Source: China Brokerage Author: Pei Lirui

On June 7, spot gold in London fell 3.45% to $2,293 per ounce, briefly breaking through the $2,290 level, and COMEX gold fell 3.34% to $2,311 per ounce, the largest closing loss since April 22, 2022. Meanwhile, the main contract for COMEX silver futures fell 6.69% to $29.27 per ounce. Looking at the data over a longer period of time, since the high point of $2,454.2 per ounce on May 20, COMEX gold has retreated by about 6%, and the year-to-date increase has narrowed to around 12%. However, many institutions still believe that the gold price still has strong support, especially after the recent volatile adjustment, the short-term callback risk may have gradually released, and the gold price in the medium and long term is still expected to continue to rise.

Two factors led to a sharp drop in gold

On June 7, the international gold price plummeted by more than 3%, marking the largest single-day drop in nearly a month and a half.

Many institutions believe that this round of gold callback is mainly affected by two data released on Friday, one is the unexpected non-farm employment data of May, and the other is that China's central bank suspended purchasing gold this month.

The report from the U.S. Bureau of Labor Statistics showed that non-farm employment in May was significantly stronger than market expectations, while the unemployment rate exceeded 4% for the first time in two years. Specifically, seasonally adjusted non-farm employment in the United States increased by 272,000 people in May, significantly higher than the market's expected 185,000 people, while the unemployment rate unexpectedly increased from the previous level of 3.9% to 4.0%.

Why did both employment and unemployment indicators rise? Huaxia Fund believes that the logic behind this is that new immigrants in the United States are crowding out employment, and the employment market in the United States is being squeezed by new immigrants. The employment environment for domestic residents is deteriorating. New immigrants are more hardworking and even have the phenomenon of repeated jobs, resulting in an over-expected increase in labor supply. Combined with the recession signal of ADP employment data and the unemployment rate data, as well as the continued downward revision of the previous non-farm data, the current U.S. employment data is still mixed with joy and sorrow.

At the same time, statistics from the State Administration of Foreign Exchange show that as of the end of May 2024, China's foreign exchange reserves amounted to US$3,232 billion, up US$31.2 billion from the end of April, an increase of 0.98%. It is worth noting that the gold reserves at the end of May were US$170.96 billion (72.8 million ounces), which remained unchanged. Before this, China's gold reserves had risen for 18 consecutive months, which means that the Central Bank of China temporarily suspended purchasing gold in May.

Global central bank purchases of gold have been the core factor since the fourth quarter of 2022 when gold was better than US bond rates, during which time gold has repeatedly risen in tandem with the US dollar and US bond rates. Huaxia Fund believes that the current suspension of gold purchases by the Central Bank of China may slow down the pace of global central bank purchases of gold. If gold purchases are suspended, the pricing of US bond rates is expected to once again become the main influencing factor.

Wang Qing, Chief Macro Analyst of Dongfang Gold, also said that the central bank's suspension of its increase in holdings may be related to factors such as the significant increase in the international gold price in recent months. In the context of the historical high level of gold prices, adjusting the pace of increasing holdings appropriately is conducive to controlling costs.

As prices have fallen in the gold market recently, funds have bought more by increasing the share of ETFs, and the share of several gold-themed ETFs has increased significantly.

According to Wind data, as of June 7, there were 17 gold-themed ETFs in the entire market, including 13 gold ETFs directly investing in spot gold and 4 gold stock ETFs, of which 14 have shown a net increase in shareholding in the past month, and the trend of net capital inflows is obvious.

Among them, Huaxia's gold ETF has had a net increase in shareholding of about 450 million shares in the past month, with the latest fund holdings of 4.045 billion shares, reaching a historical high. The latest net asset value of the fund is 21.859 billion yuan, an increase of 3 billion yuan in just one month.

In addition, Yongyuan's gold stock ETF, Huaxia's gold stock ETF, and E Fund's gold ETF have increased by 396 million shares, 138 million shares, and 108 million shares, respectively, in the past month, of which Yongyuan's gold stock ETF and E Fund's gold ETF also hit a historical high in terms of fund shares on June 7, with the latest fund shares of 975 million shares and 1.77 billion shares, respectively.

Overall, in the past month, the shareholding of the 17 gold-themed ETFs has increased by a total of 1.073 billion shares, and the net asset value has increased by more than 5 billion yuan.

Pay attention to inflation and the signal of the June interest rate meeting.

Looking ahead, does gold, which has been fluctuating at a high level, still have investment value? How should we participate after recent corrections?

Liu Tingyu, manager of Yongwin Gold Stock ETF Fund, believes that the recent large fluctuations in gold prices are mainly due to the delay in the market's anticipation of the rate cuts by the US Federal Reserve and the cooling down of the risk aversion. Of course, it is also related to the high increase in gold prices in the previous period and the need for certain profit-taking by investors. However, after the recent shock adjustment, the short-term risk of a pullback in gold and gold stocks may have gradually been released, and the long-term price of gold is still expected to continue to rise.

A researcher at a certain public fund for precious metals also said that he still bullish on the rise of gold prices. The short-term logic is the certainty before the first interest rate hike landing. The closer it is to the landing, the stronger the certainty will be, and during this period, we can ignore the fluctuations of US data and the repeated attitudes of the Federal Reserve. He believes that the long-term logic of gold is the weakening of the US dollar system, the appreciation of physical assets relative to the US dollar. Recently, with the decline in the price of gold, gold stocks have also generally pulled back, and it is recommended to re-adjust accordingly.

In addition, he also pointed out the investment opportunities in silver. In the case of a rising trend in gold prices, the timing of silver price increases lags behind that of gold, but the magnitude is often greater, with silver prices reaching a new high since 2012.

Wang Lingxiao, manager of Boshi Growth Select Hybrid Fund, still sees copper, gold, and oil as having relatively large upward elasticity, tight supply, and large valuation space in the medium term. However, the potential risks currently include a demand freefall and the possibility of interest rate hikes by the Fed caused by excessively hawkish external financial conditions. There is no hard landing in the global economy for the time being, overseas growth may exceed expectations, and the demand for replenishing inventory in the US real economy has begun to emerge. Therefore, when selecting companies, more attention is paid to quality growth rather than speed and ineffective expansion.

Huaxia Fund recommends that investors continue to closely monitor inflation data and signals from the June interest rate meeting. The Federal Reserve's June interest rate meeting will be held next week, and CPI inflation data for May will be released before the meeting. Based on the lower-than-expected oil prices in May, the energy sub-category may provide some negative contribution to the overall CPI decline. Of course, the key factor is still core inflation, especially rent.

The company believes that in the medium to long term, high interest rates and high debt in the United States cannot coexist. Under the background of high debt and continuous expansion of fiscal policy, future interest rate cuts are still needed to alleviate the pressure of interest payments, but this risk has not been fully priced in the short term. Therefore, although gold has experienced an obvious correction and has large fluctuations, and economic indicators in the past month have shown continuity in fluctuations, it is recommended for investors not to rush to buy high or sell low, and to pay attention to the configuration value of gold under the three major logical changes of the US Federal Reserve's interest rate reduction cycle, global monetary system change, and repeated geopolitical risks.

Editor/Lambor