Xu Zhiyan: Huaan gold investment model sharing, how to quantitatively analyze the gold price level?
Contents of the current fiscal year
Hello everyone, I'm Xu Zhiyan. Welcome to the masterclass Gold: Opening a New Era.
I have been working at HuaAn Fund for the past 20 years, and my relationship with gold was in 2012, when I was fortunate to participate in the creation of the first gold ETF at Huaan Fund. Since 2012, I have been leading my team to study and analyze gold, and promote the development of gold ETFs, which recently exceeded 20 billion yuan, and Huaan's gold ETF is the largest gold ETF under management in Asia.
In "Gold Masterclass Part 1", we analyzed the three driving forces behind the new highs of gold, and in this section, we will continue to explore the factors behind the gold price. We've done a lot of models, and a lot of them have some important platforms and core customers in use. There are a lot of things behind these models that can be quantified, but some of them are not so well quantified, and each data period and frequency is different.
So we've iterated 3-4 times in the last 11 years, and this time we've found some new variables. Let's look at gold trading, and out of its dozens of indicators, these dozen are very critical.
What are the quantitative indicators and strategies for gold investment?
Before building a model, we must first look at whether there is a correlation between these indicators and gold, and these correlations may play a positive role in the model. So we measured a lot of metrics:
First, there is a clear correlation between debt and gold, so from another perspective, the outstanding debt of the United States is everyone's concern about the US dollar in the medium and long term, or the future currency depreciation caused by its expansion.
Second, deficits, which are not the same as debt, can also help us look at money from another perspective.
Thirdly, it's very interesting that when people think the economy is strong, gold tends to be weak. From a data point of view, if you go back to a very high real interest rate, very strong economic growth, a very healthy global trade environment, then gold may be weaker, and there is indeed a certain negative correlation with the PMI.
Fourth, the amount of gold sold/purchased by the central bank is also very interesting, and the central bank's gold purchases will also play a certain role in the promotion of gold in some major upward phases. We see the correlation on a quarterly basis, which is not so obvious on a monthly basis, but it is still evident on a quarterly basis.
Fifth, the impact of real interest rates on gold can be said to be the first. Why is there a correlation between the rise in real interest rates and the fall in gold?
Intuitively, if you are given 100 yuan and you buy a bond, the interest rate of the bond is 2%, and the inflation is 3%, then you will drum in your heart: I don't seem to be able to buy this bond, then I will look at the stocks - the stocks are quite volatile, and then look at gold. As a result, money is over-issued, leading to higher inflation, so the relative investment opportunities for gold will increase.
Therefore, when the real interest rate falls, gold is more valuable as an investment, which comes from the cost performance of the investment - it is more cost-effective to buy gold, and the opportunity cost is lower. On the other hand, rising real interest rates indicate a strong economy, either rising in cash and government bonds, or falling inflation, so the economy is expected to be better. Suppose you buy cash Treasury bonds, 100 yuan gives a loan interest rate of 2%, but inflation is only 0.5%, then it is cost-effective for you to buy this bond.
So this period is particularly unusual, and it has been rare in history that there has been such a long divergence in more than a year: real interest rates are rising, and so is the price of gold. It is easy to analyze gold, but if we analyze it from the perspective of the past, how to explain this phenomenon? Therefore, we must use a broader vision, a deeper understanding, and a more forward-looking judgment to understand gold, and judge whether the market is wrong or we are wrong.
There is a saying in finance: most of the time it is not the market that is wrong, but we have to better judge the market, so the market is the first priority. Metrics are metrics, it's not the only factor in pricing, it's just a reference. Therefore, any model should study and judge the framework and structure of model adaptation, and analyze what endogenous and exogenous variables are.
Sixthly, the indicator of speculative positions is also more effective. When the market sentiment increases, are people more willing to go long or short? If it is flat, investors will feel that the sense of direction is not strong. Now it seems that speculative positions are indeed on the rise, with the latest data rising with the market. Many financial phenomena are like this, people don't care so much at first, suddenly rise feel a little suspicious, and then accelerate the rise, many people feel that there is a chance, so speculative people take advantage of such an opportunity to amplify their investment, but it does not mean that it will fall. However, this will certainly accumulate some risk, but whether it is worth investing in is another topic.
Seventh, the correlation between stocks and bonds is also a very important indicator. Warren Buffett said he was reluctant to invest in gold because it had nothing to do with the U.S. economy, hindering the American dream, believing that investing in stocks could create value for companies. I don't think that's a problem, but investment is a diversified market, stocks are an investment, bonds are a kind of investment, and gold is a kind of gold.
From a statistical point of view, correlation is a correlation, such as the butterfly effect, which is often referred to as the butterfly effect. Although stocks and gold are weakly correlated and negatively correlated, it does not mean that the two must rise and fall. To give an example, in March 2022, when global markets were affected by the pandemic, the Federal Reserve began unlimited quantitative easing. Gold fell from 1,600 to 1,400 at once, and the stock market plummeted at the same time. After a large amount of money was injected, it was found that everything that should have risen had plummeted. At that time, I suggested investing in a few targets: gold, the Nasdaq and the A-share Venture 50, and almost every target has doubled since then.
Eighth, geopolitical conflict is actually a manifest thing, because you can't predict where something will go wrong. But geopolitics is a complex global topic that does have an impact on gold.
Gold itself has anti-risk attributes, so we also found some indices in geopolitics, which also showed a certain correlation, which is more obvious. How do you build a model based on so many factors? We actually measured dozens of indicators, and the ones that had a more significant impact were placed here. We made these factors into a multivariate model for testing and regression, and these five tests were very good. There are more detailed things, such as using dozens of indicators every month to make a comprehensive evaluation, and there will be a judgment on gold.
So gold is actually a hugely complex analytical system, and we may have found some of that that that is very effective in this historical environment. However, as the environment changes, our model will continue to adjust, including this time the real interest rate is actually not a positive effect, and may do some work on the demand side, the model is not static, and needs to be further adjusted.
At the moment, we see that some factors have a positive impact on the gold price, while others are neutral. But now it seems that there are not many "empty" factors, and inflation is still high. But we judge: it may come down in the second half of the year. Because after the 2008 financial crisis in the United States, although interest rates were raised quickly last year, the interest on many debts will be reflected in January 2024, and the inhibiting impact on the economy has only been a quarter ago, and it is not yet obvious.
But it is precisely why we judge that the Fed has a strong incentive to cut interest rates in the second half of the year, and we judge that it may be around 2.3%. In terms of employment, short-term employment data is relatively good. But there is also a reasonable explanation, such as more seasonal factors, although the employment data is better, but not so good, and the interest rate will be adjusted due to the Fed's policy. Now it seems that the rate will be cut in the third quarter, which is positive, and it will gradually turn neutral, with some changes in between.
Because most currencies are medium and long-term, there should not be much change. Factors such as the central bank's increase in gold, aging, weakening globalization, and widening gap between the rich and the poor will all cause the global economic momentum to weaken, and the over-issuance of money may also be long-term.
Therefore, among the trading factors, the position of futures is actually the result of market trading, and it also reflects everyone's sentiment towards the market, which is high-frequency tracking. Huaan's five-factor pricing model is public, with five factors on the top and test results on the right, which may have some impact on your future pricing.
Recap: Why did gold briefly distort in March 2020?
Let's talk about the events of March 2020, when the Fed launched unlimited quantitative easing in two weeks and released a huge amount of liquidity, and the market was very unusual. What we're seeing is a collapse in gold, stocks, overseas stocks.
At that time, everyone questioned whether gold was not a safe haven, and why did gold plummet after such a big risk event came out? In fact, we later found out that in the 2008 financial crisis, when Lehman went bankrupt, gold also plummeted, but not by a large margin. Because the base was low at that time, and this time the base is high.
What is the reason? Suppose you, as a business entity, are going to face huge debt repayment pressure tomorrow, what is the first thing you do? Sell something. Gold is the world's best money with high liquidity and high credit, so the first thing to do is to sell U.S. bonds and gold.
In fact, it was also related to the short-term depletion of liquidity at that time, so gold fell sharply. We compared 2008, as you can see in the picture above, I wrote 3 articles at that time, and they were read very well, with a total of 2 million to 3 million people. We worked overtime to write it out, and the conclusion was very simple - increase the allocation of risky assets. Everyone feels that there is such a big problem in the market, and it is necessary to increase the allocation of market risk assets, including gold. At that time, we changed the definition of gold from "defensive assets" to "offensive assets", which is a deep understanding of gold. A short-term sell-off in such a high-quality asset as gold could be a very good investment opportunity.
As it turned out, we were right. Since then, many of the Fed's bailouts have had a very positive effect on the market. At that time we saw several phenomena of gold:
The first is that when such a good asset is released sharply, since there is a decline, it often indicates an opportunity, which is the understanding of gold's deep currency;
The second is that the epidemic has caused such a large easing of liquidity, which will definitely have a great impact on future asset pricing. Later, we saw that problems such as inflation, which had not been encountered in 40 years, also had a very positive effect on gold.
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