Gold has finally started to cool down recently, and on April 22, the international gold price plunged 3%, the biggest one-day drop in more than two years. The cumulative decline in a few days has exceeded 5%, allowing investors who have recently chased gold to quickly trap themselves. Why did the soaring gold plummet? Does this mean that the bull market in gold is over? Or is it another good opportunity to buy gold?
Gold prices have plummeted, first of all, because the recent rise has been too fast and too large, and there is already a strong demand for a pullback on the technical side. And the more immediate trigger is that the Federal Reserve recently abruptly lowered its expectations for interest rate cuts, and gold lost the momentum to continue rising.
Stills from "The Great Gold Robbery".
In 2023, inflation in the United States will fall rapidly, and the world thinks that the Federal Reserve will soon shift from a rate hike cycle to interest rate cuts, thus driving the super market of gold. However, the road to cooling inflation in the United States this year has not been smooth, and inflation in the first three months has exceeded market expectations, especially in March, which hit a new high in the past six months. Not only the inflation data, but also the US employment data far exceeded market expectations, with the number of new jobs added in March coming in 50% higher than expected.
The two main reasons for whether the Fed will cut interest rates are inflation and employment, and the Fed has had to postpone the timetable for rate cuts due to the strong performance of inflation and employment data.
Federal Reserve Chairman Jerome Powell recently said that unless the U.S. economic data is exceptionally weak, there may not be any interest rate cuts this year. In addition to Powell, senior Fed officials have even said that the Fed should not only not cut interest rates at this time, but even continue to raise them.
Stills from "Blue Blood Sands".
The Fed's attitude has undoubtedly given the market a slap in the face. Because before that, the market originally expected the Fed to start cutting interest rates as early as June this year, and there could be at least three rate cuts this year. It is precisely under the stimulus of the expectation of interest rate cuts that gold has come out of a super market, and has frequently refreshed record highs since March.
Since the gold rally has overdrawn the expectation of interest rate cuts, if the Fed does not implement interest rate cuts this year, and may even continue to raise interest rates, then the logic of gold's rise is no longer valid, and gold's valuation needs to be adjusted quickly.
After expectations of a Fed rate cut cooled sharply, the dollar rebounded quickly, with the dollar index rising to 106, up more than 6% this year. At the other end of the seesaw, against the backdrop of a strong rebound in the US dollar, gold has fallen rapidly, plunging 5% in recent trading days.
Stills from "Mong Kok Dark Night".
So, from an investment point of view, what does the gold plunge really mean? Is this bull market in gold over? Or does it mean a good opportunity to get on the car again?
If you want to see the future trend of gold, you need to first figure out the reasons for this round of gold surge.
This round of gold bull market is mainly driven by three factors, one is the Fed's interest rate cut expectations, the second is the tension in Israel and the surrounding region, and the third is the large-scale gold purchase by global central banks. The superposition of three factors has jointly triggered this round of gold bull market. So, where gold will go in the future should also be analyzed from these three factors.
Of the three factors mentioned above, the most stable is the global central bank gold purchase.
In the 2022-2023 Fed's super interest rate hike cycle, the dollar rose strongly, which hit many emerging economies. Historically, every time the dollar raises interest rates, there are always other countries that suffer from it, as the former US Treasury Secretary said, "the dollar is our currency, it is your trouble", and the impact of the dollar on other countries can be described as the world's suffering for a long time.
Stills from "Girlfriends 2".
After another super interest rate hike cycle in the US dollar in the first two years, many countries have begun to "de-dollarize" and reduce their dependence on the US dollar.
Since the purchase of gold by global central banks is a national strategic behavior, it is basically not affected by the short-term rise and fall of gold prices, and will be the general trend for many years to come, which will become an important supporting force for the gold market.
However, central bank gold purchases cannot have a decisive impact on gold prices, and central bank gold purchases account for about 2% of the demand for gold, so the final trend of gold depends more on international geopolitical risks and the trend of the US dollar.
From the perspective of geopolitical risks, the current situation affecting gold is mainly the situation in Israel. If the situation in Israel escalates into another large-scale war in the Middle East, it is likely that the price of gold will continue to rise, and conversely, if the situation in Israel does not escalate, or even slowly subsides, the safe-haven demand for gold will drop sharply.
A still from "Pirates of the Caribbean".
For gold, the central decisive factor is the US dollar. If the US inflation data can cool and the Fed can pull the curtain on interest rate cuts, this will be the most important driver of gold's rally.
Conversely, if the U.S. inflation data continues to remain high and the job market remains strong, the probability of the Fed cutting interest rates will become less and less, and gold will most likely continue to retreat. In a more extreme case, if US inflation moves much more than expected, it cannot be ruled out that the Fed may even raise interest rates, and if such an extreme scenario occurs, gold prices will suffer a sharp blow.
The Chinese people have always had a special preference for gold, especially in recent years, and the demand for gold has never been greater. The reason is that domestic deposit rates have fallen to record lows, housing prices have continued to fall, and stocks have been hovering at 3,000 points, which can be regarded as the most scarce period for ordinary people. Against this backdrop, gold has become one of the few investment options.
Stills from "Out of the Jade Gate in the West".
For ordinary people, while pursuing gold, they also need to have enough awareness of the risks of gold, especially when gold is at a historic high. If you look at the long cycle of history, gold has actually been bullish and bearish, and the return on investment is not ideal, and the annualized return on gold has been less than 1% in the past 40 years, far worse than inflation.
Gold is a non-interest-bearing asset, and the opportunity cost of holding it becomes prominent during periods when there are no investment opportunities, as Warren Buffett said, gold is like a hen that doesn't lay eggs. Therefore, the opportunity for gold mainly occurs in individual special years, that is, the so-called troubled times to buy gold, but after all, troubled times will not be the norm in this world.