Abstract: As of 17:00 Beijing time on April 11, the international spot gold price was reported at 2,331.91 US dollars / ounce, down slightly from 2,333 US dollars / ounce on April 10. Spot gold is still up about 7% in a month
Text: Kang Kai
Editor|Zhang Wei
After rising for many days, the international gold price rebounded. In the U.S. stock market on April 10, the COMEX gold May contract, the most actively traded contract on the New York Mercantile Exchange, fell nearly 1% intraday.
As of 17:00 Beijing time on April 11, the international spot gold price was reported at $2,331.91 per ounce, down slightly from $2,333 per ounce on April 10. However, spot gold is still up about 7% in a month.
The international gold price is the anchor for the pricing of various types of gold assets. On 11 April, the prices of many gold jewellery in Chinese mainland also fell. Among them, the price of pure gold can drop by 7 yuan/gram in a single day, and the quotation is between 720 yuan/gram and 721 yuan/gram.
In the stock market, gold stocks fell collectively after the opening on April 11, with China Gold International falling nearly 5%, China Gold falling 3%, and Sichuan Gold falling 4%. As of the close, China Gold International, China Gold and Sichuan Gold were quoted at HK$48.10 per share, 10.87 yuan per share and 29.98 per share respectively.
At the same time, silver was also affected by the price of gold. As of 17:00 Beijing time on April 11, the spot silver price was at $27.91 per ounce, a slight decrease from the previous day's closing price.
Li Gangfeng, an analyst at the European mining fund Commodity Discovery, believes that on April 11, the reason why gold prices fell first but then rebounded was that the hot inflation data in the United States suppressed expectations for the Federal Reserve's interest rate cut. However, in the medium to long term, the international gold price remains strong, which reflects the market's expectations for the Fed's interest rate cut bets in 2024, and even bet on the Fed to raise its inflation target by 2%.
Shi Cheng, a researcher at Huatai Futures Precious Metals and Nonferrous Metals, said that in addition to the real interest rate factor, global central banks and consumer gold purchases are also an important driver of the current rise in gold prices. At present, the gold market is relatively crowded, and the future profit-taking of funds may become a major risk for the market.
(International gold price trend, data source: Wind)
1. The expectation of interest rate cuts disturbs gold prices
Li Gangfeng believes that the main reason for the pullback in gold prices is that the hot inflation data in the United States has suppressed the Fed's interest rate cut expectations. When interest rates rise, gold prices tend to fall because bond yields will be more attractive in comparison. Inflation and employment are the twin goals of the Fed's monetary policy, and when inflation rises and employment improves, the Fed has no greater incentive to cut interest rates.
The latest data from the U.S. Department of Labor showed that in March, the U.S. consumer price index (CPI) rose 0.4% month-on-month and 3.5% year-on-year. Excluding the volatile food and energy components, the core CPI rose 0.4% month-on-month and 3.8% year-on-year in March, both higher than market expectations.
As a result, the yield on the 10-year Treasury note, a benchmark for mortgages and other loans, surged above 4.5%, and the yield on the 2-year Treasury note, which is linked to interest rate expectations, surged to nearly 5%. The U.S. dollar index surged more than 1%, hitting a new high for the year.
The latest data from the Chicago Mercantile Exchange FedWatch showed that the market is betting that the probability of a Fed rate cut at its June meeting will fall below 20%, with the first rate cut likely to be in September.
In addition, the employment data did not support the Fed to cut interest rates prematurely. According to the U.S. Department of Labor, U.S. non-farm jobs surged by 303,000 more than expected in March, the largest increase since May 2023.
In the long run, the international gold price is still at a historical high. As of April 11, spot gold in London rose to $2,343 an ounce from $2,043 an ounce in early March, an increase of about 15%.
In Shi Cheng's view, the real interest rate in the United States is an important factor affecting gold. While the current inflation data is slightly volatile, as long as the magnitude of inflation does not trigger Fed rate hike expectations, this is positive for precious metals. Because nominal interest rates will fall in the future anyway, and it doesn't matter when the Fed cuts them.
The minutes of the Fed's latest meeting said that participants generally noted the uncertainty that high inflation persists, but the recent data did not increase their confidence that inflation continues to move towards the 2% target. They also said the anti-inflation process continued, albeit with "some bumps."
UBS recently raised its gold price forecast for the end of 2024 to $2,500 an ounce from $2,250 previously, and expects gold ETF holdings to increase in the future as the Fed initiates interest rate cuts in the middle of the year, as buying is often linked to interest rate adjustments.
Goldman Sachs also believes that against the backdrop of the Fed's interest rate cut expectations, international gold prices still have room to rise in 2024.
2. Global central banks continue to buy gold
The tightness of the Fed's monetary policy affects market liquidity, which in turn affects the rise and fall of various assets. From a broad asset perspective, markets are betting on Fed rate cuts, but gold prices have risen significantly more than equities and are decoupling from real interest rates.
Since March, the three major U.S. stock indexes have risen by less than 1.5%, and the Dow Jones index has fallen slightly. So far this year, the yield on the 2-year Treasury note is up more than 70 basis points.
In Shi Cheng's view, global central banks continue to buy gold, which has become a major driver of the recent rise in gold prices.
UBS said preliminary data from January to February showed that global central banks bought about 64 tonnes of gold. According to the World Gold Council, in 2023, global central banks will purchase 1,037 tons of gold, the second highest in history. By the end of March, China's central bank had increased its holdings of gold reserves for the 17th consecutive month.
UBS said that non-traditional gold buyers are also likely to drive the gold price higher, as gold-backed ETF holdings are at a four-year low.
Shi Cheng further said that behind the continuous purchase of gold by global central banks, there are geopolitical risk aversion factors, as well as considerations for the US dollar credit system.
In 2024, more than 60 countries and regions around the world will hold elections, most notably the United States. At the end of February, President Joe Biden and former President Trump locked in their respective party nominations. The latest poll released by the Wall Street Journal in early April showed that Trump is ahead of Biden in six of the seven states with the most competitive elections in the 2024 election.
The U.S. dollar is based on the national credit of the United States, which has now ranked first in the world in terms of debt for ten consecutive years. After the massive stimulus package, the total US national debt increased from $12 trillion in 2008 to $33 trillion in 2023, and its share of gross domestic product (GDP) increased from 82% to 121%. According to the Institute of International Finance (IIF), in 2023, the total global debt will be $313 trillion, and the United States will increase the most among the new debts.
Against the backdrop of high interest rates, interest on U.S. debt has risen sharply. Interest costs in U.S. federal fiscal spending have climbed from $186.9 billion in 2009 to $659.3 billion in 2023, rising from 1.29% to 2.44% of GDP. The Congressional Budget Office estimates that interest payments will account for 3.6% of the country's GDP by 2033.
In addition, consumers' enthusiasm for gold buying has become a major driver of the rise in gold prices. According to the data, during the Spring Festival in 2024, China's gold and jewellery sales increased by 24%. Meanwhile, the London Bullion Market Association (LBMA), an international trade association representing the over-the-counter bullion market, said retail demand was strong in Japan, as was India.
However, Shi Cheng reminded that although gold prices are still in an upward channel, the risks cannot be ignored. For example, the bulls are relatively crowded, and the funds are profit-taking. "It can be observed whether there is a significant decline in open interest at a time when the volume has risen sharply. In addition, liquidity risks also need to be paid attention to, and there are no obvious signs for the time being. He said.
Li Gangfeng believes that gold should remain at the current level, that is, $2,400 per ounce. "Of course, the market sometimes loses its rationality, and if it rises now, it will have to give back more later. At the end of April and the beginning of May, the price of gold in the market is likely to be more volatile. He said.