KUALA LUMPUR (May 12): Swiss investment bank UBS expects gold and silver to hit fresh record highs this year, as escalating Middle East tensions and the prospect of lower real interest rates fuel demand for precious metals.

UBS precious metals strategist Joni Teves said the bank maintained its view that gold prices would reach new highs this year while the potential for prices to exceed its baseline forecasts over the medium to long term was increasing.

“We still think that prices can recover from current levels and continue to make new highs this year,” Teves said during a presentation on UBS’ outlook.

She noted that the drivers of the rally remain intact, supported by broadening demand from private investors and central banks, as gold increasingly becomes a core portfolio allocation amid heightened macroeconomic and geopolitical uncertainty.

Teves added that the current consolidation offers investors a chance to build positions, with the market still appearing underinvested. Any pullback towards the US$4,000 per ounce level, she said, should be viewed as an opportunity to accumulate.

“Even if the Fed stays on hold, if inflation is going up, that still means a compression in real rates,” she explained.

“If the Fed has to respond to weaker growth by cutting rates, that’s an even more compressed real rate scenario, which tends to be bullish for gold.”

Real interest rates are defined as the nominal rate minus the inflation rate.

UBS also expects official sector demand to remain firm despite concerns over potential reserve sales following recent price volatility. Preliminary World Gold Council data showed first-quarter central bank purchases were slightly higher than a year earlier.

Teves said sovereign buying has become a key pillar of support, absorbing supply, reducing liquidity and cushioning prices during periods of macroeconomic stress. Investor flows driven by macro factors continue to dominate short-term price action while official sector demand underpins the broader uptrend.

She highlighted resilient sentiment in Asia, with Chinese gold exchange traded funds (ETFs) recording net inflows alongside strong physical demand earlier this year.

On silver, UBS maintained a constructive outlook, projecting prices to rise alongside gold as supply deficits persist and investor sentiment improves.

“We expect silver to follow gold higher. As gold makes new highs, silver should also make new highs,” Teves said.

UBS noted silver could outperform gold as investors increasingly view it as a higher-beta alternative, though positioning remains more tactical given its volatility. Robust physical demand from China, including restocking and investment buying, should continue to support sentiment.

Still, weaker industrial demand could weigh on silver if global growth slows sharply. The silver market has remained in deficit for some time, supported by inventory drawdowns and investment demand from China, India and the Middle East.

UBS reaffirmed its year-end targets of US$5,600 per ounce for gold and above US$100 per ounce for silver.

After hitting a record high above US$5,600 an ounce in late January, gold is now trading near US$4,730 an ounce. Silver, which touched an all-time high of US$121 earlier this year, is meanwhile trading above US$86 an ounce.