Source of this article: Times Finance Author: Li Yiwen
The once soaring gold price is experiencing a high dive.
Since the record price of gold reached US$2,450.1 an ounce on May 20, gold prices have repeatedly declined, and related topics have repeatedly rushed to social media hot searches. As of June 29, the price of COMEX futures gold was quoted at $2,336.9 per ounce, and the price has fallen by nearly 4.6% in 40 days. Among them, the price of gold fell by 3.34% in a single day on June 7, the largest one-day decline in the past two years.
Since the beginning of 2020, when gold prices started their upward cycle, this round of gold prices has been volatile for four years, and its duration and magnitude of the rise are almost unprecedented. But now, the favourable conditions that underpinned the frenzied buying frenzy in the past are changing, and will the price of gold remain firm?
Gold prices rose sluggishly
The loosening of support for gold prices first came from a report in early June.
On June 7, the State Administration of Foreign Exchange (SAFE) released data on the size of foreign exchange reserves at the end of May 2024. China's official gold reserves stood at 72.8 million ounces in May 2024, unchanged from the previous month, the data showed. This means that the People's Bank of China, the largest buyer in the global gold market, paused its holdings in May after increasing its holdings for 18 consecutive months.
Source: Picture Worm Creative
Previously, the world's major central banks, led by the People's Bank of China, continued to buy gold, which gave direct and strong support to the rise in gold prices. More importantly, compared with ordinary investors, these central banks have more direct and extensive information and have more advantages in the market game, so ordinary investors in the gold market often regard the central bank as a weather vane. Therefore, the central bank stopped buying gold, which will exacerbate the wait-and-see mentality of gold investors to a certain extent.
After the release of relevant data from the People's Bank of China, the bearish situation on gold in the market has heated up significantly.
On June 7, the price of COMEX futures gold "dived" by 3.34% in a single day, the largest one-day decline in the past two years.
SPDR Gold Trust, the world's largest gold ETF, also interrupted its holdings for two consecutive trading days, reducing its holdings by 1.44 tons on the same day, and then started a series of reductions. As of 27 June, SPDR Gold Trust now held 829.05t, down 49.49t, or 5.6%, from a high of 878.54t at the start of the year.
"The price of gold is rushing too high, too hard." Tan Yaling, president of the China Foreign Exchange Investment Research Institute, believes that the technical repair of the current gold price is expected, and the logic and technology of any price rise and fall in the market are still the norm.
Tan Yaling told Times Finance that in the context of geopolitical tensions, the People's Bank of China has continued to purchase gold in order to enrich the diversification of foreign exchange reserves. However, at present, the proportion of gold in foreign exchange reserves has been increased to a certain extent, and the price of gold continues to break through the history, which has also brought some pressure to the central bank's gold purchases, so the central bank may continue to suspend gold purchases in the short term.
In addition to losing "big" orders from the People's Bank of China, the largest consumer group in the gold market is also waiting for the high gold price.
As the largest source of demand for gold, the demand for gold jewelry has declined significantly since the beginning of this year. According to the Global Gold Demand Trends Report, global jewellery consumption in Q1 2024 was 479t, down 2% y-o-y, with China, the largest market, spending 184t, down 6% y-o-y.
Source: Times Finance Li Yiwen/photo
To add insult to injury, investment demand for gold has also taken a hit as demand for both reserve and consumption gold has stagnated.
As a dollar-denominated, non-interest-bearing asset, the price of gold is closely related to the interest rate of US Treasury bonds. Since the beginning of this year, despite the relatively optimistic inflation situation, relevant Fed officials still unanimously agree not to cut interest rates in the short term, and the hawkish speeches made by some Fed officials have even caused the market to bet that interest rates may be raised in the future.
In this regard, Song Jiangzhen, a senior researcher at the Guangdong Southern Gold Market Research Institute, told Times Finance that previously, the sharp rise in risk aversion in the international market promoted the negative correlation between gold prices and US dollar interest rates, and there was a historically rare divergence. But now, the market has priced in geopolitical risks, and gold prices are gradually getting back on track.
"As a result, when the market anticipates a possible Fed rate hike, the dollar usually strengthens, causing gold prices to fall." He said.
The fourth quarter is key
Now, the gold market has once again reached a critical juncture. With the central bank of China stopping gold purchases, jewellery gold consumption rarely falling, and the Fed cutting interest rates in the distant future, is it worth continuing to hold gold that has reached an inflection point?
"Realistically speaking, gold prices will be suppressed by dollar assets in the next period of time, and the price will face greater pressure, and to a large extent, it will enter a process of adjustment and shock. However, gold investment is the pursuit of long-term returns, rather than short-term speculation, so from an investment point of view, if frequent short-term operations, it is likely that you will not be able to enjoy the benefits of the long-term rise in gold. Song Jiangzhen said.
Tan Yaling also believes that although some of the current economic data in the United States are relatively bright and the dollar index is at a historical high, there is still a large debt risk in the huge debt of the United States, and the global geopolitics is still in a tense state, and gold will still be sought after for a long time as a safe-haven asset.
In fact, the large and still fast-growing debt of the United States has caused concern in international markets.
Source: Picture Worm Creative
As early as August 1, 2023, Fitch, an international rating agency, downgraded the long-term foreign currency issuer default rating of the United States from AAA to AA+. Fitch said in a statement that the downgrade of the US credit rating is mainly due to the high and increasing debt burden of the US government, and the fiscal position is expected to continue to deteriorate over the next three years.
Then, in November 2023, Moody's, an international credit rating agency, also announced that it had decided to downgrade its U.S. sovereign credit rating outlook from "stable" to "negative" due to the continued rise in U.S. interest rates and heightened political polarization in the U.S. Congress.
According to the latest data released on the website of the U.S. Treasury Department on June 23, the size of the federal government debt has reached $34.73 trillion, equivalent to $103,000 per American.
In addition to the risk of U.S. bonds, as an important support for gold prices before, there is still hope for central bank gold purchases to resume in the future. In fact, although the proportion of gold reserves of the central bank of the mainland has been optimized, there is still a certain gap with the international average. Relevant data show that as of the end of the first quarter of 2024, the proportion of mainland gold reserves is only 4.64%, which is still at the bottom of the global central bank ranking.
In addition, in addition to the People's Bank of China, the demand for gold reserves by the central banks of the world's major economies is also at an all-time high.
According to the results of the World Gold Council's annual central bank gold reserves survey released on June 18, 29% of the 70 central banks surveyed expect to increase their gold reserves in the coming year, while another 81% believe that global central banks will increase their total gold purchases in the coming year. Both indicators are the highest since the survey was launched in 2019.
In the future, where is the specific node where the gold price correction will be completed?
Song Jiangzhen believes that the fourth quarter is a more critical time node. "November in the fourth quarter of previous years is a traditionally seasonal buying point. If gold prices still fail to rise in the fourth quarter of this year, the support point for gold prices to retreat will be between 2190-2230. ”