Since the end of February 2024, international and domestic gold prices have continued to rise. Credit hedging is the most dominant driver of large-scale markets, with inflation driving gold prices upwards through commodity attributes, but not always effectively. Recent U.S. economic and employment data showed signs of weakness in the U.S. economy, while the New York community bank crash also raised concerns about financial risks. Under the US dollar credit system, the real interest rate is still the main anchor variable for gold prices in the long cycle. With the gradual pace of interest rate cuts by the Federal Reserve, the downward pressure on the U.S. economy is gradually becoming clear, and the anchoring effect of real interest rates on gold will reappear.
In the US dollar interest rate hike cycle, gold's financial attributes dominated, and since mid-2007, the real interest rate of US Treasury bonds has shown a significant negative correlation with the trend of gold prices. The effectiveness of this pattern has weakened since the second half of 2022, and the gold highs corresponding to the phased lows of US Treasury real interest rates have been rising. The surge in central bank purchases has supported the strong gold price since 2023, and the real interest rate is still the main anchor variable for gold prices. The surge in central bank purchases has supported the strong gold price since 2023, and behind the surge in gold purchases is the demand for diversified allocation of reserve assets in emerging markets.
Since 2024, U.S. inflation has exceeded expectations for the third time, and inflation has shown a rebound momentum, including the partial wage performance of ADP employment and non-farm payrolls announced last week also exceeded expectations. Against this backdrop, inflation is a key data for the Fed in terms of monetary policy. Geopolitical issues are still expected to be difficult to end in the short term, and gold still has room for safe-haven value expression. In the medium term, although the current market expectation of the Fed's interest rate cut has been delayed from June, resulting in a short-term correction in gold prices, it will not change the medium-term trend of gold strengthening under the catalyst of interest rate cuts, central bank gold purchases, de-dollarization and geopolitical risks.
Federal Reserve Governor Waller's latest proposal to implement a "reverse reversal operation" released a dovish signal to support gold prices. On the inflation front, the previously released US inflation data for February was higher than market expectations, but the market is still betting on a Fed rate cut in June. Since March, domestic and foreign gold prices have repeatedly hit record highs, catalyzed by the hedging attribute, it is expected that this year's domestic gold and jewelry terminal consumption will still have the potential to be further released driven by the demand for investment hedging, and the high prosperity of the industry is expected to continue.
There is a positive correlation between gold prices and ETF holdings. At present, ETF and COMEX gold holdings are still at a relatively low level, and with the return of the gold anchor to the real interest rate, the main line of trading is gradually clear, and the upward position is expected to further raise the gold price operation center. Riding bulls and bears found that gold ETFs and COMEX gold holdings are still at a low level, and they are optimistic about the upside of gold prices. Under the bullish gold price, the valuation center of gold stocks may usher in an upward revaluation. When gold prices are higher, the market tends to give pessimistic expectations for future prices, which is reflected in depressed valuations when mapped to equity assets.
The Fed's monetary policy is in a switching cycle, the pressure on economic growth has increased, and the long-end U.S. Treasury yields and the U.S. dollar cycle are still down. On the one hand, taking into account the returns and risks of multiple types of assets, consumers' demand for gold investment products has increased, and on the other hand, consumer demand for gold jewelry products will continue, and the sales of gold jewelry have been re-verified. Riding bulls and bears believes that inflation is still the general trend in the future, but in the short term, the difficulty of the last mile may increase, and the inflation data will further hit the market's interest rate cut expectations, and some traders choose to leave the market in advance, but gold prices fell first and then rose, which also verified that the resilience of gold buying is still very strong, and the upward momentum has not been exhausted
In the medium to long term, central bank gold purchases may still support gold prices to reach new highs. On the one hand, "de-dollarization" is not a global behavior that is easy to repeat, or the "decoupling" of some countries, given the current low proportion of gold reserves in such countries, as the price of US bonds recovers, the pace of central bank gold purchases is easy to rise and difficult to fall. On the other hand, a timely rate cut in 2024 remains the baseline assumption. Historically, there is a strong certainty that the decline in U.S. Treasury interest rates in the last quarter before the rate cut may support stronger investment demand.
With the fall of U.S. inflation data and economic data, the U.S. dollar index and U.S. Treasury yields have fallen significantly in the past week, and the market's dovish expectations for the Federal Reserve have fermented, and gold has ushered in a new round of drive. Gold prices are expected to remain strong in the short term, and gold has entered a right-hand rally. The scale of U.S. debt has repeatedly reached new highs, gold as a substitute for credit currency, the intrinsic value has increased, and the strategic allocation status of gold has been enhanced under the background of de-globalization, increased global risk events, and continuous gold purchases by central banks, and the long-term gold price remains unchanged.