has already factored in a substantial tightening in expectations.
"We would expect a September hike to generate a knee-jerk correction, but not to derail the broader recovery," she wrote. "A hold would likely deliver a stronger upside response."
Teves outlined the expected market mechanics under each Fed outcome. If the Fed raises rates, gold's initial reaction is likely to be downward as real interest rates and the dollar adjust. That first move lower, she said, should be limited by non-rate drivers:
- seasonal physical demand;
- buying by institutional investors;
- official-sector purchases at lower price levels.
In the event the Fed opts not to hike, UBS expects investors to chase gold higher, particularly if the decision raises questions about central bank independence. Teves characterized the risk profile as two-sided but tilted toward upside, noting both vulnerability to hawkish surprises and growing sensitivity to positive catalysts.
"Gold may still be vulnerable to hawkish surprises, but it appears increasingly more sensitive to positive catalysts," she wrote.
UBS also pointed to ongoing central-bank buying and other market support. The bank said China added about 20 tonnes in August, bringing its purchases to roughly 80 tonnes year-to-date - the strongest pace since late 2023. Additional factors cited as supportive include gradually rebuilding gold ETFs, improving trading activity in China, and the approaching seasonal demand period in India. Taken together, UBS concluded that the risk-reward profile for gold into the year-end is skewed higher.
While UBS foresees a short-term correction if rates rise, the strategist emphasized that structural demand sources and official buying should constrain any steep fall, and a hold by the Fed could spur a more pronounced upside in prices.