Recently, the international gold price has risen strongly, breaking the record in May this year and hitting a record high. The weakening of the U.S. macro economy and the expectation that the Federal Reserve will stop raising interest rates are the core reasons for the rise in gold prices, and there is a high probability that it will continue to fluctuate and strengthen in the later period.
"Too many factors have caused gold prices to "grow wildly"
There are many reasons behind the continuous rise in international gold prices. The rise in gold prices some time ago was mainly due to the Palestinian-Israeli conflict. Before the Palestinian-Israeli conflict, gold prices had a slight downward trend. After the emergence of the Palestinian-Israeli conflict, the intensification of geopolitical tensions led to a stronger headline in the market, and the rise in gold prices was an inevitable result. Gold prices retreated when the market was expecting a lower chance of a more violent conflict. However, in general, the current Palestinian-Israeli conflict situation is still tense, the geopolitical conflict has not been completely resolved, and gold is still in the geopolitical risk premium stage.
In addition to geopolitical conflicts, the weakening trend of contraction in financial conditions is also a major factor affecting gold prices. Expectations of a Fed rate cut pushed gold prices to record highs. The Fed is currently expected to start cutting interest rates in May 2024 and cut rates four times to 4.5% next year. Fed funds rate futures implied that the market's expectation of the first rate cut was moved forward from June to May, and the dollar index weakened significantly, driving gold prices stronger over the past month.
On the one hand, the market is worried about whether the U.S. economy will be shaken or even a recession will start a new round; On the other hand, the market has speculation and expectations for the United States to stop raising interest rates and even enter the state of interest rate cuts next year. In this context, the dollar index is also weakening, so the rise in gold prices is also affected by changes in financial conditions.
In addition, the continued "binge" of gold by global central banks is also one of the factors driving gold prices upward. According to the World Gold Council, global central bank gold demand increased by 14% year-on-year to a record 800t in the first three quarters of 2023. The central bank made 337t of net purchases in Q3, the third highest quarterly net purchase on record.
The central bank is the "weather vane" of the market. The central bank's continued gold purchases actually show that the current market headlines and tensions have not completely eased under the influence of geopolitical situations and other influences. According to the World Gold Council's latest central bank gold reserves survey, seven out of 10 central banks surveyed expect to increase their gold reserves in the next 12 months, taking into account inflation, geopolitical events and other factors, and the trend of central bank gold purchases is likely to continue for many years.
The continuous surge in international gold prices has also gradually spread to China, and domestic gold premiums are higher in comparison. Wan Zhe analysis, some time ago the dollar index rose, the price of gold denominated in RMB rose higher, with the relative weakening of the dollar index, it is expected that the difference between the gold price premium and the outside will also converge.
Will gold prices continue to soar?
Looking ahead, we remain bullish on gold prices. The slowdown in U.S. economic growth in 2024 is a high probability event, and 2024 will usher in U.S. interest rate cuts and a weakening of the U.S. dollar, which is good for gold prices and gold stocks, and is optimistic that gold prices will continue to hit new highs.
The Fed's current interest rate hike cycle may be over, U.S. interest rates may stay at a higher level for a period of time and then usher in a turn, the dollar index, U.S. Treasury real yields fell, gold prices rebounded, and the medium and long-term continued to be optimistic about the rise of gold prices.
At present, the situation of conflict, division and confrontation in the world, whether in the political or economic aspects, has not completely disappeared, and the global governance, order and framework are in the process of restructuring. Whether geopolitical conflicts will continue to occur in the future, where and whether the risk points of the global economy and financial markets will recur, these are all issues that the market is concerned about. Therefore, in the long run, gold prices will continue to have high support for a long time.
Market Outlook:
1) U.S. stocks: The core of the strong operation of U.S. stocks lies in the resilience of the U.S. economy beyond expectations, the market's expectation of a soft landing in the current round of the U.S. economic cycle continues to strengthen, and at the same time, U.S. inflation continues to fall, and the long-term trend of the market is relatively optimistic.
2) U.S. Treasuries: Looking ahead to the future trend of U.S. Treasury yields, the 10-year U.S. Treasury yield is expected to continue to weaken, and investors need to take countermeasures and pay close attention to market dynamics.
3) Gold: In the future, the price of gold will remain at a high level, and the investment value of related gold financial assets will still be prominent, but there is also a risk of price fluctuations. For investors, they can actively pay attention to the price trend of gold and the market of the sector, and choose the right time to appropriately increase the allocation of gold assets.
This article is from: Selected Brokerage Research Reports
