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Everbright Securities: Why is the gold price hitting a new high? Gold is still in its third bull market in history

王俊杰2017
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Event:
Recently, gold prices have shown strong performance, with London gold closing at a historic high of $2114.3 per ounce on March 4. In the past five trading days (February 27, 2024 to March 4, 2024), London gold has risen 4.1%, and in the past six months (October 5, 2023 to March 4, 2024), London gold has risen 16.1%.
Core viewpoint:
The recent rapid rise in gold prices is mainly due to the easing of liquidity expectations from the Federal Reserve, and the downward trend in US bond rates driving up investment demand. In the short term, fluctuating expectations of interest rate cuts may lead to high volatility in gold prices. However, in terms of trend, the US economy is cooling down, the supply of US bonds is falling, and the interest rate reduction cycle is moving back but still expected to start, indicating a strong downward trend in US bond rates and opening up space for gold prices to rise. In addition, under the background of anti globalization, frequent geopolitical conflicts and the wobbling US dollar credit system, coupled with the increasing demand for safe haven in the election year, will drive central banks of various countries to continue purchasing gold and enter the process of "de dollarization", which will become the support for gold prices in the medium and long-term dimensions.
1、 The easing of liquidity expectations from the Federal Reserve has pushed up gold prices again in the near future
Previously, we mentioned that gold contains three attributes: commodity, currency, and finance. Its price changes mainly come from investment demand driven by the real interest rate of US bonds, as well as the demand for safe haven and the central bank's gold purchase demand brought about by "de dollarization". Among them, the actual interest rate of US Treasury bonds is the anchor for the short-term pricing of gold, and the price of gold shows a reverse relationship with the interest rate of US Treasury bonds. In the context of anti globalization, frequent geopolitical conflicts and the fluctuation of the US dollar credit system have driven central banks of various countries to continue purchasing gold, becoming the support for gold prices in the medium and long-term dimensions.
Since the fourth quarter of last year, the market expects the Federal Reserve's interest rate hike cycle to end, driving gold prices back to the upward trend. The subsequent market mainly fluctuates around the Federal Reserve's liquidity expectations
From October 2023 to December 2023, the expectation of interest rate cuts rapidly increased, catalyzing a volatile upward trend in gold prices. In early October, the conflict between Palestine and Israel boosted demand for safe haven gold. At the same time, due to the slowdown in US economic data in October, the stance of the November Federal Reserve's interest rate meeting was biased, and the certainty of the end of the interest rate hike cycle was high, triggering a rapid increase in interest rate cut expectations and triggering an upward trend for gold.
From January 2024 to mid February 2024, the expectation of interest rate cuts has fallen, driving a temporary correction in gold prices. Since January, the US economy and inflation data have exceeded expectations, indicating that the economic resilience remains strong, and premature interest rate cuts may once again trigger the risk of secondary inflation. The combination of hawkish statements from the Federal Reserve has led to a sustained pullback in interest rate expectations. The market's expected time for rate cuts has shifted from March to June, which has led to a strengthening of the US dollar index, an increase in US bond rates, and a corresponding pullback in gold prices.
Since late February 2024, expectations of loose liquidity have risen, and gold prices have risen rapidly. On the one hand, the economic data in the United States has slowed down, with new orders for durable goods in January and lower than expected PMI for ISM manufacturing in February. The year-on-year growth rate of disposable income for residents in January has significantly declined compared to the previous month. The probability of the market betting on a rate cut in June this year has also increased. On the other hand, the Federal Reserve's stance is biased. On March 1st, Federal Reserve official Waller proposed that the Federal Reserve should "buy short and sell long" on its balance sheet, driving down US bond rates and rapidly rising gold prices.
2、 Looking ahead, gold prices are still in the upward trend channel
In the short term, the downward trend of US bond interest rates is strong, providing upward support for gold prices
The most critical factors affecting the trend of US bond interest rates in 2024 are the US economy, inflation issues, and the direction of the Federal Reserve's monetary policy. In the short term, the risk of inflation in the United States repeatedly restricts the opening of interest rate cuts. However, in a high interest rate environment, the cooling of the US economy remains the main trend. Coupled with the easing of pressure on US bond supply, the central downward trend of US bond interest rates is the overall direction. Considering the recent statement from the Federal Reserve's vote committee that the transition from an eagle to a dove is only a matter of time before the interest rate cut cycle begins. From a point of view, 4.2% -4.3% may already be the top range of the current 10Y US bond interest rate volatility, and there is a high probability that the US bond interest rate will enter a downward channel, which will drive up demand for gold investment.
From a medium to long-term perspective, in the process of "de dollarization", central banks of various countries continue to increase their purchases of gold, and gold is still in the third round of bull market in history
In history, the emergence of each round of gold bull market is inseparable from the strengthening of the monetary attributes of gold, reflecting the rise and fall of various forces in the international monetary system. Since 2018, the international geopolitical situation has become increasingly complex. The China US game, the Russia-Ukraine conflict, and the Palestine Israel issue have continued to emerge. The world has entered the process of "de dollarization", which is manifested in the decline of US dollar foreign exchange reserves and the rise of gold reserves.
Since the second half of 2022, central banks of various countries have accelerated their pace of purchasing gold, supporting the high operation of gold prices. Taking China as an example, as of the end of January 2024, the People's Bank of China has continuously increased its holdings of gold for 15 months, with a gold reserve size of 148.2 billion US dollars. Compared to the foreign exchange reserve of 3.2 trillion US dollars, the gold reserve size is still relatively low, and there is still significant room for further increase in holdings in the future.
In addition, 2024 may become the largest election year in history. According to incomplete statistics, more than 70 countries and regions worldwide will hold elections in 2024, covering nearly half of the world's population and nearly 50% of its total economy. The changes in political power and policy adjustments in these countries will bring significant uncertainty. Therefore, the increasing demand for safe haven in the election year is also continuing to catalyze central banks around the world to purchase gold.
Risk warning: The resilience of the US economy exceeds expectations; The geopolitical situation has eased.
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