For the whole of 2020, gold prices rose 24 per cent, from a low of $1500 at the end of March to a high of $2075 in early August, the biggest increase in the range. But after breaking a high of $2000, gold has fallen all the way, down another 8.26% since 2021. Gold prices have fluctuated between $1700 and $1800 over the past two months.

Us CPI has rebounded significantly since August last year, and break-even inflation expectations have also remained upward. Inflationary pressures have risen significantly, while gold prices are falling because there is no direct causal relationship between gold prices and inflation.

Compared with other commodities (such as crude oil, non-ferrous products and other industrial products), gold has strong financial attribute and weak industrial attribute. The economic recovery has led to improved demand and higher capital prices, suppressing the financial attributes of commodities and strengthening their industrial attributes.

When the industrial and financial attributes of commodities go to the opposite direction, the trend of gold price and inflation will also be reversed, so there is no direct causal relationship between them.In general, industrial products and cyclical stocks have better opportunities than precious metals in the context of economic recovery.

Figure 1: gold has experienced a roller coaster since last year

As a precious metal with low industrial properties, the value of gold is given by the reference.As a currency that has been in circulation for a long time in history, the reference of gold is the US dollar, and the yardstick of pricing is the real interest rate of US debt. Although the dollar index appears to be negatively correlated with the price of gold, causality comes from real interest rates.However, the supply, industrial demand and consumption properties of gold are generally ignored.

Figure 3: the negative correlation between the dollar index and the gold price is unstable

Real interest rates on US debt have rebounded since the beginning of this year, and judging from the current situation, real interest rates will continue to rise, at least until this year's Q3-Q4.

On the economic front, vaccination in the United States is better than expected, and with the retaliatory recovery in the service sector, the unemployment rate will accelerate to about 5% (but long-term unemployment will recover slowly), and the demand for funds will continue to recover. In terms of policy, the size of the Fed's bond purchases remains unchanged, and the second half of the year may begin to communicate with the reduction plan, and the marginal supply of funds will be tightened.

The real interest rate is expected to reach a high of 0.2%, 0.3%, corresponding to 70%, 80% historical quantile, which is about the average level in 2019. The continued rebound in real interest rates this year means that the financial nature of gold will continue to decline.

Figure 4: us real interest rates are expected to continue to rise to around 0.2% in the medium term

The good news is that gold's current risk pricing has returned to neutral.

One measure of the valuation of gold is the ratio of gold to copper, which, as a commodity's financial and industrial attributes, partly reflects the degree of pricing expected by the market for economic recovery:

When the recovery expectation is strong, the gold-copper ratio is low; when the recession expectation is strong, the gold-copper ratio is high. After last year's outbreak, the gold-to-copper ratio rose rapidly to an all-time high (recession expectations are strong); after November last year, with vaccines, the gold-to-copper ratio began to converge rapidly (recovery expectations) and has now returned to historically neutral levels.

Figure 5: the gold-copper ratio has returned to the neutral level (unit: percentile)

Position congestion in the gold spot market has also returned to neutral levels. Gold holdings in SPDR, the world's largest gold ETF fund, have fallen to 1021 tonnes from 1270 tonnes in October, roughly the same as in April last year and at post-crisis neutral levels.

Figure 6:SPDR gold ETF position at the post-financial crisis neutral level (in tons)

However, speculative sentiment in the gold futures market is not pessimistic. Although the proportion of non-commodity net bulls in COMEX gold futures has declined from last year's high, it remains at a high level.

From the perspective of term structure, the futures market is neutral and optimistic about the medium-term trend of gold price: the current expiration contract price from April to October in 21 years is near the spot gold price, and the expiration contract from December 21 to February 22 rises slightly.

Figure 7:COMEX futures bulls' congestion declined slightly.

So is there a "golden opportunity" for gold?

My opinion is:

In the short term, gold may have neither speculative value nor systemic risk this year.

The bad news is that real interest rates will continue to rise as a result of the US economic recovery and shrinking QE expectations, creating continued resistance to gold prices.

The good news is that from the perspective of gold-copper ratio and spot positions, congestion has been significantly alleviated compared with the previous period, the current risk pricing of gold price has returned to neutral, and the response to bearish and bullish is basically symmetrical.

Prices may fluctuate in a range during the year-there is no elasticity above $1800 and no room below $1700. In the ranking of large categories of assets, precious metals are weaker than industrial products and cyclical stocks, but better than interest rate bonds.

In the long run, gold still has strategic allocation value.

K-shaped recovery and long-term unemployment have reduced the demand for funds, preventative high savings and passive monetary easing under MMT practice have increased the supply of funds, and the long-term hub of real interest rates may be systematically lower than that before the epidemic, so the pricing center of gold may also be systematically higher than that before the epidemic. The bulls in the futures market have not withdrawn completely, and the proportion of net long positions has declined, but it is still at a historically high level.