Source: China Securities Brokerage Author: Yu Shipeng
After reaching a new high on the evening of September 12, the spot gold price continued to steadily climb on September 13 and 14. As of the time of publication, the price of gold has surpassed the high level of $2579 per ounce. This is just the "high movement" of the gold price after surpassing the $2500 mark, and the gold price has consistently surpassed multiple levels, setting a new record more than 25 times this year. The main reason for this new high is not only the expected rate cut by the Federal Reserve, but also the interest rate cut decision officially announced by the European Central Bank.
China Securities Brokerage reporters have found two new phenomena in gold investment: First, the gold-themed ETFs have generally seen significant gains this year, but Bridgewater and others who were previously positioned have been selling off in the first half of the year. Globally, gold ETFs have seen a net outflow of 120 tons in the first half of this year, the highest level in the same period since 2013. Second, there is an obvious divergence between the trend of gold stocks and the price of gold. How to deal with these two issues once again tests investors at high gold prices.
Gold continues its "high movement"
Looking at the market, London Gold surged by 1.88% on September 12, breaking through the $2550 level and showing a significant increase in momentum. In the following two days, the price of gold continued to rise based on the previous day's level, and as of the latest data, it has surpassed $2579 per ounce. Looking at a longer period of time, this is just the "high movement" of the gold price after surpassing the $2500 per ounce mark. Prior to this, the gold price had surpassed multiple levels this year, setting a new record more than 25 times.
The latest round of gold price rally started around March of this year. After reaching a new high on March 6, it quickly broke through the $2200, $2300, and $2400 levels. After a period of consolidation and volatility from mid-April to mid-July, fluctuating between $2300 per ounce and $2400 per ounce, the upward trend resumed at the end of July. As of August 14, the price of gold reached a high of $2466 and broke through $2500 per ounce on August 16.
In fact, behind the continuous record-breaking of gold prices is a close relationship with the recent external environment.
Firstly, in terms of Europe. According to reports, on September 12, the European Central Bank, headquartered in Frankfurt, Germany, decided to lower the deposit facility rate by 25 basis points to 3.5%; lower the refinancing rate by 60 basis points to 3.65%; and lower the marginal lending rate by 60 basis points to 3.9%. As early as June of this year, the European Central Bank had lowered all three key interest rates by 25 basis points, marking the first rate cut since October last year. In July of this year, the European Central Bank decided to keep the three key interest rates in the eurozone unchanged.
Next is the focus on higher attention to the US economy and expectations of a Fed rate cut. Huaxia Fund analyzed to Brokerage China that on September 5th, the US released the so-called 'small non-farm' ADP employment report, showing a seasonally adjusted increase of 0.099 million private sector jobs in August, the lowest since January 2021, well below the previously expected 0.144 million jobs, and lower than the downwardly revised 0.111 million jobs in July. This further confirms the weakness in the US job market, with the US dollar under pressure, gold surging more than $20, leading to increased market bets on a 50 basis point rate cut by the Fed later this month.
Bosera Fund's fund manager Wang Xiang analyzed to Brokerage China that recent remarks by Fed Board member Waller have shown increased concerns about economic weakening, but no recession judgment has been made yet. If the economic slowdown accelerates in the future, the Fed will 'preemptively' cut rates. However, Waller's benchmark expectation for a 25bp rate cut in September still remains in the short term, failing to provide more uplift to the market, but suggesting that demand in the real economy will come under pressure.
Institutions diverge further.
Gold prices continue to rise, with considerable gains in public funds and other varieties, but there are also some differences between the funds of different institutions.
According to data from Tonghuashun iFinD, as of September 13th, the average increase in the 14 gold-themed ETFs in the entire market is about 7% year-to-date, with 9 ETFs accumulating gains of over 10% year-to-date, and 7 gold-themed ETFs such as e-fund and Guotai have accumulated gains close to 20% year-to-date. Among them, on September 12th, the largest intraday increase in the gold stock ETF reached 3.42%, highlighting the amplifier effect of the gold price. Although gold is at a high level, the intraday prices of related gold stock ETFs remain at recent lows. Liu Tingyu, the fund manager of Yongying Gold Stocks ETF, believes that there are three main reasons for the deviation between gold stocks and gold: first, the rapid appreciation of the Renminbi against the US dollar in the foreign exchange market; second, the overall retracement of the A-share market; and third, the lack of sustained confidence among A-share investors in the future rise in gold prices.
However, from the regular reports disclosed by funds, institutions began positioning in gold ETFs as early as 2023, but profit-taking selling phenomenon emerged in the first half of 2024. Taking foreign institution Bridgewater Fund as an example, Bridgewater China sold a large amount of gold ETFs in the first half of this year, dropping out of the top ten holders of three gold ETFs, with a total sold amount exceeding 0.147 billion shares. According to the 2023 annual report, Bridgewater China's three Bridgewater All Weather Enhanced China Private Equity Securities Investment Funds collectively held three gold ETFs, with a total holding amount close to 0.19 billion shares. In addition, according to the World Gold Council data, global ETF fund holdings decreased slightly by 7 tons to 3105 tons in the second quarter of this year, with a total outflow of 120 tons in the first half of the year, reaching a new high for the same period since 2013.
Looking at the data from major central banks, the trend of gold buying has not seen a significant change yet. The latest report from the World Gold Council shows that central banks worldwide have continued to buy gold in recent months. In July, global central banks added a net 37 tons of gold reserves, a 206% increase compared to the previous month, the highest monthly total since January (45 tons), with Poland, Uzbekistan, and India leading the gold purchases, buying 14 tons, 10 tons, and 5 tons respectively. Among them, the gold purchase volume of the Polish central bank in July saw the largest monthly increase since November 2023, purchasing a total of 33 tons of gold in the past four months.
Will there be increased volatility after the Fed rate cut is implemented?
Looking ahead, Wang Xiang expressed that from the perspectives of trading congestion and seasonal effects, gold may still face the short-term risk of adjustment. However, with the clarification of the prospect of recession or stagflation, the acceleration of the pace of Fed policy may once again drive actual interest rates down, reinforcing the logic of gold assets at that time.
Hua Xia Golden Stock ETF Fund Manager Hua Long stated that this year, the certainty of the Fed's interest rate cut is strong, with a small probability of deep price correction, and there is still upward potential in the long term. During this round of gold price increases, golden stocks were impacted by the weak sentiment in the equity market, relatively underperforming the gold price. With future interest rate cuts taking effect, continued rise in gold prices, easing sentiment in the A-share equity market, and the expectation of golden stocks entering a David double-click market, the current low position may be worth paying attention to or making regular investment purchases.
"Subsequently, as the Fed continues to cut interest rates, investors in gold ETFs and other trading accounts will continue to bring in inflows of funds. Along with central banks worldwide, this will drive gold into a new round of major uptrend." Liu Tingyu stated that historically, gold price fluctuations often amplify around the time of the first interest rate cut landing. If there is a price dip after the initial rate cut, it may bring good opportunities for buying in at a lower price. Subsequently, the rise in the U.S. deficit rate and escalating global geopolitical risks are expected to push the central gold price up.
Hua Xia Fund Golden ETF Fund Manager Rongyong pointed out that based on historical data, the Fed's interest rate cuts have long-term bullish effects on gold prices. Coupled with global political and economic developments, increased safe-haven demand, and the continual heat of central banks worldwide in purchasing gold, the value of gold allocation is evident. Short-term fluctuations in gold prices may intensify, with many investors holding long positions in gold at historical highs. Short-term volatility may increase, providing a low entry opportunity for investors.
Editor/Lambor