Major banking houses have been chilly toward gold for some time, but there are signs some of them are warming up to the yellow metal.

In fact, analysts at UBS in a report asked the rhetorical question: “Time to warm up to gold?” 

The UBS team acknowledged gold’s decline, due primarily to expectations of Fed interest rate actions.  But they take the position that the market has gone too far in punishing gold over recent months.  The delay in raising U.S. rates, and lower expectations for the degree of any rate increases around the world they see as good for gold.

“But the possibility that the market may be overestimating the terminal rate suggests that current weak sentiment and price expectations may also be overdone,” UBS analysts wrote.

To UBS, this suggests an opening to buy. “Positioning has declined considerably over the past couple of years and has now become very light. There may be an opportunity, especially for long-term oriented participants looking to diversify portfolios, to rebuild positions at more attractive levels.”

UBS says gold has more upside potential than downside risk.  “Any further downside is likely to be contained, and we expect the market to ultimately find stability, which should provide the foundations for a moderate recovery over the coming years.”

UBS expressed the opinion that any bad news for gold is already baked into the price, explaining that “the bulk of the adjustment to the current and expected macro environment has already taken place,” which should boost the metal:  “Right now, investors are simply not engaged. It's been a tough market to trade and there are other assets that are acting as alternative avenues to express macro views.

While the lack of interest has meant that there is less urgency to buy dips, it also means that there is less selling firepower. In addition, the risk/reward of going short has deteriorated," UBS argued.

HSBC observed that investors are beginning to view gold more favorably, despite some occasional sags in sentiment.  “It has managed to hold above and build on gains over $1,100/oz. and in non-USD terms, it is back above EUR1,000/oz.,” the bank says.  “The recovery in oil prices, which … if sustained, may lend additional support to gold. Chinese demand, as indicated by persistent Shanghai premiums, implies decent levels of imports of gold into China. This is offsetting the slowdown in Indian demand. Retail demand for gold and silver coins is also strong. On the negative side, we are unsure about central-bank demand, at least at the moment,” said an HSBC analysts note.

Commerzbank noted in a report that “Switzerland exported 173.9 tons of gold in August, 8% more than in the previous month. Nearly 70% of this total was shipped to Asia…50% more gold was exported to China. Exports to Hong Kong were actually more than twice as high as in July, which suggests that China also imported more gold from Hong Kong last month.”     

The report also took into account the expectation for a strong festival season in India which could boost demand as much as 15%

“Increased gold demand in India and China should lend support to the gold price,” said the Commerzbank report.

About the Author: Mike Fuljenz
Mike Fuljenz is a member of the Newsmax Financial Brain Trust. Click Here to read more of his articles. Mike's books, media appearances and newsletters about gold and rare coins have won Best of the Year awards from the Numismatic Literary Guild and the Press Club of Southeast Texas, and he received the NLG's coveted top honor in 2013, "The Clemy Award."