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On April 22, local time, spot gold in London fell 2.72% to $2326.810 per ounce, the largest single-day decline in the past two years, and COMEX gold futures fell 3.01% to $2341.1 per ounce. On April 23, London spot gold and COMEX gold futures continued the previous day's decline, London spot gold once fell below the $2,300 mark during the session, and COMEX gold futures closed down 0.46%.
At the close of trading on April 23, the main Shanghai gold futures contract closed down 3.54% to 544.84 yuan. Domestic gold jewelry prices have also seen a pullback, taking Chow Tai Fook as an example, on April 23, the retail guide price of pure gold 999 was 719 yuan/gram, and the previous day was 733 yuan/gram.
Source: Chow Tai Fook official account (gold price on April 23)
On April 23, domestic gold stocks also fell almost across the board, according to Wind data, as of the close of the day, the precious metals sector fell more than 4%, of which Zhongrun Resources fell more than 8%, and Yulong shares fell more than 6%. However, on April 24, the plate was repaired, according to Wind data, as of the close, the precious metals sector rose 2.94%, in terms of individual stocks, Hunan silver and Yulong shares rose more than 7%, and Zhongrun Resources, which fell sharply on the 23rd, rose 1.81%.
Why did the sudden plunge in gold prices take place? How has the logic of gold investment changed, and how will the market interpret in the future?
With the 4-month gain approaching the level of the whole of 2023, what is the impetus for gold's surge?
Since the beginning of this year, gold has repeatedly hit new highs. Wind data shows that since the beginning of this year to April 22, London gold spot gold rose nearly 13%, COMEX gold rose 13.23%, the main domestic Shanghai gold futures contract rose nearly 16%, Shanghai gold spot rose more than 17%.
The increase in the above indicators in the past 4 months is close to the level of growth in the whole of 2023.
Data source: Wind Graphics: Titanium Media APP
The continued buying of gold by central banks is an important support for the upward movement of gold prices. As of the end of March 2024, the top 10 countries in the world (the United States, Germany, Italy, France, Russia, China, Switzerland, Japan, India, the Netherlands) had 24,260.63 tons of gold reserves, up 15.58 tons from February, which is the 17th consecutive month that the above ten countries have increased their gold holdings. China's central bank is no exception, with the latest data from the People's Bank of China showing gold reserves of 72.74 million ounces at the end of March, up 160,000 ounces from 72.58 million ounces at the end of the previous month, and also increasing gold holdings for 17 consecutive months.
The recent depreciation of Asian currencies against the US dollar, and the sharp shorting of the yen by global capital are also an important embodiment of the impact of the strong dollar on the monetary system of other countries, and the willingness of the global monetary system to "de-dollarize" continues to strengthen, as the other end of leverage, the demand for gold is also increasing.
Another concern about the dollar's creditworthiness comes from the US debt pressure, which has long had a dual fiscal and trade deficit, and the US has borrowed heavily after the epidemic, coupled with the Fed's sharp interest rate hikes, which has increased the burden of interest expenses on the US government.
Michael Hartnett, chief investment officer at BofA, noted in his latest report that the U.S. government's interest payments on debt over the past 12 months have reached $1.1 trillion, doubling since the pandemic, and that annual interest costs could rise to $1.6 trillion if the Fed does not cut rates by 150 basis points over the next 12 months.
CICC Fixed Income pointed out that overseas investors account for a relatively high proportion of U.S. bond investors, and once overseas investors are worried about the solvency of U.S. Treasury bonds, they may turn to other alternatives and require U.S. Treasury bonds to pay higher interest levels to balance future repayment risks.
The expectation of interest rate cuts is also an important reason for the rise in gold prices. Although a number of recent economic data in the United States continue to exceed market expectations, the Fed's transition from a rate hike cycle to a rate cut cycle is still a more certain event this year. A Fed rate cut usually means a fall in real interest rates and a weaker dollar, which reduces the opportunity cost of holding gold and makes gold an attractive investment.
According to Ping An Securities, from historical data, within 6 months after the start of the Fed's interest rate cut cycle, the average rate of return on gold investment was significantly higher than that of other assets, and the winning rate reached 100%.
In previous interest rate cut cycles, gold prices reacted at the end of the rate hike cycle, generally rising 2-3 months in advance. Previously, on March 21, Goldman Sachs predicted that the Fed would cut interest rates in June, September and December, for a total of three rate cuts throughout the year. Judging from the trend of gold prices, gold prices rose sharply in late March this year.
In addition, the Iran-Israel conflict has further boosted the global risk aversion, but this is still a great deal of uncertainty, and at present, its impulsive push up on gold prices has also laid the groundwork for this gold price decline.
After gold flattens out its premium, is it bullish or bearish in the future?
Gold prices remain high, after many have warned of the investment risk of too high a gold premium.
Since March this year, China Merchants Bank, Bank of China, Bank of Ningbo and China Construction Bank have raised the minimum purchase amount of accumulated funds, and industry insiders said that this move can remind investors to prevent investment risks and pay attention to diversification. "Gold does have the ability to resist the depreciation of assets brought about by inflation, but the short-term volatility of gold prices is not suitable for investors with low risk appetite. Gold analyst Zhang Yalin previously said.
Senior gold analyst Mark Mead Baillie commented that the price of gold has seen a large premium to value over the past three months, approaching 8.8%.
For this round of gold price decline, CITIC Futures put forward three reasons: one is the weakening of geopolitical risks, the second is the tightening of liquidity in the early stage, and the third is the profit taking of long profits.
In terms of geopolitical risks, Iranian Foreign Ministry spokesman Nasser Kanaani recently said in a speech in Tehran that the Israeli attack was insignificant and had no military value.
Maike Futures said that both Iran and Israel are relatively restrained and there is no risk of further expansion, which is equivalent to some risk events have landed, which has led to a decline in risk aversion. The focus of precious metal prices is expected to re-shift to factors such as the US dollar, US Treasury interest rates, and monetary policy, so the risk of periodic adjustment will increase.
On the liquidity front, US inflation expectations rebounded, interest rate cut expectations were postponed again, and the US dollar continued to strengthen.
According to data recently released by the U.S. Department of Labor, the U.S. consumer price index (CPI) rose 3.5% year-on-year in March, an increase of 0.3 percentage points from February. At the same time, the core CPI rose 0.4% month-on-month and 3.8% year-on-year, exceeding market expectations for three consecutive months.
Fed Chair Jerome Powell also revised his previous forecast for price movements on April 16, saying that "it seems to be taking longer than expected" to be confident that price inflation in the United States will return to 2%. Powell's statement once again hit the market's expectations for a rate cut.
In addition, on the emotional side, Zhang Wen, head of the macro and commodity strategy group of the CITIC Futures Research Institute, told the media that the market's concern about central bank purchases and U.S. fiscal risks is actually a long-term logic, which is not enough to support the rise of precious metals close to 20% this year.
This year, factors such as the U.S. election, changes in the Middle East, and the Federal Reserve's interest rate cut have all affected the future trend of gold prices.
There is still a bearish view in the market in the near term. Chen Xingwen, chief investment officer of Blacksaki Capital, believes that gold prices may continue to face adjustment pressure in the short term, especially in the context of reduced safe-haven demand, investor profit-taking, and changes in the Fed's monetary policy expectations. Gold prices have experienced significant declines due to reduced geopolitical risks and the strengthening of the US dollar exchange rate. Fed Chairman Jerome Powell and other officials have maintained a more hawkish stance on interest rate policy, and other factors have resonated, further putting pressure on gold prices.
However, in the long run, there is a view that the current level of gold holdings is low and there may still be room for growth.
According to the World Gold Council, as of the end of March, gold ETFs accounted for the fourth lowest level in the history of total ETF AUM in the US market, and gold open interest was much lower than the open interest in stocks, bonds and commodity futures. Despite the continued high gold price, the World Gold Council believes that gold holdings are currently low, and gold does not look to have "peaked" this time, and the low participation of US investors indicates that the rally in gold may continue.
Image source: World Gold Council
At the same time, the Fed's interest rate cut expectations still exist, and market analysts believe that this factor is also the key to supporting gold's trend in the future. If the impact of the U.S. election on the Fed's monetary policy is added, the accommodative dollar environment may come sooner than the market expects.
Ye Ruzhen, co-chief analyst of the metal group of Changjiang Securities, said that the expected transaction of interest rate cuts in 2024 is still the core clue of gold. From the trend point of view, gold short-term trading can be defined as three stages, slowing down the rate of interest rate hikes, interest rate cut expectation trading, and interest rate cut relay crisis trading. Ye Ruzhen said that it is still in the early stage, and the cost performance of equity allocation is still outstanding. Before the interest rate cut is still maintained, short-term fluctuations are an opportunity to increase the allocation of precious metals.
Xu Ying, chief macro analyst of the Orient Securities Derivatives Research Institute, also believes that in the medium and long term, high interest rates and high inflation pose a downside risk to the U.S. economy, the volatility of the financial market is also increasing, the Fed's balance sheet shrinkage is facing adjustments, and monetary policy will eventually enter an easing cycle. Under the trend of de-globalization, the importance of gold allocation is increasing, which forms the basis for gold's long-term rise. In the context of the long-term upward logic has not changed, investors can wait for the better allocation opportunities brought by the pullback.