As gold dips below $1,230/oz in early trade for the first time this month, consolidation at a lower price could offer investors an opportunity to buy into this year's rally, UBS said in research Tuesday.
"Pullbacks in gold so far this year have been relatively shallow and short-lived, not really offering investors many opportunities to enter at better levels," UBS precious metals analyst Joni Teves said.
"Some more consolidation at this point should be healthy for gold given strong price gains year-to-date, a considerable increase in Comex positioning and the rebound in risk," she added.
Platts reported Monday net long gold positions on COMEX had risen to a 14-month high in the week to March 8 of 127,427 contracts, according to US Commodity Futures Trading Commission.
Gold has shed nearly $50/oz since trading around one-year highs of $1,270/oz last week, with many analysts attributing price weakness to profit-taking by speculative financial investors.
But recent strong US economic data has also increased the possibility of further tightening from the Federal Reserve, due to meet Wednesday.
Although the probability of a rate increase in March is less than 5%, according to CME Fed Fund Futures, the market now sees a 50% chance of a hike by June and close to 70% by November.
With higher interest rates back on the cards, the opportunity cost of holding gold increases as a non-yielding asset class.
However, any gold price weakness is still yet to have any effect on physical markets, which have been increasingly subdued this year.
"While a cheaper gold price should encourage some physical buying, we are not expecting much during this seasonally quiet period," UBS said.
Physical markets in mainland China, Hong Kong, India and Turkey have all reported weak demand in 2016, with investors deterred by high international prices.
Discounts offered by local dealers to international prices have been reported in most locations, with Indian discounts -- currently in the middle of a two-week long national strike by jewelers -- heard as high as $30-40/oz.
The loco swap rate between Zurich and London also indicates the absence of physical demand and the presence of scrap metal, according to UBS.
The London Bullion Market Association Gold Price settled at $1,233.60/oz Tuesday morning, down $9.15/oz on yesterday's close.
