Global central banks continue to buy gold Gold price volatility does not hinder the medium to long-term upside

Our reporters Gu Mengxuan and Xia Xin reported from Guangzhou and Beijing

Recently, the international gold price hit a record high and was quickly sold off, triggering a sharp decline. The price of gold denominated in RMB has also fluctuated significantly, causing widespread concern in the market.

On December 4, the price of gold futures in the New York market once rushed to the $2,150 per ounce mark, up more than 3% in the day, hitting a record high. Then the gold price fell rapidly, and as of the 7th, the cumulative correction per ounce exceeded $100.

Affected by this, the gold Au99.99 listed on the Shanghai Gold Exchange fell back after soaring to 487 yuan per gram on the 4th, and the retail price of some domestic brands of pure gold jewelry stood at a high of 630 yuan per gram and then fell back to about 615 yuan per gram on the 7th.

According to library Wind data, on December 15, the price of COMEX (New York Mercantile Exchange) gold futures was reported at 2018.3 US dollars per ounce, and as of press time, gold Au99.99 per gram listed on the Shanghai Gold Exchange was 472.99 yuan per gram.

Welcome the inflection point of relaxation

For the pullback of gold prices, Wang Xiang, fund manager of Bosera Fund Index and Quantitative Investment Department, pointed out that the Fed's interest rate hike cycle is coming to an end and will usher in an easing inflection point. However, there is an impulse to take profits near the all-time high, and the net long position of the short-term COMEX futures fund is too fast, and there is a need for adjustment.

At 3 a.m. Beijing time on December 14, the Federal Reserve issued a statement on the December 2023 FOMC meeting (Federal Reserve interest rate meeting), announcing another pause in interest rate hikes.

According to data provided by Bosera Fund, inflation expectations in the United States have dropped significantly. In December, the University of Michigan Consumer Sentiment Index rebounded to 69.4 versus 62 expected, with inflation expectations falling significantly, from 4.5% to 3.1% for the one-year period and 2.8% for the five-to-10-year period from 3.2%. "This combination is bad for precious metals. Wang Xiang said.

Regarding the rise in gold prices in the early stage, Bi Mengjiao, an investment researcher at Geshang Fortune Jinzhang, pointed out that gold, as a non-interest-bearing physical asset, often ushers in an upward opportunity when other assets have poor returns.

First of all, from an economic point of view, we may be in a global recession. Given fears of an economic downturn and falling stock markets, investors are more willing to buy gold to hedge their risks, driven by risk aversion, leading to a rise in gold prices. In November, the global manufacturing PMI (purchasing managers' index) was 49.3, the US manufacturing PMI was 46.7, and the euro area manufacturing PMI was 44.3, all of which were below the boom and bust line, reflecting the overall recession of the global economy.

Second, last week's US ADP data (an economic indicator commonly used to measure the job market) fell short of expectations, and the market speculated that the Fed would not raise interest rates in December, that is, the nominal interest rate was likely to show a downward trend in the future, making gold prices rise again.

Finally, global central banks continue to buy gold, and global central bank gold purchase demand will remain strong in 2023, supporting the upward trend of overall gold prices.

"This week's correction in gold was mainly due to the rise in the dollar index and U.S. Treasury rates after the U.S. non-farm payrolls data exceeded expectations, and the 'hawkish' signal from the Federal Reserve Chairman caused gold prices to fluctuate to the downside. Bi Mengjiao said.

Gold has a compound annualized rate of return of 7%

The reporter noted that in August this year, there was a large divergence in the trend of domestic and international gold prices. Has the excessively large spread between the inside and outside of gold prices been corrected in recent months?

Wang Xiang pointed out that in September this year, the highest price difference between domestic and foreign countries was 30 yuan +/g, and the current price difference has converged significantly to 7 yuan/g, but it is still far from the historical 95% confidence fluctuation range of 1.2~1.8 yuan/g. During the convergence process, the onshore gold price will underperform the US dollar gold.

Bi Mengjiao pointed out that the international gold price and the domestic gold price are basically in a positive correlation, but due to the influence of factors such as the pricing system, rates and time lag, the short-term may show divergence, and the fluctuation of domestic gold prices tends to lag behind. After several months of adjustment, international and domestic gold prices have basically converged.

Central banks around the world have also shown continued enthusiasm for gold purchases. According to the World Gold Council, global central bank gold purchase demand remained strong in 2023, with 387t in the first half of the year, a record high, and a record 800t in the first three quarters, up 14% y-o-y. At the same time, data released by the State Administration of Foreign Exchange showed that at the end of November, the central bank's gold increased for the 13th consecutive month.

In this regard, Bi Mengjiao pointed out that the central bank's allocation of gold mainly considers safety, liquidity and returns. First, gold is seen by central banks as a safe asset and a store of value because it is more stable in the face of credit risk than other assets such as government bonds, secondly, gold is more liquid and allows central banks to enter the market quickly without distorting prices, and finally, although returns are not the main motivation for central banks to buy gold, gold's compound annualized yield of around 7% over the past few decades has provided investors with relatively substantial returns.

"The proportion of gold in the mainland's foreign exchange reserves is still low, although the proportion is still less than 6% after continuous holdings, compared with the proportion of more than 40% in Europe and the United States. Wang Xiang said that increasing the proportion of gold in foreign exchange reserves will be conducive to the diversification of the reserve structure and the maintenance of local currency and asset prices in the US dollar contraction cycle.

Investors invest rationally

For the future market of gold assets, Nuoan Fund pointed out that affected by the issuance of bonds by the U.S. Treasury, the reduction of the Federal Reserve's balance sheet to reduce U.S. bond holdings, and the current relatively strong economic expectations, it is expected that the long-end yield of U.S. bonds will remain high, and short-term gold is still suppressed by interest rates and the U.S. dollar index. However, we expect that the signs of a slowdown in the US economy may be more pronounced in the first half of 2024, and high interest rates and near-term geopolitical risks may increase the volatility of financial markets compared with the previous period. Recently, the market's expectations for the Fed's interest rate cut have increased, which has given a significant boost to gold prices, or more changes in expectations in terms of pricing. It is recommended that investors actively pay attention to the price trend of gold, and consider the proportion of gold allocation to grasp gold investment opportunities.

Wang Xiang said that whether it is the smooth convergence of inflation, leading the monetary policy of Europe and the United States to turn to the logic of liquidity, or the impact of emergencies Inflation rises again, taking the logic of stagflation, different macro paths are beneficial to the gold margin, so that it is still one of the assets with high certainty, and the difference is only in the difference in odds. Next year is an election year for many economies, and the intensity of geopolitical games may remain at a high level, which is also conducive to the rise of the price center. The upward target of US dollar gold is 2200~2400 US dollars, corresponding to about 515~550 yuan/gram in China.

"It is normal for gold prices to become more volatile in the area near new all-time highs, and investors should neither be overzealous when the market is overbought, nor completely lose confidence after its breakout fails. Wang Xiang pointed out that from a medium and long-term perspective, next year's Fed easing and the weakening of the dollar is still a high probability path, combined with many economies into the election year, the intensity of the geopolitical game will remain at a high level, after the release of short-term selling sentiment, gold will still return to the medium and long-term upward path.

(Editor: Xia Xin Proofreader: Yan Jingning)