On July 19, Caixin reported that as the Federal Reserve's interest rate cut approaches, the price of gold appears to be "ambiguous." On the one hand, Trump's comments have disrupted the market's expectations. On the other hand, several officials from the Federal Reserve have been very dovish, causing violent fluctuations in the price of gold.

On Wednesday, international gold prices hit historic highs during intraday trading, soaring to a high of $2,482.14/ounce, and the highest gold futures price on the COMEX hit $2,487.4/ounce. The international gold price has been soaring since the end of June, repeatedly breaking new highs, the main reason was that the liquidity expansion or interest rate expectations have increased in the Federal Reserve.

However, looking at the plate, the gold price in the foreign market is clearly stronger, while the gold price in the domestic market is weaker than that in the foreign market. At the same time, both domestic and international gold futures fell today. As of the close, the main contract for Shanghai Gold Futures 2410 fell 2.44%, to 565.94 yuan/gram, directly erasing the rise of the previous days.

"Today, gold plunged significantly and there was a divergence between domestic and foreign markets. The core reason for this is that the expected interest rate cut has changed due to the upcoming US presidential election." Zhang Wen, head of the macro and commodity strategy team of CITIC Futures, told Caixin that it can be seen that the price of gold has risen since the beginning of the year mainly because the Fed liquidity expansion or interest rate expectations have pushed up.

In addition, due to changes in U.S. debt risk and the number of bond issuances, the surface-calculated U.S. bond actual interest rate can no longer represent the impact of loose liquidity on precious metal prices. Zhang Wen said that looking at the year-on-year growth rate of the U.S. M2, the rise of its gold price is accompanied by the process of loosening liquidity. Due to the raised expectations of a rate cut in September, the price of gold has hit new highs recently.

Is the gold price's surge just temporary? The logic of "interest rate trading" comes back

Caixin noticed that various dovish statements from the Fed officials in recent days have further raised the probability of a rate cut in September. But Trump's recent remarks also create uncertainty about this event.

According to CME's FedWatch tool, the probability of the Federal Reserve lowering the target range for the federal funds rate by 0.25 percentage points in September is 93.3%. Some traders even believe that the Fed will cut rates at the July meeting and again in September.

On the 17th, Williams, the third-ranking official of the Federal Reserve and president of the New York Fed, said that if inflation continues to slow down, there may be reasons to cut rates in the next few months, but there will be no rate cut at the July meeting.

At the same time, Federal Reserve Board Member Bullard also said that the time for a rate cut is getting closer. If there is no impact, a rate cut in September, November, or December of this year will not have a macro impact.

However, recent positive factors that have supported the rise in the price of gold are considered, but considering that market risk appetite may also be affected by dovish Fed statements, the relaxation of financial conditions may support the overall market risk appetite level. The logic of "interest rate trading" may not constitute sustained positive factors for gold prices. The Federal Reserve's preventative interest rate cut behavior under the normal weakening of the economy should be maintained cautiously optimistic for gold prices.

Zhang Wen believes that the increase in Trump's chances of winning the election creates uncertainty about interest rate cuts. On the one hand, Trump's trade protection and immigration policies will weaken the trend of inflation in the US service sector, restricting future interest rate cuts and affecting the price of precious metals. On the other hand, Trump has openly stated that he hopes interest rates will be cut until November, which limits the boost of the liquidity expansion expectation for the price of gold. The expected short-term changes are obviously causing precious metal prices to fall back.

Trump once expanded the fiscal deficit, which once drove up the price of gold.

On the 17th, in an interview with the media, Trump mentioned that if he was re-elected, he would allow Powell, who is currently serving as chairman of the Federal Reserve, to complete his term, including serving as a board member, especially if he believes the latter is doing the right thing. Regarding policy interest rates, he warned that the Federal Reserve should avoid cutting rates before the November election to avoid boosting Biden.

Wang Lei, a certified intermediate gold analyst at the Shanghai Gold Exchange, told Caixin that "after this shooting incident, the probability of Trump's re-election has greatly increased. The previous surge was because of the market's criticism of the Federal Reserve during his previous term. So after seeing the changes in the election, the subjective trading of the rate cut for September emerged, and some investment banks even believe that the rate cut will be in July."

"Currently, we are in the early stage of the second phase of trade, which is the market racing up significantly after the Federal Reserve cuts interest rates. When Trump showed up for the first time after the gun shooting case, he stated that he would not replace Powell. He also expressed that he did not want the Fed to cut interest rates before the November election, to prevent any possible re-election of Biden. This is different from the market's previous expectations, which caused the current metals to fall back." Wang Lei believes that the time point between now and the new president's inauguration is still half a year away, and whether Trump can safely take office in this half year is the biggest unknown. Once Trump cannot take office, at that time, gold will trade the risk premium due to the instability within the United States.

Zhong Junxuan, a precious metals researcher at Minmetals Futures Research Center, pointed out to the media that in terms of fiscal policy, Trump advocates reducing corporate taxes and expects high-end manufacturing to return to the United States. The Trump administration launched the "Tax Cuts and Jobs Act" in 2017. During his previous term, the US fiscal deficit expanded, which is also an important driving factor for the rise in gold prices. Currently, Trump's approval ratings are leading, increasing market expectations of US fiscal deficit expansion, and the international gold price is also strongly rising.

From the perspective of the US election, Zhong Junxuan said that Trump currently has an advantage in the US election. He clearly expressed his policy orientation of "broad finance" in the interview, intending to lower US corporate taxes to achieve the return of manufacturing to the United States. At the same time, Trump had implemented a tax reduction plan for American residents during his previous term, and these policy inclinations are not conducive to controlling the size of the US fiscal deficit. The broad financial expectation generated by Trump's election advantage will continue to support the international gold price.

Why is the domestic market weaker than the international market for gold?

In addition to the recent decline in gold, Cailian News also noticed that the downward trend of domestic gold is stronger than that of international gold.

"The price difference between domestic and international gold is mainly due to exchange rates, which can be understood from the recent exchange rate between the renminbi and the US dollar." Wang Lei said.

Zhang Wen summarized that the change in interest rate expectations will also affect the difference in gold prices between the domestic and international markets. At this time, the exchange rate risk of the RMB increased, and thus the domestic market is under more pressure than the international market due to price. In addition, the relatively strong investment expectations for gold prices in China compared to overseas is also a reason for the differentiation of domestic and international prices.