UBS (UBS) has revised its outlook on gold prices, lowering its medium-term target while maintaining a long-term bullish stance, attributing the adjustment to persistent pressure from interest rate and currency exchange environments.

The bank has reduced its gold price forecast for the end of 2026 from $5,900 per ounce to $5,500 per ounce. Analysts Dominic Schnider and Wayne Gordon explained that elevated U.S. Treasury yields and sustained dollar strength are exerting significant pressure on gold.

In their report, they noted, "The market is rediscovering the concept of opportunity cost. With real interest rates staying high, gold's characteristic of not generating yield is once again becoming a more significant consideration." In this context, capital is shifting from gold to other income-generating assets.

Changes on the demand side also reflect this trend. Fund flows in ETFs and futures markets have notably weakened. Even with some recent stabilization, it is insufficient to restore the upward momentum seen in early 2026.

However, UBS has not dismissed gold's long-term upward trajectory. The analysts believe the structural bull market remains intact, though investors may need to wait longer for returns in the current environment. According to their assessment, gold prices could still be about $1,000 higher than current levels by the end of 2026.

For the longer-term outlook, they mentioned that if monetary policy becomes more neutral in 2027 and dollar support weakens, gold's appeal could strengthen again.

UBS's assessment of gold is also interconnected with broader commodity trends. Previously, the bank's commodity analyst Giovanni Staunovo analyzed the impact of the Middle East situation in his research.

He pointed out that tensions in Iran and risks surrounding the Strait of Hormuz are driving up energy prices and increasing volatility. "We remain positive on the upside for commodities, supported by fundamentals, supply-demand imbalances, and further geopolitical risks," he stated. He recommends maintaining allocations through active management to hedge against inflation and energy shocks.

In contrast, gold's performance has been relatively subdued. He suggests that investors with substantial gold holdings and significant unrealized gains could expand their allocations to include copper, aluminum, and agricultural products to diversify income sources.

Regarding gold's performance during conflicts, UBS analysts also compared historical patterns. They noted that since the escalation of tensions with Iran, gold prices have not breached $5,200 per ounce, failing to show typical safe-haven buying, which contrasts with the approximately 65% gain in the preceding year.

The report explains that this performance aligns with historical patterns: investors often buy gold briefly at the onset of conflict but subsequently shift to more liquid assets or energy-related investments. For instance, after the Russia-Ukraine conflict erupted in 2022, gold prices initially rose by 15% but later fell by 15% to 18% as the Federal Reserve raised interest rates. During the Gulf War and the Iraq War, initial gains of 17% and 19% were also followed by declines.

Despite the short-term weakness, UBS maintains an overall optimistic outlook for 2026. The analysts emphasize that gold serves more as a hedge against macroeconomic risks rather than a direct reaction to singular war events. Its core role lies in addressing issues like currency depreciation, widening fiscal deficits, and economic slowdown.

They also note that in the near term, rising energy prices and inflation concerns are boosting the dollar and reinforcing expectations for interest rate hikes, factors that weigh on gold. However, they anticipate that central banks will not rush to raise rates but will instead respond more cautiously to inflation risks.

Furthermore, if the U.S.-Iran conflict persists, its negative impact on the global economy could potentially increase safe-haven demand for gold.

From a longer-term perspective, a positive correlation exists between gold and inflation. UBS cited data from the Global Investment Returns Yearbook, indicating that since 1900, the real returns of gold and commodities have shown a positive correlation with inflation trends.

Structural support on the demand side remains. UBS pointed out that although ETF investors reduced their holdings slightly at the beginning of the month, recent positions have stabilized, while hedge funds have slightly increased their net long positions.

The bank believes overall demand is likely to remain robust, supported by continued central bank purchases, recovering investment demand, and gold jewelry consumption driven by rising incomes in Asia.

From a broader structural trend perspective, high government debt levels and the desire of global investors and central banks to reduce reliance on the U.S. dollar in their allocations continue to enhance gold's appeal.

Based on these factors, UBS continues to view gold favorably within investment portfolios, considering it an effective diversification tool. For investors with a preference for gold, it is recommended to maintain an allocation not exceeding a mid-single-digit percentage within a diversified portfolio.