Why gold is going crazy

Why gold is going crazy

Original Liu Xiaobo

As soon as A-shares opened today (December 4), the gold sector rushed to the first place on the list of gainers, up 2.52% by 10 a.m.

Among them, Sichuan gold rose 6%, Zijin Mining rose 5.3%, Shandong gold rose 5%, and Hunan gold rose 3.67%.

Why did gold stocks suddenly soar?

Because last night and this morning, New York gold hit an all-time high:

Why gold is going crazy

Gold was last traded at $2,106 an ounce in New York, and briefly surged to $2,152.3 this morning.

2152.3 US dollars / ounce, which is converted to 493.6 yuan / gram in RMB.

The main reason is that the US dollar has ended its interest rate hike and is about to enter the interest rate cut cycle, and hot money has begun to speculate on expectations.

Historically, gold has been seen as a safe-haven asset, and its price soars when war, unrest, hyperinflation, or interest rate cuts in major currencies.

After World War II, the U.S. dollar became the world's number one currency, and gold and the U.S. dollar formed a special correspondence, which we can understand as follows: gold and the U.S. dollar sit on opposite ends of the seesaw. In recent years, cryptocurrencies have also diverted gold's hedging function by sitting with gold.

Recently, the US inflation rate has fallen significantly and the unemployment rate has rebounded slightly, which means that the continued interest rate hikes of the US dollar have had an effect, and it is generally believed that the US dollar rate hikes are over. And the trend that the dollar is about to enter a cycle of interest rate cuts is becoming more and more obvious.

After the release of the CPI in October, the market expects the probability of another interest rate hike by the Fed approaching 0, with the probability of the first rate cut in May 2024 exceeding 80%, and the probability of a 100bp rate cut for the whole of next year approaching 100%.

In this case, the market began to speculate in advance about the US dollar interest rate cut, and gold became a very good target.

In fact, central banks have been buying gold for a long time.

Why gold is going crazy

The chart above shows the increase in gold holdings by the People's Bank of China.

This round of holdings began in November last year, and has been increasing its holdings for 12 consecutive months until October this year, with China's gold reserves at the end of October at 71.2 million ounces, and this round of gold holdings increased by 8.56 million ounces, equivalent to 266.2 tons.

Due to the accurate judgment, early start, and low cost of increasing holdings, the People's Bank of China has made a lot of money on gold.

In fact, many central banks in various countries (localities) have also increased their holdings of gold in the past year.

One month ago, the World Gold Council released its latest Global Gold Demand Trends Report, which showed that global central banks bought 337 tonnes of gold in the third quarter of 2023, the third highest quarterly net purchase on record. In the first three quarters of 2023, global central bank demand rose 14% y-o-y to a record 800t.

The following chart shows the gold reserves of major countries and regions, and the data is a bit old for your reference.

Why gold is going crazy

As of the end of October 2023, China's gold reserves stood at 2,214.32t, ranking sixth in the world. Since China has the world's largest foreign exchange reserves, there is a lot of room for the central bank to increase its holdings of gold in the future.

While the central bank continues to increase its holdings of gold, the people's desire to increase their holdings of gold has also increased significantly, especially in China and India, two populous countries, where people are very fond of gold. When these 2.8 billion people are keen to buy gold, it is impossible for the global gold price not to rise.

In the first three quarters of 2023, the country's gold consumption was 835.07 tonnes, an increase of 7.32% compared to the same period in 2022, according to data from the China Gold Association. Among them, 552.04 tons of gold jewelry, up 5.72% year-on-year, 222.37 tons of gold bars and coins, up 15.98% year-on-year, and 60.66 tons of industrial and other gold, down 5.53% year-on-year.

The amount of gold owned by the Indian people has always been higher than that of China, and Indians prefer gold more than Chinese.

There are two other minor factors worth paying attention to in this round of gold surge.

First, diamonds have collapsed.

Since the beginning of the year, the global wholesale price of polished diamonds has fallen by about 20 per cent and the price of uncut diamonds by about 35 per cent. The International Diamond Exchange diamond price index reached a historical peak of 158 in March 2022, and then fell all the way to the current level of about 110, a new low in the past five years, a decline of about 3%.

The reason for the avalanche of diamond prices is closely related to the continuous reduction of the cost of artificial diamonds. With the advancement of science and technology, artificial diamonds are very close to natural diamonds in terms of appearance, quality, hardness, etc., and it is difficult to distinguish between real and fake.

Man-made diamonds are much cheaper: in 2023, man-made diamonds will sell for an average of $300 per carat, and natural diamonds will sell for an average of $1,500 per carat, a difference of up to five times.

Consumer acceptance of man-made diamonds is also increasing. From the previous disdain to recognition, it is believed that artificial diamonds are more environmentally friendly and ethical, and there is no suspicion of blood diamonds (oppression, corruption, and bloodshed in the mining process).

According to the 2023 Global Diamond Consumer Survey Report, in 2023, more than 70% of global consumers consider man-made diamonds to be a fashionable and eco-friendly choice, up from 50% in 2018.

In 2023, the global production of man-made diamonds reached 20 million carats, while the global production of natural diamonds was only 14 million carats.

The surging appearance of man-made diamonds has destroyed the valuation system for natural diamonds. In fact, the scarcity of natural diamonds has been questioned, believing that a few large companies have monopolized the source of the mine and manipulated the price.

This can also be seen from the composition of the reserve assets of central banks in various countries and regions: since natural diamonds are so "scarce", why don't central banks buy them? Among physical assets, why do central banks only love gold?

The collapse of diamond valuations has caused a considerable amount of private funds to flow to gold, which is also an important reason for the soaring price of gold.

The collapse of diamonds tells us that it is easy not to get involved in regional and partial collections or investments that a small number of people are keen on, and its price is easy to be manipulated, and once it collapses, it will be out of control, and decades of hard work and investment will become a joke.

Second, cryptocurrency has become less popular.

Although the price of cryptocurrencies has also rebounded recently, compared with the previous two years, the global popularity of cryptocurrencies has decreased, and some funds have returned to gold.

Compared with physical gold, cryptocurrencies are more private, easier to flow and transfer wealth across borders, and are welcomed by various black money. However, cryptocurrencies are not "secret", they are vulnerable in the face of quantum computing, and they may be stolen by hackers, which is its shortcoming. In this increasingly virtual era, assets that can be seen and held in your hands are more reassuring.

What's more, gold is inherently deflationary: while new gold is being produced every year, the amount of gold that is hidden and disappeared by private individuals is also very large.

It is an eternal law that bad money drives out good money. Everyone tries to keep gold in a private place and prioritizes the use of all types of banknotes. With the death of gold holders, a large amount of gold disappears every year, which effectively maintains the value of gold.

Do we need to allocate physical gold? The answer is yes.

My suggestion is that it is more appropriate to allocate 5% of the assets to physical gold, and you can choose to buy physical gold bars from the four major state-owned banks. Physical gold is an asset at the bottom of the box, regardless of the rate of return, and it is not easily realized, mainly used to prevent unpredictable super risks, such as super inflation.

People who have strong requirements for asset liquidity should not easily allocate a large amount of physical gold, and the liquidity of physical gold is slightly weaker. The best outcome of physical gold is to pass it on to children and grandchildren, and you don't have to use it when you are alive.

There is still some room for gold prices before the dollar starts to cut interest rates.

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