The price of gold has risen wildly, and the gold store has a new high price every day, what kind of logic is it speculating

If you walk into a Chow Tai Fook store on April 13, the price of 1 gram of gold for jewelry is already as high as 736 yuan. A month ago, the price was 666 yuan for 1 gram. Just last year, the price was once in the range of 400~500 yuan.

Corresponding to this is the international gold price, which has soared to a point of being dumbfounded. On April 12, the spot price of gold exceeded $2,430 per ounce at the highest intraday, climbing nearly 18% compared with the beginning of the year, killing popular assets including the U.S. stock market and the Japanese stock market.

Under the fierce offensive, the international investment banks, which were originally bullish on gold but issued vigilant instructions in the short term, were forced to constantly raise their gold price forecasts, $2,000, $2,100, and $2,200, and last week UBS raised the forecast to $2,500.

However, some fund managers directly said, "I've seen $3,000." ”

In this one-sided bullish mood, it seems that it is not difficult to understand that gold prices have not seen a pullback for a long time, because everyone is worried about not being able to get on the car, after all, FOMO (Fear of Missing Out) is more uncomfortable than buying and losing money.

The support behind gold prices includes geopolitics (risk aversion and the search for alternatives to US dollar assets), global central bank holdings, limited mine development, rising overseas inflation expectations, and unsustainable government fiscal positions.

Of course, the recent rally is more due to fears that Iran may be involved in the Middle East war. U.S. President Joe Biden said last Friday (April 12) that Iran is expected to attack Israel "sooner or later".

While gold remains bullish in the medium term, it will be interesting to see if it can remain elevated in the near term, given that it is now at an extremely overbought level, or whether it will soon stage a belated correction.

Gold prices ignore all resistance threats

In general, there are four main factors driving the price of gold – the level of economic expansion, risk and uncertainty, opportunity cost (interest rates), and market momentum.

Market momentum can be used to explain the surge in gold prices. For example, concerns about Iran's disruption in the Middle East, short-term spikes in speculative positions, etc. But after the short-term factors, it is the medium- and long-term trends that are more critical.

In terms of risk and uncertainty factors, since last year, geopolitical risks, banking crises in Europe and the United States, etc., have pushed gold prices higher. This year is the year of the global election, and the data shows that some major countries will have a total of 50~70 elections, and these countries account for more than 50% of the world's GDP.

Among them, the elections in the United States and India are the most important, and investors may hedge their investments to a certain extent for uncertainty.

From an opportunity cost perspective, the turning point of interest rate hikes has historically been when gold prices have taken off. For gold, a non-interest-bearing asset, a rate cut means that the opportunity cost for investors to hold gold will be lower, and vice versa. Since the fourth quarter of last year, market expectations for the Federal Reserve to cut interest rates have climbed, and gold prices have hit record highs.

However, since March, the Fed's interest rate cut expectations have cooled sharply, but gold prices have not moved, why is this?

There is a view that the market's pursuit of gold has also led speculators to find every reason to be bullish on gold, this time as a "function against inflation".

The reason why US interest rate cut expectations are starting to cool is also because several data this year have shown that inflation data remains high.

On April 10, the US CPI exceeded expectations across the board, which led to a sharp drop in expectations for interest rate cuts in June, Goldman Sachs postponed its first forecast to July, lowering its forecast for three interest rate cuts for the year to two, and UBS directly pushed forward its first rate cut forecast to September.

The year-on-year growth rate of core CPI in March did not fall to 3.7% as expected, but remained unchanged at 3.8% in February.

As a result, the US 10-year Treasury yield plummeted to 4.5%. U.S. dollar index futures also jumped in a straight line, breaking through 104 from 103.8 and then approaching the 106 mark.

Gold is now at extremely overbought levels. Gold may not be able to withstand the rise in Treasury yields for long, and the opportunity cost of holding gold is increasing from a yield perspective because it lacks interest-bearing attributes.

Gold looks quite overbought on the weekly chart, with the RSI rising above 75.00, which is an extremely overbought level. When gold broke through the 70 mark before, it experienced a decline.

｜黄金周线图。 来源：Tradingview

The overbought situation pointed by the RSI can be corrected over time, especially if gold consolidates around the current level for a few days without giving back too much, such as falling below the $2222 level.

The world's main force has become the main buyer

Of course, none of the above-mentioned objective factors can compare with the driving force brought by real capital inflows. The world's central banks, the number one buyer of gold, should not be underestimated.

Global central bank demand reached the second-highest level on record in 2023 at 1,037t, while China's official gold reserves also increased month-on-month, but remained unchanged for many years.

By the end of 2023, China's official gold reserves had reached 2,235t, accounting for 4.3% of total reserve assets. The People's Bank of China (PBOC) added 44t to gold reserves in Q4, pushing the annual gold purchase to 225t.

Preliminary data from January ~ February this year show that global central banks bought about 64 metric tons of gold, and China's total gold imports from Switzerland reached 132 metric tons. China's foreign exchange reserves rose month-on-month in March this year, and gold reserves rose for the 17th consecutive month.

As global tensions intensify, especially after the outbreak of the Russia-Ukraine war, there are growing concerns about the safety of US dollar assets, and global central banks are more willing to buy physical gold and store gold in their own countries.

Invesco's survey found that 68% of central banks hold some of their gold reserves domestically, up from 50% in 2020. According to the investigation, which looked at 57 central banks and 85 sovereign wealth funds that manage about $21 trillion in assets, many sovereign investors are "concerned" about the precedent of freezing Russian assets.

According to a survey conducted by the World Gold Council in the third quarter of last year, more than seven out of ten central banks surveyed expect global gold reserves to increase in the next 12 months. Emerging markets are more likely to increase their gold reserves than developed markets, which are already at relatively high levels.

Asian countries such as China, India, Singapore and Bolivia in Latin America are the main buyers of gold.

Central banks allocate gold primarily for safety, liquidity and returns.

First, gold is seen by central banks as a safe asset and a store of value, as it is more stable in the face of credit risk than other assets such as government bonds.

Second, gold is highly liquid and allows central banks to enter the market quickly without distorting prices, and while returns are not the main incentive for central banks to buy gold, gold's compound annualized yield of around 7% over the past few decades has provided investors with relatively attractive returns compared to US and non-US equity returns.

Anxious Chinese buyers enter the market

Chinese buyers are a group that cannot be ignored. In the early years, the reports of "Chinese aunts" grabbing gold are still vivid, and after many years of silence, it seems that this momentum has some signs again, whether it is gold jewelry or gold ETFs, they have been increased by Chinese buyers.

In 2023, despite a 17% surge in the domestic gold price, total jewellery demand in China reached 630t, up 10% y-o-y, while Q4 consumer demand in China was 148t, down 4% from Q3 but up 17% from a low base in 2022, the data showed.

In Q4 2023, gold-backed ETFs in the Chinese market continued to see inflows (+CNY1 billion), pushing their total AUM to a record high of RMB29 billion by the end of the year. In contrast, overseas gold-backed ETFs were actually net outflows.

With the property market downturn and A-share slump, Chinese investors seem to be looking for alternatives. There is a view that gold can only maintain its value in the case of inflation, and China has no inflation problem at present, and even the CPI once entered the negative range, and buying gold can not bring substantial benefits.

The public's rush to buy gold has little to do with value preservation, but more importantly, psychological comfort.

In particular, renminbi-denominated gold traded domestically has actually risen more than the international gold price, as the renminbi has weakened sharply against the US dollar, and the gold price has the effect of hedging exchange rate risk.

Although gold is good, gold hoarders need to be clear that there may not be much additional cost to buy gold bars, and the premium of gold jewelry far exceeds the spot trading price of gold itself, and the market price of gold stores itself is at a premium, and each piece of jewelry is charged at least a few hundred yuan for processing, so investors seeking to preserve value may need to think twice;

In addition, even gold-backed ETFs can be bought at a high premium at a time when the market is extremely frenzied, detached from the actual movement of the gold price, which can also incur risk.

No.5731 and Irene Zhou

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