Xu Zhiyan: Gold earns money from over-issued currencies and has entered a long-term allocation range

Key takeaways:

1. Despite the high short-term increase, from the perspective of the general trend, gold has entered a better allocation range and cycle.

2. COMEX gold futures have actually exceeded eight points on an annualized basis so far. A lot of people don't believe in an annualized rate of more than eight points and don't believe in that high.

Usually the rise in real interest rates should respond to a correction in gold prices, but why has gold not only not corrected, but also continued to hit new highs?

I think we need to look at the world and the changes that are happening to gold in a new light. Our gold analysis framework has been iterated three times in the past 11 years, and this time it is in the process of being iterated as well.

3. Warren Buffett has a theory that going long gold is about being afraid of going long, for example, when stocks and bonds are killed, the logic of buying gold to participate in hedging is smoother. On the other hand, maybe in the process of the long-term rise of stocks, you have a bit of a seesaw meaning with gold, which is not very meaningful.

In fact, the two are weakly correlated, not equal to cause and effect......

Warren Buffett earns money from stocks, and gold is money from over-issuing currencies.

4. The core pricing logic of gold actually comes from currency expansion and the lack of cost-effectiveness to buy other assets.

5. Gold stocks are basically equivalent to the amplifier of gold, and in several rounds of large gold rising cycles, stocks are amplified. Of course, when gold has short-term fluctuations, it can also fluctuate.

6. Many people think that buying gold jewelry is also investing in gold, but in fact, it is not cost-effective as an investment, and it is reasonable to meet the beauty of consumption.

Recently, the gold market has become the focus, as the largest gold ETF fund manager in mainland China, Xu Zhiyan recently made the above judgment on the new gold high and the investment logic behind it in an online meeting room.

In this meeting room, Xu Zhiyan, as our representative of the square, his view is that gold does have investment value. The opposite is Zhou Honghao, a senior researcher in gold research, who borrowed Warren Buffett's views to carry out the argument.

Xu Zhiyan is the assistant general manager of Huaan Fund and the senior director of the index investment department, with 18 years of experience in the securities and fund industry, with a management scale of more than 60 billion, and has won 6 Golden Bull Awards.

The following is the essence of the investment homework lesson representative (WeChat ID: touzizuoyeben) to share with you:

Gold has entered a better allocation range and cycle

Q: What is the reason behind the record highs in gold prices, how long will this continue and what will be the future direction? Dr. Xu would like to give you a brief analysis.

Xu Zhiyan: The main reason is that the price of gold has repeatedly reached record highs. We mentioned three aspects in our annual gold report at the beginning of the year, and these major logical and cyclical environments have not fundamentally changed so far.

First, the Fed's interest rate cut policy. Although it cannot be asserted, it can be said that in the next three years, the central banks of advanced economies, represented by the Federal Reserve, will still be in the channel of cutting interest rates. Despite rising inflation in the short term, gold investors should seize opportunities from the perspective of the general cycle and general trend.

The reason for the Fed's rate cut is straightforward: the current rate is 5.25%, while the economy is growing at only 1.2%. This is the result of the rapid release of water during the pandemic and the rapid rate hike after high inflation. In fact, the economy has not improved significantly, so interest rate cuts are the general trend. At present, it seems that there are still 2 to 3 rate cuts expected in the second half of the year.

Second, gold is closely associated with debt and currency. Global debt monetization is significant, especially in the dollar system. Concerns about the US dollar are also being heard. From the perspective of global central banks, the overall share of the petrodollar is declining, with a partial shift to gold, and this demand is still heating up.

Third, gold has the characteristics of risk prevention and anti-inflation, and has good medium and long-term returns. In recent years, there have been frequent risk events, ranging from the Russia-Ukraine conflict to the Palestinian-Israeli conflict, and global uncertainties have continued unabated. The demand for gold is related to this, and investors' concerns about risk also have a place in the allocation judgment.

Investors participating in the gold market are all long-term factors, not short-term factors. As a result, our allocation to gold remains in line with the start of the year. Despite the high short-term gains, from the perspective of the general trend, gold has entered a better allocation range and cycle.

Warren Buffett earns money from stocks, and gold is money from over-issuing currencies

Moderator: Warren Buffett has made a lot of comments on gold investing. What is his view on gold investment? Mr. Zhou, the representative of today's opposing party, would like to explain to you Warren Buffett's views on gold. The representative of the positive side is Xu Zhiyan, who supports gold investment.

Zhou Honghao: Warren Buffett is neutral on gold.

At its core, Warren Buffett believes that gold is an asset that does not generate interest. Warren Buffett's favorite asset is an operating asset that generates abundant cash flow.

To put it simply, buying shares of a listed company is equivalent to buying its future profits, and the funds can increase themselves, just like a chicken laying eggs. In this way, the value of the enterprise rises. The same goes for stocks and bonds, the essence of which is to lend money to others, and after a few years, that money will be converted into more cash flow.

Gold is very stable, one gram of gold does not turn into two grams. This essentially indicates that gold does not generate interest.

Warren Buffett believes that it is difficult to find a long-term allocation logic for assets that do not generate interest. I think this explanation of Warren Buffett is in line with what many of us understand about gold.

Moderator: Warren Buffett's main point is that this asset does not generate interest and cannot generate interest income and cash flow income like stocks or bonds, what do you think of this view?

Xu Zhiyan: My first rebuttal is that it is indeed true that gold does not generate interest. Of course, our gold-backed ETFs have a little interest, but not much. Traditional gold does not generate interest.

But I want to talk about two things. First, the difference between monetary and non-monetary currencies. Since the Greenspan era, the United States has started the real over-issuance of central bank money. Over-issuance of money leads to a decrease in purchasing power.

That is, while stocks and bonds may provide returns of 2 to 3 percentage points per year, the value of currencies has changed.

Looking at the past 40 years, the purchasing power, represented by the dollar system, has fallen by more than 70 to 80 percent. That is, the purchasing power of a dollar is now less than one-fiftieth of what it used to be, or even lower.

During the 2008 financial crisis, the real money printing machine was activated. There was a saying at that time that "throw money at a helicopter". March 2020 was even more severe, releasing a huge amount of money to the market in just two weeks, twice as much as in 2008.

At that time, it took seven years in 2008 to carry out three quantitative easing. There will be more and more money, according to Greenspan's understanding of money, that is, "more surface adds water, more water adds more surface", the money supply increases, and the value of money will decrease.

Different assets have their own value. The intrinsic value of gold, which does not generate interest, is derived from money.

Judging by the gold standard for thousands or even centuries, gold has indeed been effective against currency depreciation. Many of us say gold is inflation-resistant, but is gold really inflation-resistant? In fact, the gold market is priced and yielded very highly.

Many people ignore this. According to the World Gold Council, COMEX futures have actually returned more than 8% annualized to date. Many people don't believe that the annualized rate of return can be so high.

Many textbooks compare the yields of gold and Treasuries. In fact, data from the last 100 years shows that equities and gold have similar returns. However, for the first 50 years of 100 years ago, the price of gold was fixed, and the price of 1 ounce of gold was $35, so the yield for 50 years was almost zero.

This leads to an error in the calculation of the yield.

Over the past few years, gold's overall gains have been very good. Therefore, the core goal of investing is to generate income. Over the past 20 years, gold has outperformed other assets. Warren Buffett makes money through stocks, while gold makes money through currency over-issuance.

I think gold has many other functions, such as more recent industrial and process functions. But at its core, gold is a countermeasure to money, a hard currency. Gold's reaction to currencies should be prioritized.

Gold is also an important investment. Not all investments must accrue interest.

But as a global, standardized, and fully transparent hard currency, gold's returns are actually good. Therefore, although gold does not generate interest, it is still good as an investment good.

Going long gold equals going long fear? Stocks and gold are not opposites

Moderator: How do assets like gold deal with risks? What did Warren Buffett say? Let's listen to it.

Zhou Honghao: Warren Buffett famously said about gold, that is, going long gold equals going long fear.

When some geopolitical risk factors or the financial system collapses, people are very panicked about asset trading, and the prices of stocks and bonds fall sharply. Undoubtedly, if you can buy some hedge assets, such as gold, it will perform better.

But Warren Buffett's understanding is that the logic of buying gold as a hedge is only reasonable when there is a panic, such as when the stock price plummets. Conversely, in the long-term rally of equities, it makes little sense to allocate gold.

So Warren Buffett believes that stocks and gold are opposites. If you are bullish on stocks, you should not be bullish on gold, and being bullish on gold is actually bearish on stocks. What is Dr. Hui's understanding of this issue?

Xu Zhiyan: I think Warren Buffett's logic is intuitively correct. But digging deeper reveals several aspects.

The first is statistical correlation. I'm a Ph.D. in statistics, and correlation is not causation. Stocks and bonds, stocks and gold are weakly or negatively correlated, this is a correlation, not because the stock falls necessarily leads to gold rising, this is not a causal relationship, which is more difficult to explain and not intuitive.

For example, in March 2020, when unlimited quantitative easing began, gold plummeted from $1,600 to $1,400. We have made an important view that the broad asset allocation should be biased towards risky assets. At that time, we no longer saw gold as a safe-haven asset, and we recommended both equities and gold.

As it turns out, gold may also be close to doubling so far, as are stocks.

Behind this, we actually find that the short-term negative correlation is not causal, and may be unrelated in the short term, but in the long run, both have seen a significant increase.

The core logic of gold comes from monetary expansion, which is more cost-effective

The pricing logic of these two types of assets is different. The pricing logic of equity assets comes from medium to long-term value. The logic of gold pricing is diverse, and fear is only one of the factors, such as geopolitical conflicts and other events that lead to an increase in gold demand.

But the core pricing logic we see for gold actually comes from monetary expansion, and the lack of value for money to buy other assets. For example, if you buy a bond, $100 gives you $2 interest, and inflation is 3%, and you don't think you're winning, then gold tends to go up as well, and it's actually a cost-effective option.

Warren Buffett's view that gold is defined by fear is not entirely correct or entirely appropriate. His view is from the perspective of investing in U.S. stocks and reviving the U.S. economy. We are from the perspective of residents' wealth management and medium and long-term allocation needs. I think the two perspectives have different standpoints.

The logic of gold's rise is different from the past, and it needs to be looked at from a new perspective

Moderator: How do we view gold now? What do we look at in the short, medium and long term, and where are the current trading logic and risk points?

Zhou Honghao: From Warren Buffett's point of view, when we analyzed the fundamentals of gold in the past, we mainly looked at the real interest rate in the United States. Because holding gold does not incur interest, the real interest rate may be a measure of its cost of holding. But we have found that real interest rates have risen rapidly since 2018, including throughout the Fed's rate hike cycle. Including nominal interest rates, which rose from about 1% during the pandemic to a peak of 4% to 5% last year.

We generally believe that rising real interest rates should respond to a correction in gold prices. But why in this big market, gold not only did not pull back, but also continued to hit new highs? I don't understand this, I hope Dr. Xu can give us an answer.

Xu Zhiyan: Indeed, the recent rally in gold is different from the traditional analytical framework, and it is also a place that many professional gold analysts discuss a lot.

Starting from the second half of 2022, the Federal Reserve began to raise interest rates, and gold fell first and then rose, and there was a significant rise in the process of raising interest rates. So far, the Fed has not cut interest rates, and real interest rates are relatively high. The data has been volatile, and inflation has been strong recently, but gold remains strong.

Our gold analysis framework has been iterated three times in the past 11 years, and this time it is in the process of being iterated as well. I think we need to look at the world and the changes that are happening to gold in a new light.

For example, the first change is that central bank demand is very unusual, with more than 1,100 tonnes of gold bought in both 2022 and 2023. This year, it seems, is still increasing.

Why are global central banks, especially in developing countries, buying gold in large quantities?

One of the intuitive reasons for this is their concern about the dollar system. The second is concern about global geopolitical conflicts. The third is that the gold configuration has a prominent effect.

Gold stocks are amplifiers of gold

Moderator: Although Warren Buffett has said before that gold is a zero-coupon asset, you can also find that his companies have also invested in gold-related projects. What is the specific situation? Mr. Zhou, as a representative, would like to analyze it with you.

Zhou Honghao: Actually, Warren Buffett briefly invested in gold in 2020, when he invested in Barrick Gold, the world's largest gold mining company. At that time, his logic must have also been based on fundamentals.

In 2020, the overall gold price performed well, with overseas gold prices breaking through the US$2,000 per ounce mark. Therefore, the rise in gold prices has greatly improved the profits of the corresponding enterprises. This was also the logic of Buffett's configuration at that time.

But we saw him liquidate gold stocks after a brief hold. If we look at the stock price today, it hasn't gone up to the cost of holding his position at that time, so overall it's really amazing.

We clearly see that the price of gold itself continues to hit new highs, but why are gold stocks still in a state of sideways shock?

Moderator: Gold has reached new highs, but some gold stocks have not yet reached all-time highs. What does Dr. Xu think about this? Are gold stocks an amplifier of the price of gold?

Xu Zhiyan: First of all, gold because it's like our gold ETF buys AU9999, 10,000 pure gold is actually a substitute for physical gold, it's pure, it's the price of gold. It's intuitive.

Gold stock is actually a security, this securities represents the company is a business entity, its main business is mining gold, mineral gold, of course, there are some other mineral business, such as copper, aluminum, lead, zinc, may take care of some, some may be a little more.

In fact, we have done a lot of research on the correlation between gold stocks and gold. Intuitively, it is actually affected by two factors, one is the price of gold, and the other is the company's operation.

The price of gold has a significant impact on it, and [gold stocks] are basically the amplifier of gold. The individual companies you mentioned just now may not be outstanding in this regard, but from the perspective of A-shares, it is still relatively obvious.

In several large gold rally cycles, stocks have been amplified. Of course, when gold has short-term fluctuations, it can also fluctuate.

Our conclusion is that Buffett's selection of individual stocks is not the whole story.

On the whole, in a short period of time, such as 3 to 6 months, its amplification effect is still obvious. But greater volatility also brings with it some uncertainty in the stock market.

But if investors are particularly bullish on gold and don't know so much about stocks, buy gold ETFs. In the end, the gold ETF is almost 100% AU9999, which is a physical alternative.

In fact, you have to look at the stock to be bullish on several layers, is this company operating all the gold, does he have a new gold mine, how is his operating performance this year, his management is not doing his duty, some of his other compliance risks.

Because gold mining is a very complex matter, many of them are now mined from 1,000 meters to 4,000 meters or less, and governments around the world have high requirements for pollution control.

The operation of gold is not so easy, some people dig up the gold and sell it immediately, and some people dig up the gold and wait for the gold to rise before selling, but if you are not careful, it may fall. So there will be some operational problems.

The stock market itself is volatile. Therefore, I suggest that investors like gold, or buy gold ETFs first, then study stocks, and then allocate gold stock ETFs.

It is not cost-effective to buy gold jewellery as an investment

We, as managers, should manage this environment, including rental income. Actually, the gold I just talked about doesn't earn interest, but we will have a little interest.

We lease 30% of the gold to commercial banks, and commercial banks lease it to downstream enterprises, which also indirectly supports the real economy, and all these lease income are included in the fund assets. We have made our annual reports public in the past ten years, and our rental income has exceeded 140 million, where did the 1.4 go?

Gold ETF, I often use this analogy, that is, you go to the bank, go to the gold merchant to buy gold, and now it is 560 yuan, and it basically adds 20 to 30 yuan a gram to you, which is equivalent to nearly 4% to 5%.

What are our costs? We charge a management fee of 0.5 percent per year, plus a custody fee of 0.1 percent, and that 0.65 percent minus our rental income -- a little over 0.2 percent. Our cost is about 0.4%-0.5%.

It's 4% to 5% over there, 0.4% to 0.5% here, and the cost is equivalent to 1/10th, and a lot of investors don't notice that, they tend to see the real thing.

Many people think that buying gold jewelry is also investing in gold. In fact, gold jewelry has now exceeded 720, and the real raw material, that is, the gold corresponding to our gold ETF, is about 560. You go and buy gold jewelry, and the 160 yuan is the premium, about 25%.

As an investment is not cost-effective, of course it satisfies your consumption function, aesthetic function, and is also reasonable.

But don't make the mistake of thinking that it is a completely gold investment, so investing in gold and choosing gold ETFs, our liquidity is also very abundant.

Xu Zhiyan's certificate number: F0060000900008

Source: Wang Li, the author of the investment workbook Pro

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