China Business Daily (Reporter Yang Hongsheng) Recently, the rise and fall of the A-share precious metals sector and the fluctuation of gold prices have aroused widespread concern among investors and consumers. Experts say that the price trend of gold depends on many factors, including but not limited to global economic conditions, inflation expectations, interest rate adjustments, geopolitical risks, market sentiment, etc. At present, due to a combination of factors, the price of gold is likely to remain at a high level.
The picture shows the old temple gold counter located in the Rainbow Shopping Mall on Guang'anmenwai Street in Xicheng District, Beijing. (China Business Daily reporter Yang Hongsheng/photo)
What is the logic of gold pricing?
Generally speaking, the main logic of gold pricing is based on supply and demand. When the demand for gold increases, the price usually rises, and when the demand for gold decreases, the price usually falls.
"The pricing of gold is largely determined by inventory transactions. "Guolian Securities Research Report believes that the correlation between gold pricing and the economic cycle is not strong, and its price is first of all related to the long-term real interest rate in the United States, which is related to the fact that gold is mainly traded in inventory. In addition, risk aversion is also an important variable affecting the price of gold. The launch of gold ETFs (exchange-traded funds) and central banks' increases in gold reserves may also have an impact on the gold price pivot.
According to the World Gold Council, there were around 213,000 tonnes of above-ground gold stocks globally at the end of 2023. Among them, the financial market for gold with strong liquidity (composed of gold bars, gold coins, gold ETFs backed by physical objects, and central bank reserves) has a gold inventory of about 84,000 tons. Guolian Securities Research Report believes that this means that the main demand of the gold market is the demand for inventory, the main supply is the supply of inventory, and the impact of demand and supply factors on commodity attributes is limited.
Guolian Securities Research Report said that after excluding the impact of the 10-year TIPS (inflation-protected treasury bonds), which represents the long-term real interest rate of the United States, the price of gold has not remained stable, such as several significant rises from the end of 2005 to 2006 and 2022 to the present, and fell back in 2012, which means that there are other factors affecting gold prices.
As a representative safe-haven asset, gold's price rises and falls are driven by changes in risk appetite for many times. Guolian Securities' research results show that after excluding the impact of long-term real interest rates and safe-haven demand, real gold prices have stabilized, but there are still a few significant fluctuations. Among them, at the end of 2005 and the beginning of 2006, the real gold price, which excludes long-term real interest rates and safe-haven demand, rose significantly, which may be mainly related to the new gold trading demand brought about by the rapid development of gold ETFs.
Gold price trend as of April 29 this year. (Photo from the website of the Shanghai Gold Exchange)
Why is the price of gold rising?
In the first quarter of 2024, the world's major economies continued to implement loose monetary policies, the U.S. economic data fell short of expectations, geopolitical conflicts escalated, central banks continued to increase their holdings of gold, and gold prices rose strongly, repeatedly breaking record highs, the China Gold Association said.
Guolian Securities Research Report believes that the recent rise in gold prices may be more related to the rise of risk aversion and the acceleration of the central bank's purchase of gold, rather than investors' expectations of unexpectedly high inflation in the United States.
There is a view that the rise in gold prices in the past two years may be mainly driven by safe-haven demand. Guolian Securities' research model shows that safe-haven demand has indeed boosted gold prices to a certain extent.
There is also an argument that the accelerated purchase of gold by central banks in various economies in the past two years may have changed the demand for gold at the margin. Guolian Securities said that since 2022, the scale of net gold purchases by central banks of various economies has indeed seen a trend of pivotal lifting, changing the structure of gold demand.
The data shows that since 2010, central banks have shifted to net buying of gold. Until 2022, central bank net purchases of gold as a share of total gold demand remained below 15%. Since 2022, central bank purchases have risen sharply to 23% of gold demand.
According to the China Gold Association, in the first quarter of this year, the mainland increased its holdings of gold by 27.06 tons. As of the end of March, the mainland's gold reserves stood at 2,262.47t. From November 2022 to March 2024, the mainland increased its holdings of gold for 17 consecutive months.
The World Gold Council expects central banks to continue to buy more gold than expected this year, helping gold prices rise.
The picture shows the daily K-line chart of the A-share precious metals sector. (Image courtesy of Straight Flush)
What is the future direction of gold prices
"Looking ahead, we believe safe-haven demand and central bank demand are likely to continue to support gold prices. Guolian Securities Research Report said that in the medium term, with the Federal Reserve cutting interest rates and the decline in real interest rates in the United States, gold prices may be expected to rise further.
Dongxing Securities expects that gold prices will remain strong this year, and gold is expected to continue to gain favor from investors and consumers as a safe-haven asset.
Yintai Gold, a listed company, said that this year, the Federal Reserve's interest rate cut and the central bank's gold purchase will become important supporting factors for gold prices, and gold prices are expected to show a strong trend of shocks.
"In the long term, gold prices are rising strongly and are expected to reach US$2,700 per ounce in 2025. "Guojin Securities Research Report believes that it is expected that in 2024, under the condition of rising gold prices and relatively stable cost control, the performance of gold stocks will have a better performance, and the current market value of gold stocks does not reflect the expectation of more gold price increases, and there is a large space for "making up for the rise".
Zhu Keli, executive director of the China Information Association and founding president of the National Research Institute of New Economy, told China Business Daily that as a safe-haven asset, the price of gold is affected by a variety of factors, including global economic growth, inflation, monetary policy, geopolitical risks, etc. When the market is concerned or uncertain about these factors, investors tend to turn their money to relatively safe assets such as gold, pushing their prices higher.
"Gold prices may be more volatile and risky after a rapid short-term surge, but the medium- to long-term upward trend remains unchanged. You Chunye, chief macro analyst of Minmetals Securities, further analyzed the reasons for the medium and long-term bullish gold prices to reporters: first, there is a greater risk of secondary inflation overseas, and the anti-inflation attribute of gold is prominent; second, the trend of rising US government debt is difficult to reverse, and the value of gold is pushed up; third, central banks of all countries have the demand for "selling dollars and buying gold" to disperse reserves, and central bank gold purchases have become a long-term support for gold prices.
Currently, the price of gold is highly volatile, and investors should be cautious when investing. Zhu Keli said that although gold is an important safe-haven asset, it also needs to allocate assets reasonably according to its own risk tolerance and investment objectives.
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Gold consumption is polarised
Notably, the impact of the surging gold price on gold consumption has been polarised: in the first quarter of the year, gold jewellery consumption declined, while bar and coin consumption increased year-on-year.
Statistics from the China Gold Association show that in the first quarter of this year, the national gold consumption was 308.905 tons, an increase of 5.94% compared to the same period in 2023. Among them, 183.922 tons of gold jewelry, down 3.00% year-on-year, and 106.323 tons of gold bars and coins, up 26.77% year-on-year.
The China Gold Association believes that the rapid rise in gold prices, combined with factors such as gold jewelry processing fees and high brand premiums, has strengthened consumers' wait-and-see sentiment, which has suppressed gold jewelry consumption to a certain extent, and increased sales pressure on gold jewelry retailers.
In addition, the high price of gold and huge fluctuations have increased the risk of production and operation of gold processing and sales enterprises, wholesale and retail enterprises have become cautious in purchasing, the cost of raw materials for jewelry processing enterprises has risen, shipments have declined, and some small and medium-sized processing enterprises have even stopped work and taken holidays. In contrast, physical gold investment has gained more attention due to the surge in safe-haven demand, with bar and coin consumption at relatively low premiums rising sharply.
(Note: This article does not constitute any investment advice)