Gold price correction gold investment is at a "crossroads" again

China Business News

2024-05-11 02:38Published on the official account of Beijing China Business Daily

Our reporters Hao Yajuan and Zhang Rongwang report from Shanghai and Beijing

Gold prices fell from a high level, some investors took the opportunity to buy, and some investors waited and waited.

After hitting a record high in April, international gold prices have fluctuated downward since May. Combined with the "May Day" holiday promotion, some domestic gold jewellery quotations returned to the "5 era".

Gold prices have rebounded, can investors still "get on the bus"? Wang Xinjie, chief investment strategist of Standard Chartered China's wealth management department, believes that speculative bets on gold price movements are difficult to form an effective investment strategy, and it is more appropriate to use gold as a hedge against inflation or geopolitical risks. Once the gold price has retraced, you can increase your position on dips.

The abscuring risk aversion constrains gold prices

After reaching the $2,400 per ounce mark in April, international gold prices fluctuated lower.

Talking about the reasons for the recent decline in gold prices, Wanlian Securities investment consultant Qu Fang told the "China Business Daily" reporter that among the short-term factors affecting gold prices, risk aversion is the first to bear the brunt. Recently, the situation in the Middle East has eased, which has reduced international risk aversion, which has constrained the further rise of gold prices. In addition, the Fed's interest rate cut policy is still affected by inflation data, so there are concerns about indecisive implementation.

It is worth mentioning that on May 1, local time, the Federal Reserve announced its latest interest rate decision, maintaining the federal funds rate at 5.25%~5.50%, which is the sixth consecutive time that the Fed has kept interest rates unchanged since September 2023.

In this regard, Li Yuefeng, a researcher at the Beijing Gold Economic Development Research Center, pointed out that the gold market is trading "interest rate cut expectations", the Federal Reserve keeps interest rates unchanged, and Fed Chairman Powell claimed that "the next action cannot be to raise interest rates", suggesting that even if the army does not move, it is more likely to cut interest rates later. This would have been good for gold, but there is still great uncertainty about the timing of the "stay put" and the magnitude of the rate cut. As a result, it can only support gold prices in the short term, while the medium term (at least until the Fed's June meeting is clearer on monetary policy) will remain dampening. However, in the long run, the Fed's expectation that "it will eventually cut interest rates" will still support gold prices until the interest rate cut boots land, or cause the phenomenon of "buying expectations and selling facts".

In addition to the Federal Reserve's monetary policy, trading factors are also one of the reasons for the decline in gold prices. Ye Qianning, a senior gold investment analyst at GF Futures, told reporters that since mid-to-late April, the market has released overbought sentiment in the case of the exchange prompting volatility risk and the rising cost of gold prices hitting new highs.

Looking ahead to the trend of gold prices, respondents believe that anti-inflation attributes and central bank gold purchase demand will bring support to gold prices.

Wang Xinjie told reporters that changes in supply and demand will have a direct impact on gold prices, this round of supply and demand changes originated from the central bank's net buying directly led to the increase in demand, although the spot position of ETF is declining, but the follow-up purchase of the retail end and the sharp rise in the futures market position have promoted this round of gold price rise. In the future, as real interest rates fall and central banks continue to buy, gold prices will be supported.

According to the World Gold Council's Q1 2024 Global Gold Demand Trends Report, total global gold demand (including over-the-counter transactions) increased by 3% year-on-year to 1,238t in Q1, the strongest Q1 demand performance since 2016. At the same time, in addition to the continuous increase of gold reserves by mainland central banks, global central banks also continued to maintain a rapid gold buying trend, with global official gold reserves increasing by 290 tons in the first quarter.

According to data released on the official website of the People's Bank of China on May 7, as of the end of April 2024, the gold reserves of the mainland central bank were reported at 72.8 million ounces, up 60,000 ounces from the previous month, which is the 18th consecutive month that the mainland central bank has increased its gold reserves.

"In the long run, the factors affecting the price of gold are: first, the central bank's purchase of gold; Second, geopolitical factors, the tension in the Middle East is still continuing, the US election is imminent, and the future risk aversion will still attract speculative funds to enter the market, increasing the demand for gold bars and coins, thereby supporting the rise in gold prices; The third is the Federal Reserve's monetary policy, the Federal Reserve's tightening policy is nearing the end, and the expected time of interest rate cuts in the next 6~12 months will still support gold prices. Li Yuefeng added.

Guojin Securities pointed out in the research report that gold prices will still have a basis for rising in 2024, and the driving force behind them is not only the physical investment demand driven by the central bank's gold purchase and the rise in safe-haven demand, but gold ETF investment is also expected to promote gold prices to continue to rise, especially after the start of the Fed's interest rate cut cycle, its upward driving force may be significantly enhanced. The investment demand, represented by gold ETFs, is expected to become an incremental source of funds for the rise in gold prices. At present, the holdings of gold ETFs are gradually stabilizing at the bottom, and then with the start of the Fed's interest rate cut cycle, according to the historical law: U.S. bond interest rates may tend to fall, and the decline in the opportunity cost of gold holdings will drive its investment demand up; Whether it is the expected trading stage before the start of the interest rate cut, or after the start of the interest rate cut, gold prices and gold stocks have risen. It is expected that the investment demand for gold in the later period, especially the increase in global gold ETF holdings, is expected to provide new impetus for the rise of gold prices.

However, CICC (601995. SH) believes that as far as the current market is concerned, there is great uncertainty in the monetary policy and macro environment, and the delay in the Fed's interest rate cut expectations may mean that the expected trading phase of the gold market has not yet ended, and the premium of gold prices over fair value may persist before the Fed cuts interest rates. In the baseline scenario of no global turmoil or recession, the Fed's interest rate cut boots could become the "fuse" for the gold bubble to burst.

Retail investment demand will continue to grow

The reporter noticed that the topic of "the price of gold jewellery fell to the beginning of 5 and consumers did not buy it" on social platforms caused widespread discussion.

"Recently, the price of gold has fallen sharply, but I am not in a hurry to start, and we will wait and see." Ms. Zhang from Shanghai said.

Mr. Li, who specializes in gold investment, said: "I mainly invest in gold ETFs and physical gold, and I invest regularly every year, and I don't want to sell it in the short term, so I keep holding it. ”

Investors are generally concerned about whether gold can be bought after a sharp rise and fall?

Li Yuefeng believes that for asset allocation investors, the retracement of gold prices may be a good opportunity to enter the market. For speculative investors, patience should be maintained in the near future. Gold's historical price action shows that the second quarter is usually a phase of gold price retracement, and it should wait for gold prices to retrace further before waiting for opportunities to enter the market.

Qu Fang pointed out that for investors, first, gold investment should determine the investment period, not gold as a short-term speculation tool, but as a long-term allocation of assets. Second, gold investment should emphasize diversity, including physical gold, gold ETFs, gold wealth management products, etc. Third, in gold investment, investors must be familiar with and understand the specific attributes and risks of investment tools, many gold financial derivatives have huge potential risks, for ordinary investors, can not identify their investment value and risk through the professional level, but also should listen to the opinions of professionals.

"Gold plays an important role in asset allocation and is seen as a 'softener' that balances portfolio volatility as it is negatively correlated with other risk assets during risk events, thus acting as a diversifier. From an investment perspective, the key to diversified asset allocation is asset diversification, by combining gold with other assets such as stocks, bonds, overseas assets, etc., the volatility and risk of the overall portfolio can be optimized, so as to better meet the needs of investors. Xu Zhiyan, assistant general manager of Huaan Fund and senior director of the index and quantitative investment department, said in an interview with reporters.

Wang Xinjie also said that the price of gold will rise due to geopolitical conflicts or falling real interest rates, and investors can use gold as the core allocation of diversified portfolios, effectively using the characteristics of gold to hedge the risk of asset portfolios.

Regarding the reasonable allocation ratio of gold, Xu Zhiyan pointed out that from the perspective of global asset distribution and total gold, the proportion of gold between 5% and 10% is a reasonable estimate. Therefore, controlling the proportion of gold in asset allocation to 5% to 15% can not only achieve good risk management, but also enjoy the advantages of gold as an asset allocation. It is important to emphasize that even though gold, as a high-quality asset, occupies an important place in asset allocation, it is not recommended to put all your money into gold. The goal of asset allocation is to achieve risk diversification and maximize long-term returns, and investors need to comprehensively consider the characteristics of different asset classes to balance asset allocation.

Wang Lixin, CEO of the World Gold Council in China, said that domestic retail gold investment demand is likely to remain healthy. In order to support the economy, expand domestic demand and boost confidence, the prudent domestic monetary policy may lead to a further decline in interest rates, and the attractiveness of gold is expected to increase against the backdrop of declining local opportunity costs. At the same time, retail investor interest in gold will continue to be elevated as the record-breaking pace of gold purchases by central banks around the world continues to gain traction. In addition, weakness in the property market, potential volatility in the RMB exchange rate and the potential for heightened global geopolitical tensions could support the growth of retail investment demand.