On the 11th, Morgan Stanley's Sara Chan team released the research report “China Gold: Alpha to Beta”. They are optimistic about the future development prospects of Chinese gold and believe that the Chinese gold market will benefit from various favorable factors globally and domestically.

Damo pointed out that in the context of heightened geopolitical risks, Chinese gold will benefit from risk aversion in the market and is sought after by Chinese investors. Expectations of RMB fluctuations also provided support for the rise in gold prices.

The research report specifically points to China's “Big Three” gold — Zijin Mining, Shandong Gold, and Zhaojin Mining. They believe they are undervalued in the market, and production is expected to increase dramatically in the next five years.

Morgan Stanley's commodities team predicts that there is room for a moderate rise in the short term, and is expected to reach 2,850 US dollars per ounce in the second quarter of 2025, which is 5% higher than the current high in recent history.

Zijin, Shandong Gold, Zhaojin: Production is expected to increase dramatically in the next five years

The report highlights the three major advantages of Chinese gold mining companies: first, gold is the preferred commodity in the global geopolitical uncertainty and interest rate cut cycle, bringing opportunities to Chinese gold mining companies; second, strong investment demand for gold from Chinese investors; and third, gold prices are expected to rise further in anticipation of RMB fluctuations.

Damo predicts that the price of gold will rise moderately in the short term. It is expected to reach 2,850 US dollars per ounce in the second quarter of 2025, which is 5% higher than the current high in recent history.

The report mentioned that Zijin Mining, Shandong Gold, and Zhaojin Mining are expected to achieve significant growth in production over the next five years, with compound annual growth rates of 20.8%, 12.4%, and 8.2%, respectively. In particular, Zijin Mining's offshore project is expected to commence operation at the end of 2025, which will significantly increase the company's gold production from 17.7 tons in 2023 to 35.2 tons.

“We expect the profits of Chinese gold mining companies to increase significantly as the price of gold rises. Take Zhaojin, Shandong Gold, and Zijin, for example. For every 1% increase in gold prices, their net profit is expected to increase by 0.7% to 2.8%.”

Although gold and jewellery consumption declined in the first half of this year, investor enthusiasm was high. According to data from Damo, gold purchases increased 46% year-on-year in the first half of the year, mainly due to strong growth in investment demand. Damo expects investment demand to account for more than 40% of total gold consumption this year, far higher than last year's level.

Why choose Chinese gold

Damo said that compared to other gold companies, China Gold has more prominent alpha opportunities. This is mainly due to three things:

First, there is strong demand in the local market. Damo said that Chinese investors' enthusiasm for gold continues to rise, providing a stable market foundation for domestic gold companies.

Unlike global gold ETFs, demand for onshore gold ETFs in China continues to heat up. In the first half of 2024, demand for gold bars soared, accounting for half of China's total demand for gold. Furthermore, the People's Bank of China's money buying behavior also supports market demand.

Second, Chinese gold miners are leading the way in production growth. Damo said that in the past ten years, Chinese gold miners havemergers and acquisitionsMarket activity continues to rise. This is mainly due to China's strong demand to guarantee gold reserves. China's gold “Big Three” are actively searching for new mineral projects overseas, particularly in Africa.

Finally, Chinese gold is more flexible in terms of profit. Damo said that in anticipation of RMB fluctuations, it is predicted that the price of gold denominated in RMB will rise 14% year on year in 2025, reaching a record high of 652 yuan per gram.

The report also indicated that the market may be ignoring the growth potential of Chinese gold mining companies. Over the past year, China's gold stocks rose by 7-28%, lagging behind the 8-49% increase of global gold peers. Morgan Stanley believes that global geopolitical tension and the record high gold price environment have also raised concerns about the ability of Chinese mining companies to execute overseas projects.

Despite this, Morgan Stanley also alerted investors to potential risk factors, including delays in interest rate cuts, unrealized capital flows, and a shift in market sentiment towards risk appetite, which could lead to a return in profits.