Gold prices, which have been rising all the way, are ushering in a sharp pullback.
On April 22, spot gold fell 2.8% to $2,324.96 an ounce, down nearly $70 an ounce in a day, the largest intraday decline since June 2022. On the same day, COMEX June gold futures in New York closed down 2.79% at $2,346 an ounce, refreshing the lowest closing level since April 5 and the biggest daily decline since February 3, 2023.
On April 23, spot gold continued its downward trend, and once fell below the $2,300 / ounce mark during the session. It was not until the 24th that there was no sign of stopping the decline and stabilizing, and it was close to the 2300 mark.
Affected by the international market, on April 23, China's precious metal futures continued to fall, on the disk, the Shanghai Futures Exchange intraday gold futures main 2406 contract closed at 544.84 yuan, closed down 3.54%, with a volume of 241,300 hands and a position of 149,700 hands. Gold T+D on the Shanghai Gold Exchange closed down 3.05% at 543.63 yuan per gram during the day.
The price of gold in the upstream fell sharply overnight, and the gold jewelry in the downstream was naturally not spared: according to the International Financial News, the retail gold price of many jewelry brands was lowered by about 14 yuan, and the news that "the price of gold jewelry fell by 14 yuan per gram overnight" also appeared on the hot search. For example, the price of pure gold jewelry on April 23 was 719 yuan/gram, compared with 733 yuan/gram the day before, down 14 yuan/gram overnight!
Just a few weeks ago, the news of "gold prices soaring" was still flooding the pages of major media, and the scene of queuing up to buy gold jewelry in jewelry stores around the country is still vivid.
According to upstream news reports, since April, several kilograms of gold bars have been sold in some gold stores. "There was an eldest brother who came to buy gold bars with more than 200,000 yuan in cash, and it took 5 minutes from entering the door to checking out. He had already come to buy more than 200,000 gold bracelets the day before, and the next day after buying, he saw that the price of gold had risen, and he was unwilling to buy gold bars again. In total, there are more than 800 grams, and a total of more than 400,000 yuan was spent. ”
Even stock market investors, looking at the "sesame blossoming and rising" gold price, are inevitably unmoved: a shareholder Ms. Wei said that "so far, she has exchanged more than 600,000 yuan in her securities account for gold bars". According to the Times Weekly, since the beginning of this year, many banks have also made efforts to "get off to a good start" and promote precious metal products.
And from the door to the door, it was completely overnight. So the question is, just recently, how did gold fall? In fact, this is a "one and two sides" problem: to know how the price of gold fell, we must first know how it rose!
The driving force behind the gold price: interest rates and the current situation
In the traditional concept, the relationship between the gold price and the US dollar should be negatively correlated, the US dollar falls, the gold price rises, and vice versa, but since late March this year, gold and the US dollar have seen a wave of double rise, breaking the market's inherent impression of "gold and the US dollar is negatively correlated". In fact, since the end of 2018, the inverse relationship between gold and the US dollar index has gradually weakened and even shown a positive correlation.
Currency attributes are the core of gold pricing, and the essence is the substitution of gold for the US dollar in monetary functions, which is manifested in: anti-inflation and anti-risk. However, these logics diverged after the end of 2022. Take inflation as an example: since the second half of 2022, although US inflation expectations have been falling, it has not prevented gold from rising all the way!
Gold and US inflation diverge for more than 1 year
Image Credit: Monarch Research
Is inflation good or bad for gold? Zhongtai Asset Management Tiantuan believes that the impact of inflation on gold can be divided into two paths:
Path 1: Inflation means a decrease in the purchasing power of money, and as a real asset, the price of gold should certainly rise.
Path 2: Inflation may lead to a tightening of monetary policy (raising interest rates or delaying a rate cut) and rising interest rates, which as a non-interest-bearing asset means a decrease in the relative allocation value of gold (or an increase in the opportunity cost of holding gold), which is bearish for gold prices.
The impact of the two paths on gold prices is just opposite, so the real interest rate (nominal interest rate - inflation rate) is generally used to compare with the gold price, that is, the real interest rate falls, which will be good for gold!
But in the past two years, even real interest rates and gold prices have diverged, which is closely related to market expectations: at the end of February, the Fed's interest rate cut expectations rose significantly, gold began to rise rapidly, and then even if inflation data and employment data exceeded expectations, but gold still had a strong trend, which is related to market sentiment and trend inertia, on the other hand, it can be understood that if inflation is resilient, but then interest rates are still cut because of pressure from other aspects, it means that real interest rates (nominal interest rate - inflation rate) have fallen more. It is this kind of "expectation" that supports the price of gold!
U.S. Treasury real interest rates and gold trends
Image source: Zhongtai Securities Asset Management
But the story of the "mirage" can't replace the reality of firewood, rice, oil and salt after all: the recent stronger and stronger interest rate hike expectations in the United States may be the fuse for this wave of gold prices to come to an end!
First of all, under the high inflation data, the probability of the Fed cutting interest rates has decreased, and the relevant statements have become more hawkish, which has obviously had an impact on market expectations.
Just after Fed Chairman Jerome Powell's statement on April 16 this year that it will take longer to cut interest rates, market expectations for the Fed to cut interest rates have weakened further. Minneapolis Fed President Kashkari said on April 18 that the Fed needs to have more confidence in falling inflation before cutting rates, and is likely to postpone rate cuts until after 2024, with the first rate cut "probably" not appropriate until 2025.
Although it is not yet known when the Fed will cut interest rates in the future, the market is widely betting that delaying the rate cut is a high probability event, or even if it does not raise interest rates.
According to the China Merchants Bank Research Institute, in the context of economic growth continuing to be higher than the potential growth rate, the labor market continues to be in short supply, and the inflation level is difficult to return to 2%, the market's expectations for the Fed to cut interest rates in the middle of the year have basically been disappointed. Former U.S. Treasury Secretary Summers even said that persistent inflationary pressures in the latest data suggest that the Fed's next policy move is likely to be a rate hike rather than a rate cut. With so much hawkish information, it is normal for gold prices to fall back.
The second is the easing of the geopolitical situation: although the geopolitical conflict in the Middle East has lasted for more than a month, from the current point of view, the overall is "thunder, rain, rain", and has not further intensified and brought about the far-reaching impact expected by the market, and there is still a trend of continued easing.
We have just analyzed the unfavorable factors that affect the price of gold, but we can also see that as a natural currency, gold still has a strong "lifting" force to support, so if anyone is worried that the price of gold will "plummet", it is purely unfounded!
"National team", holding up the price of gold?
According to data released by the IMF, in March 2024, Russia increased its gold reserves by 3.11 tons to 2,332.815 tons, while Oman is also increasing its gold holdings. From the perspective of gold reserves in various countries, the behavior of central banks to increase their holdings of gold continues, and the supply and demand situation of gold has not changed. Non-Western countries have been significantly more aggressive in increasing their gold reserves. As shown in the chart below, the vast majority of the top 10 countries with increased gold reserves in 2022-2023 are non-Western emerging countries.
Top 10 countries with increased gold reserves in 2022-2023
Image source: Zhongtai Asset Management Research
Among them, the People's Bank of China is also continuously buying gold and its derivatives: according to Guotai Junan data, starting from November 2022, the People's Bank of China began to buy gold continuously, and as of February 2024, the purchase of tons of weight accounted for 60% of the global central bank net purchases. Caijing magazine reported that since November 2022, China's central bank has increased its holdings of gold by a total of 10.1 million ounces for 17 consecutive months. At the same time, China's gold-backed ETFs saw sequential net inflows, while gold-backed ETFs from other countries saw net outflows over the same period.
Image Credit: Monarch Research
However, it is important to note that central banks are medium- to long-term investors who are insensitive to short-term price fluctuations. Their increase in holdings only suggests that gold prices may be partially supported by forces in the medium to long term. The short-term rise and fall of gold prices is actually more of a fermentation of speculation, so if the majority of financial friends decide to enter, it is best to think twice.
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