(Mike Maharrey, Money Metals News Service) Despite gold’s sideways performance in recent weeks, UBS still expects gold to gain 20 percent from its current price this year.

Since the big selloff in January, gold has generally traded in a range between $5,000 and $5,200 an ounce. It got a little bump when the U.S. began military operations in Iran, but quickly settled back into that range.

Gold followed a similar pattern when it corrected last fall, trading sideways for a few months before taking off again.

While many may be surprised that gold has surged due to the war, the yellow metal hasn’t typically had a long-term impact on the gold price. After an initial safe-haven bump at the onset of a war, other factors, particularly monetary policy, have driven the gold price in wartime.

In a note, UBS analysts noted that gold has not been able to break through resistance at $5,200 even with the geopolitical uncertainty of the Iran war, calling it “a contrast to its 65 percent rise last year, when heightened geopolitical risks served as a tailwind amid fundamental drivers such as lower real interest rates and debt concerns.”

However, they noted that gold seems to be following a familiar wartime pattern, with many investors using gold as a source of liquidity to manage stock and commodity price swings.

“Its latest performance mirrors historical behavior during such events, where investors seek liquidity and consider alternatives like energy assets.”

They backed up their generalization of the wartime pattern by pointing out that gold behaved similarly during other recent military conflicts.

“Gold jumped 15 percent after the start of the Russia-Ukraine conflict in 2022, but then declined by 15-18 percent as the Federal Reserve raised rates. The same happened during the Gulf War and Iraq War—prices rose 17 percent and 19 percent, respectively, at the start but decreased as tensions eased.”

Looking beyond the short-term impacts of the war, UBS analysts remain bullish on gold, forecasting the price to rise to between $5,900 and $6,200 by the end of the year, “as the key drivers underpinning its strong rally remain in place.”

“Given the macroeconomic and political uncertainties beyond the risks arising from the U.S.-Iran conflict, we continue to hold a positive view on gold and believe that the yellow metal remains an effective portfolio diversifier.”

They point out that investment demand remains robust, even as the metal trades rangebound.

“While ETF investors trimmed their gold holdings slightly earlier this month, their positions have shown greater stability of late, and hedge funds have modestly boosted their net positioning in gold. We believe total gold demand is likely to stay strong, supported by continued central bank purchases, rising investment activity, as well as the structural growth of demand for gold jewelry amid higher incomes in Asia.”

ETFs globally added 26 tonnes of gold in February, pushing total holdings to a record of 4,171 tonnes.

Analysts at the Swiss bank add that the factors driving the bull market before the war remain in place and may be exacerbated by the ongoing conflict.

“Gold is more of a hedge against the wider impact of conflicts, rather than direct wartime threats. Gold primarily insulates against monetary risks like currency devaluation, rising deficits, and economic slowdowns, which can result from geopolitical conflicts.”

The UBS note cautioned that investors could see some short-term pressure on gold prices due to the war.

“In the short term, higher energy prices and inflation worries have led to a stronger U.S. dollar and concerns over potential rate hikes—both are negative for gold prices.”

However, UBS analysts don’t think central banks will be inclined to hike rates.

“But we expect central banks to be watchful of inflation risks without making knee-jerk policy rate hikes.”

In fact, the Federal Reserve is caught in a Catch-22 where it should hold rates higher for longer to battle rising inflation (war or no war), but can’t because the economy is being warped by a giant Debt Black Hole. In fact, further monetary easing seems far more likely than interest rate hikes.

UBS analysts agree.

“A weaker U.S. dollar and lower U.S. real interest rates are supportive of gold, and we believe this macro environment remains intact as the Federal Reserve has more to go in its easing cycle. Despite stronger recent jobs data and some hawkish elements in the latest FOMC minutes, easing inflation pressure in the coming months and a more dovish personnel profile at the Fed later this year should support additional rate cuts. We expect two 25-basis-point rate reductions by the end of September.”

Furthermore, as James Madison said, “War is the parent of armies; from these proceed debts and taxes.” The federal government already has a spending problem. A war won’t help. In fact, we can likely expect bigger deficits and an even more quickly ballooning national debt.

UBS analysts agree, noting that the longer the war drags on, the greater the risk of negative economic impacts.

Ultimately, we’re talking about an inflationary scenario, as the Fed will likely have to take steps to monetize the wartime debt. That means more money creation.

The UBS analysts emphasized that gold “stands out as a hedge against inflation.”

“According to the Global Investment Returns Yearbook, the real returns of gold and commodities since 1900 have positive correlations to inflation.”

The war could also exacerbate ongoing de-dollarization, as other nations worry about being exposed to U.S. fiscal malfeasance.

“We expect structural trends such as elevated government debt as well as central banks’ and global investors’ efforts to diversify away from the greenback to support gold’s long-term outlook.”

Mike Maharrey is a journalist and market analyst for Money Metals with over a decade of experience in precious metals. He holds a BS in accounting from the University of Kentucky and a BA in journalism from the University of South Florida.