XAU/USD: Potential CTA selling likely to be offset by physical demand - UBS

Gold has shown stronger support than anticipated over the summer, with prices rebounding above $2400 following softer-than-expected US inflation data, according to UBS.

The investment bank notes the precious metal has broadly traded within a $100 range, with $2400 acting as a ceiling and attempts to dip below $2300 being brief and shallow. They believe investors' interest in "buy-the-dip" has been prevalent, bolstered by strong sentiment towards gold and dovish Federal Reserve expectations.

UBS analysts highlight that the market remains just above the psychological $2400 level, suggesting that risks are skewed to the upside. "Positioning remains lean and there's space for investors to build gold exposure," UBS states.

UBS also discusses the impact of Commodity Trading Advisor (CTA) activity on the gold market. They explain that based on Nicolas Le-Roux's forecasting model, there are more scenarios where CTAs will be buying gold, but the volumes are expected to be small.

In contrast, there are said to be fewer scenarios for selling, but UBS believes the volumes will be larger. This probability-weighted analysis suggests mild negative flows from CTAs in July.

The bank says key levels to watch for gold are $2450 on the upside, where CTAs will be max long and stop contributing to flows, and $2250/$2300 on the downside, where CTA selling and profit-taking will accelerate.

UBS anticipates that physical demand will pick up at these lower levels, driven by investor interest and fundamental support from seasonal demand in markets like India and China as they restock for the peak season.

"Physical demand seasonality should provide fundamental support to the market as buyers in India and China restock for the peak season," UBS concludes, highlighting the importance of this factor in maintaining gold's price stability despite potential CTA selling.