Zhongtong Finance APP learned that Huaxi Securities issued a research report stating that in the long cycle, gold is in a large upward cycle. First, in recent years, the scale of US debt has accelerated, and the pressure of interest payment has continued to rise. The US sanctions on Russia's finances after the Russia-Ukraine conflict have impacted the US dollar credit. Due to concerns about the credit of the US dollar and the risk of US dollar assets, central banks around the world have continued to increase their gold reserves. Secondly, the world is currently undergoing a major change that has not been seen in a century, and the spillover risks of geopolitical conflicts such as Russia and Ukraine, Palestine, and Israel have increased the appeal of gold as a safe-haven asset. Finally, buying on dips is the characteristic of central bank purchases of gold. If the subsequent gold price once falls back, it is expected to drive central banks around the world to purchase gold again, and the bottom support of the gold price is relatively strong.

Main views of Huaxi Securities:

I. The framework of gold price drivers has switched, and the wave of global de-dollarization and central bank purchases of gold has driven the central upward movement of gold prices.

Gold is considered a safe interest-free asset, and the actual interest rate or exchange rate is the opportunity cost of gold. The significant negative correlation between actual interest rates and gold price trends reflects the financial attributes that drive gold. During the US interest rate hike cycle, the financial attributes of gold dominated. Since the middle of 2007, the trend of the actual interest rate of US Treasury bonds and the gold price has shown a significant negative correlation. However, since the second half of 2022, the price of gold has fluctuated in the same direction as the actual interest rate several times, showing that the financial attributes of gold have been weakened.

II. The Russia-Ukraine conflict has accelerated global de-dollarization, and central banks in various countries have a strong willingness to purchase gold due to concerns about US dollar credit.

Both gold and the US dollar have international currency characteristics. Central banks can control currency stock, balance international payments and exchange rates by purchasing and selling gold. For reserves, income is not the main purpose, so central banks' gold reserves are mostly relatively steady. When the economy faces risks, some countries may even choose to slow down the pressure of raising funds by selling gold. In recent years, the scale of US debt has accelerated, and the pressure of interest payment has continued to rise. The US sanctions on Russia's finances after the Russia-Ukraine conflict have impacted the US dollar credit. Central banks around the world have reduced their US dollar foreign exchange reserves due to concerns about the credit of the US dollar and the risk of US dollar assets, and instead increased their gold reserves. According to data from the World Gold Council, central banks around the world net purchased 1,037 tons of gold in 2023, which is only 45 tons lower than the historical record high in 2022. Among them, the central banks of China, Poland, and Singapore ranked in the top three in terms of gold purchases.

III. Buying on dips is the characteristic of central bank purchases of gold. Once the gold price falls, it is expected to drive central banks around the world to purchase gold again, and the bottom support of the gold price is relatively strong.

As of the end of June 2024, the gold reserves of the People's Bank of China were 72.8 million ounces, which remained unchanged for two consecutive months. The bank judged that this was related to the recent significant increase in gold prices. From the perspective of historical data, the amount of gold purchased by the central bank is negatively correlated with the price of gold. Buying on dips is the characteristic of the central bank's gold purchases in China. The World Gold Council's survey of central bank gold reserves in 2024 shows that many central banks believe that the global reserve status of the US dollar will continue to weaken. 29% of surveyed central banks said they plan to increase their gold reserves in the next 12 months, and the willingness to increase their gold holdings has reached a five-year high. Therefore, once the gold price falls subsequently, it is expected to drive central banks around the world to purchase gold again, and the bottom support of the gold price is relatively strong.

IV. The US labor market cools down, the probability of the Fed's rate cut in September increases, but attention should be paid to the disturbance of the US election.

According to data from the US Department of Labor, the US added 0.206 million non-agricultural jobs in June, higher than the expected 0.19 million, but lower than the revised value of 0.218 million in May. At the same time, the cumulative addition of non-agricultural jobs in May and April was revised downward by 0.111 million, indicating that the US labor market may be lower than the initial value. In addition, the unemployment rate continues to rise. In June, the US unemployment rate was 4.1%, higher than the expected value and the previous value, the highest since November 2011. After the data was released, the market expected the probability of a rate cut in September to rise above 70%, supporting the rise in gold prices. Subsequently, we will focus on the US election in November, which may increase the volatility of the US dollar and gold. Current polling data shows that there is a higher probability of Trump being elected as president. Trump prefers a weak dollar, but the combination of "reducing domestic taxation + imposing tariffs on foreigners" policy may once again trigger inflation.

Risk reminder: the pace of the Fed's rate cut is slower than expected, the US economy exceeds expectations, and changes in geopolitical situations, etc.