Source: Wind

London gold now continues to reach record highs this Monday, breaking $2,450 per ounce. Since the beginning of the year, gold futures have surged by more than 18%. Although many investors are “afraid” of the price of gold, institutions such as Societe Generale Bank believe that the basis for the long-term rise of gold is still there, and it will continue to rise until at least the end of the year.

The price of gold set a record, driving the A-share gold, jewellery and precious metals sector to soar. On Monday, Sichuan Gold, Shengda Resources, Hunan Baiyin, and Yuguang Gold and Lead rose and stopped, leading the two markets.

In addition to the gold, jewellery and precious metals sector, the other resources sector and the real estate sector also performed well, helping the Shanghai Composite Index hit a new high of nearly 8 months this Monday.

Will gold rise regardless of inflation?

According to the general market view, falling inflation provides data support for the Federal Reserve's interest rate cut, which is a favorable condition for gold to continue to rise.

In terms of inflation data, the US CPI increased 3.4% year on year in April, lower than the previous value of 3.5%, the lowest value since December last year. The US core CPI monthly rate for April recorded a year-on-year increase of 0.3%, lower than the previous value of 0.4%; the monthly retail sales rate in the US recorded 0% in April, which was also lower than the expected 0.4%.

Expectations of interest rate cuts by the Federal Reserve and other major central banks have resumed based on falling inflation. The IMF said in its 2024 World Economic Outlook that the Federal Reserve will cut interest rates to 4.7% by the end of this year, while the ECB will cut interest rates to 3.4% by the end of the year.

However, Société Générale said that the high stickiness of inflation will also help the price of gold rise, as has happened in recent years.

The bank said in the report that inflation is likely to be less sticky over a period of 3 to 6 months. Housing and service inflation has declined slightly because of the last resistance to reduce inflation so far, but this is noise. The inflation that Europe and the US are currently experiencing is a long-term change in economic performance over the past three years. Inflation will continue to rise unless the basis for inflation is gone. Inflation is the result of policies, and any fall back in inflation is temporary as long as the drivers of inflation remain in place.

Guojin Securities also stated that there is a risk of re-inflation in the US. The core CPI housing segment growth rate may begin to rebound in the second half of 2024. Combined with other factors, the US may be dragged into stagflation, and the price of gold is expected to reach 2,700 US dollars/ounce in 2025.

Geopolitical events spur a rise in gold prices

Geopolitical risks in the Middle East continue to plague the market. Since February 24, 2022, the price of gold has increased by about 30%.

Société Générale said that the geopolitical danger is a sign of the breakdown of trust between the two sides. Beginning with the 2008 global financial crisis, people's confidence in the US dollar waned. This is not an overnight problem, nor can a solution be achieved overnight. As a result, gold has the basic conditions to rise.

The central bank is vigorously buying gold

According to the World Gold Council, gold is an important part of central bank reserves because its safety, liquidity and return are the central bank's three main investment goals. As a result, central banks are important holders of gold, accounting for about one-fifth of all gold mined in history.

In recent years, central banks' demand for gold has once again become a key driver of gold prices, especially from non-Western countries. In 2023, global central banks purchased more than 1,000 tons of gold, double the average for 2010 to 2021.

The pace of gold purchases by central banks did not slow down in the first quarter of this year. According to incomplete IMF statistics, official gold holdings of various countries increased net by 290 tons.

Société Générale said the diversification of central banks or monetary authorities. This is a mild statement, “Everyone is adding more gold to replace US Treasury bonds,” mainly due to geopolitical perils, irretrievable public deficits, and broken trust.

Strong demand for gold

The World Gold Council reports that, including large-scale OTC purchases by investors, total demand for gold increased 3% year-on-year in the first quarter of this year to 1,238 tons, the strongest first quarter since 2016.

Gold purchases by Western investors remained strong, but there was a healthy return in profits. However, in the Eastern Hemisphere, even as the price of gold soars, buying is still very strong. Profitable transactions are rare, and regional differences are stark.

Guojin Securities also mentioned in the report that factors such as the current decline in gold mine grade will cause gold AISC costs and mine incentive prices to gradually rise. From the perspective of cost support, gold prices have momentum to increase in the long term.

Will the price of gold be higher than $2,750 at the end of the year?

Gold does not distribute dividends, making it difficult to “standardize” the price of gold. Compared to the S&P 500, the price of gold is at a low point in decades.

Turning to technical analysis, Societe Generale found that since 2018, the price of gold has been rising for a long time and may reach the level of 2,750 to 2,770 US dollars by the end of the year.

Does the gold sector have opportunities?

The sharp rise in gold also often drives the gold, jewellery and precious metals sector. Judging from recent data, there is a certain correlation between international gold prices and the performance of the gold sector.

It should be noted that gains in the gold and jewellery sector have always been weaker than in the precious metals sector.

According to Guojin Securities, the growth rate of domestic gold stocks will slow down in 2023. It is expected that in 2024, when gold prices rise and cost control is relatively stable, the performance of gold stocks will perform well, and the current market value of gold stocks does not reflect many expectations of rising gold prices, and there is plenty of room to “make up”, so it is expected that gold stocks will usher in the main upward trend.

Editor/jayden