A Rare Phenomenon in History
Since 2023, US stocks and gold have witnessed a synchronous and significant rally. As of October 29, 2024, both the S&P 500 and COMEX gold have risen by 52%. The simultaneous boom of a risky asset and a traditional safe – haven asset for nearly two years is a rather rare occurrence in history. By reviewing cases since 1968 where US stocks and gold have risen simultaneously for at least two years, we found only six instances: from 1970.5 – 1973.1, 1978.4 – 1980.9, 1985.2 – 1987.8, 2003.3 – 2007.10, 2009.3 – 2011.9, and 2016.2 – 2020.8. When categorizing the US economic state based on the year – on – year changes in US GDP and CPI, during the current rally of US stocks and gold, both GDP and CPI are declining in tandem, similar to the economic state during 1985.2 – 1987.8.

The Underlying Common Driver: Surging Liquidity

Liquidity as the Key Factor
The concurrent rise of US stocks, as risky assets, and gold, as a safe – haven asset, is primarily driven by liquidity. This liquidity doesn’t necessarily stem from the Federal Reserve’s rate cuts. For instance, during the US rate – hiking period from 2004 – 2006, both US stocks and gold still rose. When measuring dollar liquidity through the dollar index, during the past six periods of simultaneous rises in US stocks and gold, the dollar index declined, with an average drop of 15.9% and a median decline of 9.7%. Evidently, the common factor behind the simultaneous rise of US stocks and gold is a weak dollar rather than low interest rates. In 2023, gold prices significantly deviated from real interest rates but maintained a high negative correlation with the dollar index.

Reasons for Liquidity Loosening in 2023
In the 2023 stage of the Federal Reserve’s rate hikes and balance sheet reduction, why was there liquidity loosening? We identify two possible reasons. First, non – US central banks cut interest rates before the Federal Reserve, and the spillover effect of global liquidity boosted US stocks and gold. The current global rate – cutting wave differs from the past, with non – US central banks taking the lead in cutting rates while the Federal Reserve lagging. When measuring global liquidity by the proportion of net rate cuts by global central banks, the most strained moment of global liquidity had passed by early 2023, with liquidity marginally loosening, coinciding with the starting point of the rise in US stocks and gold. Additionally, the trend of Chinese treasury futures in the past two years has been largely in line with that of US stocks and gold, while US treasuries have somewhat decoupled from them. This might also be an indication of liquidity spillover, as a portion of the abundant domestic liquidity in China has flowed into overseas assets like US stocks and gold. Second, other channels in the US released liquidity to offset the Federal Reserve’s balance sheet reduction, resulting in substantial liquidity loosening. In 2023, during the Federal Reserve’s rate hikes and balance sheet reduction, based on the 2018 experience of similar actions, both US stocks and gold should have declined. However, asset prices exhibited a state of liquidity loosening in the high – interest – rate environment. Behind this divergence between liquidity quantity and price might be the release of liquidity from other US channels to offset the Federal Reserve’s balance sheet reduction. For example, the most discussed topic in the market is the decline in the scale of US reverse repurchase agreements, which has relatively released liquidity into the financial market to counteract the Federal Reserve’s balance sheet reduction. This can be seen from the trend of base money. The growth rate of US base money rose from a low of – 15.7% in December 2022 to 10.8% in February 2024. However, the growth rate of US base money has declined after February 2024, yet US stocks and gold continued to rise simultaneously, indicating that there are other domestic capital sources in the US driving liquidity. From the perspective of the US real estate market, with mortgage rates at 6% – 8%, a 15 – year high, housing prices still rose. Similar phenomena of divergence between liquidity quantity and price also occurred during the two periods of simultaneous rises in US stocks and gold in the 1970s. Moreover, the share of US dollars in global foreign exchange reserves, an indicator of the US dollar’s creditworthiness, has generally moved in tandem with the dollar index over the past 25 years. However, in the past three years, a significant divergence has emerged. The central value of the dollar index has risen to around 100, while the share of US dollars in global foreign exchange reserves has been declining. When comparing the trends of the share of US dollars in global foreign exchange reserves and gold prices, we can observe that they are largely in sync, suggesting that the dollar index in recent years doesn’t fully capture the weakening trend of the US dollar’s creditworthiness. The liquidity released by the US itself is more abundant than what interest rates and the dollar index imply. The simultaneous rise of US stocks and gold often accompanies a decline in potential labor productivity and an increase in the output gap. As the saying goes, “buy gold in troubled times.” Troubled times usually occur in the later stage when the technological dividend of the previous generation ends, with the global economic pie shrinking and conflicts more likely to intensify. Hence, the trend of gold prices is largely inversely related to the US potential labor productivity. The rise of US stocks depends on the medium – term economic cycle, that is, the increase in the output gap. Therefore, the simultaneous rise of US stocks and gold often coincides with a decline in potential labor productivity and an increase in the output gap. The current simultaneous rise of US stocks and gold since 2023 is a combination of declining labor productivity and an increasing output gap.

The End of the Simultaneous Rise: Outlook for 2025

Historical Patterns of the End of the Rally
Historically, the ways in which the simultaneous rise of US stocks and gold ended have varied. In three of the six instances, both declined simultaneously. In two cases, gold prices fell while US stocks rose, and in one case, gold prices rose while US stocks fell. So, when will the simultaneous rise of US stocks and gold end? There are three crucial observation variables. First, the end of the simultaneous rise of US stocks and gold often coincides with an inflection point in the US core CPI, which can be either a bottom or a top. Second, the downward trend of the dollar index reverses. The end of the simultaneous rise of US stocks and gold usually accompanies the dollar index changing from a downward trend to an upward or sideways movement. In short, the downward trend experiences a reversal. Third, the US potential labor productivity often bottoms out and rebounds.

The Outlook for 2025
Looking ahead, with the contraction of the US debt – issuing scale, the simultaneous rise of US stocks and gold may end in 2025. As previously mentioned, when considering the combined state of GDP and CPI, the current simultaneous rise of US stocks and gold is similar to that during 1985.2 – 1987.8, but the post – rally state will be different. From the perspective of dollar liquidity, based on the experience of liquidity spillover in the 1990s, the reversal of Japan’s liquidity spillover to the US occurred when the US economy was accelerating its weakening, as the relative advantage of the US economic fundamentals began to narrow significantly, reversing the core logic of liquidity spillover. US economic data has maintained resilience since 2023, while other economies have been relatively weak. However, the unemployment rate continued to rise in July this year, triggering Sam’s Rule. In September, the US fiscal deficit was at its lowest level in the past four years for the same period. The US Treasury’s latest projection shows that the net debt – issuing scale in the US in Q4 2024 is expected to drop to $546 billion, and in Q1 2025, it’s expected to be $823 billion. The fiscal expansion model in the US since 2023 is unsustainable. Therefore, the core factor that drove the rise of US stocks in the 1990s will no longer hold this time. The US economy and inflation this time rely on debt – issuance and money – injection. After losing fiscal support, we expect the US economy to accelerate its downward trend in 2025, with dollar liquidity reversing. The resonance – driven rally of US stocks and gold in the past two years, which was brought about by liquidity expansion, will reverse. We recommend observing the net issuance of US bonds and changes in the US job market for corresponding right – hand – side confirmation. Meanwhile, from the perspective of potential labor productivity, the CBO predicts that the US potential labor productivity will reach a low point in 2025. At that time, the simultaneous rise of US stocks and gold may also end. Combined with our judgment that the US fiscal expansion model is unsustainable, the US output gap will turn downward in 2025, ultimately leading to a possible resonance – based adjustment in US stocks and gold.

Gold Thrives on Rate Cuts
In sync with the recent easing of U.S. interest rates, gold, a barometer for hedging against monetary policy shifts, breached the $2,600 mark last week. This escalation not only set new historical records but also saw December COMEX gold futures on the New York Mercantile Exchange appreciating by 1.41% to $2,647.4 per ounce. The surge stoked market debates, with naysayers contending that gold prices are now estranged from tangible consumer demand and teetering near their peak. Contrarily, optimists maintain that given the prices have largely factored in rate cuts, we may witness a short-term uptrend marked by high volatility.

Monetary Stimulus:

The Fed’s Generous Reductions Fuel Gold’s Rise
The substantial 50 basis points slash in interest rates by the Federal Reserve during its September session—a first since March 2020—set the federal funds rate to a range of 4.75% to 5%. The Fed’s policy statement balanced the risks to employment and its inflationary objectives, affirming its commitment to fostering full employment and a 2% inflation benchmark. The “dot plot”, indicative of interest rate projections, hints at possible further cuts amounting to 50 basis points within the year. Adjustments were also visible in the Fed’s economic outlook, with a minimal downgrade in the 2024 growth forecast and a slight uptick in unemployment rate predictions through to 2026.

Interest Rate Speculations:

Market Experts Forecast Aggressive Easing
Market speculation is rife with expectations of up to 75 basis points in further Federal Reserve cuts this year, surpassing the Fed’s own projections. Rate futures markets suggest a 57.06% probability of a 25-basis-point cut by November 2024 and a 42.94% likelihood of a 50-basis-point reduction. By December 2024, the cumulative probability of a 50-basis-point cut reaches 6.69%, while a 75-basis-point decrement stands at a significant 93.31%.

Historical Context:

Economic Indications from Past Rate Cuts
Looking back, two out of three rate reduction cycles in this century commenced with substantial initial cuts, notably a 100 basis points in January 2001 and 50 basis points in September 2007. Both led to U.S. economic downturns with the S&P 500 stumbling over the subsequent six months to a year, while COMEX gold prices surged by approximately 10% to 13% after a year. Amid a burgeoning bull market for gold in 2020, the year following the cuts saw a remarkable 24% price increase.

Analyst Insights:

Gold’s Ascendancy: A Byproduct of Easing Measures
Analysts attribute this year’s successive historic peaks in gold prices to the ramifications of “rate cut trades.” Presently, gold’s ceiling remains unseen. Post-September’s rate trim, the performance of the U.S. economy and inflation over 2-3 subsequent cuts will be pivotal in determining further cuts by the Fed. If the U.S. economic slack persists or worsens, the scope for rate reductions might broaden. Alternatively, if the economy stabilizes, the prospects of further cuts may narrow. Yet, one must heed the distinctive economic context at the dawning of this easing phase, marked by an August CPI year-on-year increase of 2.5%, and a Congressional Budget Office (CBO) projection of a persistently high fiscal deficit above 5% for 2024—both metrics at historic peaks for rate cut cycles. Amidst such a ‘high-deficit + high-inflation’ economic structure, should post-cut stabilization occur, the U.S. economy might well face a secondary inflation risk. Thus, under either scenario, long-term prospects for gold prices trend upwards.

Amidst frequent uncertainties, gold’s role in asset allocation is gaining more attention from investors. The global central banks’ continuous gold purchases further fueled the demand. Looking back at the second quarter, global gold demand saw a robust growth of 4%, totaling 1,258 tons, marking the strongest second-quarter demand on record. The rise in non-market demand, ongoing central bank purchases, and cooling ETF outflows have collectively propelled gold prices to new highs. The average gold price in the second quarter reached 2,338 USD per ounce, a rise of 18% year-on-year, even peaking at 2,427 USD per ounce, a historic high. The continuous gold buying spree by global central banks remains a key driver for the increase in global gold demand.

The latest report from the World Gold Council shows that in the second quarter, the total official gold reserves globally increased by 184 tons, up 6% year-on-year, though the growth rate slightly slowed compared to the first quarter. According to the annual survey carried out by the World Gold Council, most central banks believe that in the current complex economic and geopolitical environment, gold reserves are likely to continue to grow over the next 12 months due to the need to protect investment portfolios and diversify risks.

This year’s first half witnessed global central banks purchasing a net of 483 tons of gold, 5% higher than the 460 tons in the first half of 2023. In terms of investment, global gold investment demand remained relatively resilient, yet different types of gold investments displayed varying trends. In the second quarter, global demand for gold bars and coins amounted to 261 tons, down 5% year-on-year, while the first half saw a marginal decline compared to the same period last year. Despite a minor outflow of 7 tons, totaling 3,105 tons, Asia continued to see inflows; Europe switched to inflows in May and June after several months of outflows; and North America showed a significant slowdown in outflows compared to the previous quarter. In the first half, global gold ETFs saw an outflow of 120 tons, the highest since 2013.

Comparing investment demand, the high gold prices had a depressing effect on global gold jewelry consumption in the second quarter, which fell by 19% year-on-year to 391 tons. In the first half, global gold jewelry demand declined by 10% year-on-year to 870 tons. In China, the important gold jewelry market, demand hit a new low for the same period since 2009, standing at just 86 tons. Nonetheless, the World Gold Council believes this downturn is not unique to China. Major gold jewelry consumer markets like India, the Middle East, and the Americas also showed varying degrees of decline due to historically high gold prices.

Looking ahead, China’s market may see some improvement in gold jewelry demand in the second half, depending on economic development. If price fluctuations ease, the pressure of high gold prices on gold jewelry demand may reduce, potentially supported further by the seasonal boost in the fourth quarter. However, industry consolidation might lead to reduced upstream physical gold and manufacturing demand. The key to future growth in this sector lies in consumer sentiment.

Gold as an investment instrument continues to gain traction. Despite being a non-yielding asset, its performance in the first half demonstrates gold’s appeal to investors. With the possibility of the Federal Reserve starting to cut rates in September becoming more likely, international gold prices are expected to continue climbing. Currently, investors are awaiting more dovish signals from the Federal Reserve’s July policy meeting.

Recent inflation data shows a noticeable decline in US inflation levels, supporting the case for rate cuts. Several Federal Reserve officials, including Chairman Powell, have recently adopted a ‘dovish’ tone, reinforcing market expectations for rate cuts in September. Against this backdrop, gold assets have garnered wider attention from investors, particularly amidst global uncertainty and rising gold prices. More institutional investors are incorporating gold into their asset allocations.

In 2022, the World Gold Council introduced the concept of ‘Gold+’ in the Chinese market. ‘Gold+’ refers to including a certain proportion of gold in investment portfolios as a strategic long-term asset allocation. The ‘Gold+’ strategy can enhance the risk-adjusted returns of an investment portfolio, mitigating currency and financial market volatility. Moreover, gold provides a unique source of long-term returns, with annualized returns exceeding 8% since the dissolution of the Bretton Woods system. Given its low correlation, or even negative correlation, with stocks and bonds, gold offers a distinctive source of long-term income, boosting the risk-adjusted returns post-portfolio adjustment.

Looking ahead, a key question is what the ‘catalysts’ sustaining gold’s dominant role in investment strategies will be. Anticipated rate cuts by the Federal Reserve have rekindled Western investors’ interest in gold, with growing inflows into gold ETFs expected in the second half of 2024. Recently, India announced a reduction in import tariffs, creating favorable conditions for gold demand as high domestic prices were a significant barrier for local consumers.

Driven by the global central bank gold rush, global gold prices surged 20 per cent between mid-February and mid-April, culminating in May when the spot price of gold hit a record high of $2,450.13. But since then, one by one more than expected US economic data led to the gold price began to range volatility, high gold prices also led to the central bank in May to buy gold rhythm suspended. Throughout June, gold traded in a tight range, with a high just above $2,387 and a low just below $2,287.

As of 18:40 Beijing time on July 4, the international gold spot price was at $2359 / ounce, and there were signs of a return to the rally in the near future.

Guarding the gold may be guarding the wallet. “We are still bullish on gold in the long term, mainly after the consolidation in the past few months, we think central banks will continue to add weight, and with the geopolitical situation still relatively high risks, we think gold can reach $2,450 in the next 12 months,” Wang Jie, chief investment strategist at Standard Chartered China Wealth Management, told CBN.

A temporary cooling of the “gold rush” hit gold prices

Since the beginning of this year, the central bank’s “gold rush” has driven the enthusiasm of global investors to buy gold, after all, the central bank’s buying volume is an irresistible bull force.

FawadRazaqzada, senior analyst at Gain Group, previously told reporters that in the case of gold, one of the reasons for the sharp rise in prices in recent months has been large-scale purchases by the Chinese central bank. In May, however, the People’s Bank of China ended an 18-month buying spree. But in his view, as long as the central bank does not sell reserves, the impact on gold prices will not be too large, gold is still favored by investors.

Data from June 7 showed that in May, the People’s Bank of China ended an 18-month streak of increasing its gold holdings since November 2022. The price of gold fell more than $67 an ounce that day, at one point falling to $2,307, a drop of nearly 3%. By Monday (June 10), the spot price of gold had fallen below $2,300 an ounce, showing the influence of central banks.

Indeed, the world’s central mothers have been the most powerful buyers of cash over the past year. China’s central bank in April gold reserves increased by 60,000 ounces month on month, achieving “18 consecutive increases”. According to the World Gold Council, global central bank net gold purchases reached 290 tonnes in the first quarter of 2024, a record quarterly high, led by Turkey, China and India.

Some industry insiders told reporters that this does not mean that the central bank’s gold buying trend has reversed, but it may be that in the context of high gold prices, the central bank has slowed down the pace of gold purchases, but the trend of diversified allocation is clearly accelerating, especially among emerging market central banks.

It is expected that in the future, emerging markets will still become a more important force to buy gold. Wang Lixin, CEO of the World Gold Council China, recently told the First financial reporter that European and American countries developed earlier, and the allocation of gold was also earlier, while the development of emerging economies in the early years has just started, and they need to retain foreign exchange to meet foreign trade needs. As these countries become richer and there is a stronger global need for diversification, gold will naturally be added to the holdings of emerging market central banks.

In addition to the central bank, in fact, more sovereign institutions and other “big funds” have fully recognized the role of gold in investment portfolios in recent years.

In addition to the central bank’s “purchasing power”, most investment institutions still believe that gold prices will have the potential to rise, the US interest rate cut “late but come” expectations, years of high inflation has weakened the value of fiat currencies, and the strong appeal for diversification are all reasons to support gold prices, currently UBS and other international investment banks have given a target price of $2,500 per ounce, Goldman Sachs is $2,700.

JuanCarlosArtigas, head of research at the World Gold Council, previously said in an interview with First Finance that in general, four major factors drive gold prices – the level of economic expansion, risk and uncertainty, opportunity cost (interest rates) and market momentum.

In terms of short-term opportunity cost, the turning point for interest rate hikes has historically been when gold prices have taken off. Ankay believes that for gold, a non-interest-bearing asset, interest rate cuts mean that the opportunity cost of holding gold for investors will be reduced, and vice versa.

“Given that gold has held up despite the recent strength of the dollar, it is reasonable to expect that gold could make new highs if the dollar weakens from here.” Therefore, the upcoming data will need to be closely watched. Any further signs of weakness in the U.S. economy could increase market expectations for multiple rate cuts in 2024 and could dent the dollar’s gains, especially against commodity currencies.” Lazarzada told reporters.

The US non-farm payrolls data for June, due to be released on Friday evening, will be in focus. The May data unexpectedly exceeded expectations (by nearly 100,000), which also caused interest rate cut expectations to plummet, hitting gold and risk assets. This time, the market is expected to add 180,000 jobs, compared with the previous 272,000, the unemployment rate is expected to remain at 4%, and hourly earnings growth is expected to slow to 3.9% from 4.1%.

The agency believes that the better-than-expected employment data will consolidate the Federal Reserve’s outlook of “one rate cut a year”, which will be positive for the dollar. On the contrary, if the data is weak, it will stimulate interest rate cut expectations and positive trends in gold and US stocks.

Several traders also told reporters that gold has been in a consolidation pattern recently, but recent moves point to a potential breakout. The bears will need to apply significant pressure to turn the trend in their favor. “Now that gold has broken through short-term resistance at $2,325, the next goal is to break through the next key resistance at $2,365. A break above this level would be a strong indication that the bullish trend has resumed. Conversely, if downward support at $2,300 is decisively breached, this could undermine our short-term bullish gold call.”

Zheng Renyuan, the father of target date fund and senior advisor of Fidelity Investments Greater China investment strategy and business, recently told reporters: “In the investment portfolio, if there are only two types of assets (stocks and bonds), the risk is really difficult to control, and you can only choose the time.” But timing is not our strong suit, so in pension investing, more and more institutions are choosing to allocate to gold, alternative assets and even some real real estate for risk diversification.”

Taking the famous Norwegian sovereign wealth fund as an example, the institution has also increased its allocation to gold in recent years, because in the institution’s view, as long as 2% to 5% of the capital is allocated to gold, it can greatly mitigate the risk of the portfolio, because many risks are non-linear.

Three motives drive long-term gold allocation by central banks

In the medium to long term, a recent survey by the World Gold Council also shows that the geopolitical and financial environment has become increasingly complex, making gold reserve management more relevant than ever.

The Central Bank Gold Reserves (CBGR) survey for 2024 was conducted between February 19 and April 30, 2024. The survey received responses from 70 central banks, of which 29% plan to increase their gold reserves in the next 12 months, the highest level since the survey was launched in 2018.

The main motivations for the central banks surveyed to continue buying gold include: rebalancing gold reserves; Adjust the purchase amount of domestic gold in order to achieve a better level of gold strategic reserve; Concerns about volatility in financial markets include increased risk of crisis and rising inflation.

At present, there are frequent conflicts in the Middle East and protracted conflicts in Ukraine. The findings come against a backdrop of ongoing geopolitical tensions. From a macroeconomic perspective, global inflation has begun to cool, but the pace of economic recovery is uneven, and the potential fragility of the financial system is also worrying. As a result, “interest rate levels,” “inflation concerns,” and “geopolitical instability” remain the main considerations for central banks to make gold reserve management decisions, as they did last year.

Almost all central banks believe the dollar’s share of official reserves is likely to fall. Central banks in advanced economies and emerging market and developing economies (EMDE) have been more optimistic about the future share of gold in total global reserves (and correspondingly more pessimistic about the future share of the dollar), and advanced economy central banks have clearly shifted to the same view this year.

What proportion of total global reserve assets will the dollar account for in the future? According to the survey, 69% of central banks surveyed believe that the share of dollar reserves will decline over the next five years, a significant increase from 55% in 2023 and 42% in 2022. 69% of the central banks surveyed believe that the share of gold will increase over the next five years. That’s up from 62% in 2023 and 46% in 2022.

In terms of gold reserves, the People’s Bank of China’s “official reserve assets” data shows that as of the end of June 2024, China’s gold reserves reported 72.8 million ounces, unchanged from the previous month. In the view of analysts, the market’s interest rate cut expectation of the Federal Reserve is an important factor affecting the trend of the US dollar index and global financial asset prices, China’s economic operation continues to pick up and provide support for the foreign exchange reserve scale to continue to maintain basic stability, and the general direction and long-term trend of the People’s Bank of China to continue to increase gold holdings has not changed.

Foreign reserves fell slightly in June from the previous month

Foreign exchange reserves have stood at $3.2 trillion for seven consecutive months. According to the State Administration of Foreign Exchange (SAFE), as of the end of June 2024, China’s foreign exchange reserves amounted to US $322.24 billion, down US $9.7 billion, or 0.30%, from the end of May.

Beijing Business Daily reporter further comparison found that since December 2023, the scale of China’s foreign exchange reserves has continuously remained above the $3200 billion mark. Among them, the scale of foreign exchange reserves in March 2024 reached $324.57 billion, the highest level in the year. By the end of June 2024, the scale of China’s foreign exchange reserves has decreased by 15.6 billion US dollars from the end of 2023.

For the changes in foreign reserve data this month, SAFE pointed out that in June 2024, affected by the monetary policies and expectations of major economies, macroeconomic data and other factors, the US dollar index rose, and global financial asset prices rose overall. Under the combined effect of exchange rate translation and asset price changes, the scale of foreign exchange reserves declined in the month.

“In June 2024, the US economic data was mixed, the market expected the Federal Reserve to start cutting interest rates in September, combined with the European Central Bank to cut interest rates ahead of the Federal Reserve, driving the US dollar index higher, and the overall global financial asset prices rose.” Wen Bin, chief economist at Minsheng Bank.

Specific to the performance of the financial market in June, the exchange rate, the US dollar index rose 1.1% month on month, the main non-US dollar currencies have fallen, the yen, the euro, the pound against the US dollar exchange rate depreciated 2.2%, 1.2%, 0.8%. In bond prices, the dollar-denominated hedged global bond index rose 0.9%. The 10-year European bond yield fell 25 basis points to 2.49%; The 10-year JGB yield edged down 2 basis points from the previous month to 1.06 percent. In terms of stock prices, the S&P 500 rose 3.5%, the Euro Stoxx 50 index was flat month-on-month, and the Nikkei 225 index rose 2.9%.

Zhou Maohua, a macro researcher at the financial markets department of Everbright Bank, pointed out that the change in foreign exchange reserve assets in June was mainly affected by valuation changes. In June, the influential factors were different, the US dollar rose while the prices of major global financial assets rose, but the overall volatility narrowed, and the scale of China’s foreign reserves also maintained low changes.

Gold reserves remain unchanged

In terms of gold reserves, according to the People’s Bank of China’s “official reserve assets” data, as of the end of June 2024, China’s gold reserves reported 72.8 million ounces, unchanged from the previous month. This is also the third consecutive month since April 2024 that China’s gold reserves have maintained this level.

Since November 2022, the People’s Bank of China has continuously increased its gold reserves until May 2024, ending the past “eighteen consecutive increases.” In this round of increased holdings, China’s gold reserves increased by 10.16 million ounces.

Pang Ming, chief economist of Jones Lang Lasalle Greater China, believes that in the past period of time, gold prices have continued to fluctuate at a high level, and the probability of price fluctuations and adjustments in the short term is still not low. In this context, for the second consecutive month, the People’s Bank of China suspended the use of bargain allocation as the main means of operation to increase gold holdings, reflecting that the People’s Bank of China has sought a balance between adjusting and optimizing the structure of international reserve portfolio, ensuring the preservation and appreciation of reserve assets and returns, and reducing portfolio risk and volatility. To coordinate and maintain the unity of international reserve strategy, profitability, liquidity and security.

Zhou Maohua said that the People’s Bank of China’s increase in gold holdings is mainly to optimize the structure of official reserve assets, promote the diversification of official reserve assets, enhance the ability to withstand global financial market fluctuations, and enhance the stability of official reserve assets. From the perspective of the trend, the credit of the US dollar has declined, the global financial market has fluctuated sharply, and the diversification trend of foreign exchange reserve assets of various countries has accelerated, so as to reduce the excessive dependence on a single currency and assets, reduce the impact of overseas policies, and enhance the stability and liquidity of total official reserve assets.

Since March 2024, affected by many factors such as geopolitical conflicts, monetary policy changes in major economies and interest rate cuts by the Federal Reserve, the continuous rise in precious metal trading prices has triggered hot discussions, and gold has repeatedly refreshed its highest trading price in history. According to Wind data, COMEX gold peaked at $2,454.2 per ounce in May 2024. As of the close of July 5, COMEX gold was at $2,399.8 / ounce, up 1.46% on the day.

However, Pang Ming also mentioned that considering the advantages of gold in risk aversion, anti-inflation, long-term preservation and appreciation, China’s People’s Bank in the international reserve portfolio allocation and dynamic adjustment of gold reserves, diversification and rebalancing of international reserve assets policy motivation has not changed, continued to increase the direction of gold and long-term trend has not changed.

Foreign reserves are expected to remain high

For the management of China’s foreign exchange reserves, in June 2024, Zhu Hexin, deputy governor of the People’s Bank of China and director of the State Administration of Foreign Exchange, said in a signed article that it is necessary to further improve the operation and management of foreign exchange reserves, prudently promote diversified and decentralized allocation, improve the risk management system covering the whole process, and actively expand diversified use. We will make every effort to ensure the safety, flow, preservation and appreciation of foreign exchange reserve assets, and better play the role of “stabilizer” and “ballast stone” in safeguarding national economic and financial security.

For the next stage of the scale of China’s foreign exchange reserves, the State Administration of Foreign Exchange mentioned that China’s economic operation continued to pick up to a good trend, high-quality development and solid progress, providing support for the scale of foreign exchange reserves to continue to maintain basic stability.

In Wen Bin’s view, the current international economy has maintained a moderate recovery, the global manufacturing PMI has been above the line of growth and contraction for six consecutive months, and international trade has continued to pick up. China’s commodity export structure continues to upgrade, the foreign trade “circle of friends” further expanded, high-level opening up in an orderly manner, exports are expected to maintain a medium-high growth rate, and continue to play a basic role in stabilizing cross-border capital flows. The steady improvement of China’s economic situation and solid progress in high-quality development will help maintain the overall balance of China’s international payments and lay a solid foundation for the basic stability of the scale of foreign exchange reserves.

Zhou Maohua pointed out that from the trend point of view, the uncertainty of overseas economic and policy prospects is high, the valuation of overseas assets is at a historical high, and the price fluctuations of financial assets continue to disturb the valuation of China’s foreign exchange reserve assets, but there are relatively many favorable factors, and China’s foreign exchange reserves are expected to continue to stabilize at a high of more than 3 trillion US dollars.

“Mainly, China’s economy shows a good recovery trend, foreign trade remains resilient, China, as one of the most dynamic super-large economies, attracts the global long-term capital trend inflows, and the balance of payments remains basically balanced.” At the same time, developed economies are gradually transitioning to a rate cut cycle, restricting the upside of the dollar, and the impact of the dollar on asset valuations is expected to weaken.” Mr Zhou added.

In terms of gold reserves, Zhou Maohua believes that the current gold price itself is not low and is at a historical high, but there is still room for global central banks to buy gold, but there is uncertainty in the pace of buying gold. It is a trend for central banks to diversify official reserve assets, reserve gold and optimize the reserve structure of official assets are long-term strategic considerations, and the rhythm of gold reserve will remain flexible in the short term.

Into 2024, the gold market is shining, the price has hit a record high, the London gold spot price has reached a maximum of 2450.1 US dollars/ounce, once known as the commodity market “the most beautiful boy”.

However, since late May, the momentum of the gold market has been slightly insufficient, and the overall high volatility has fallen by more than 3% on June 7. As of June 14, the current cumulative decline from the previous high of nearly $100 / ounce.

The correction of the high price of gold can not help but cause the investors who poured into the market in the early stage to worry, whether the gold price will open a falling channel? Do the bulls stay or go?

Gold high correction

In the first half of the year, the overall performance of the gold market was bright. According to Wind data, the spot price of gold in London bottomed out in mid-February, began a continuous rapid rise in early March, and then the price hit a record high, reaching a maximum of $2450.1 / ounce on May 20, but then it suffered a correction, falling 3.45% on June 7. As of the close of June 14, it was at $2332.3 / ounce, down more than $100 / ounce from the previous high, and the cumulative increase since the first half of the year reached 13.08%.

Cicc analyst Guo Zhaohui said that in addition to the steady pace of the central bank’s gold purchase, the speculative market continued to price the Fed’s interest rate cut expectations and the demand for geopolitical hedging, which all contributed to the rise in gold prices in the first half of the year.

For the recent trend of gold price correction, Liu Shiyao, a precious metals researcher at Zijin Tianfeng Futures, analyzed that it was mainly affected by the suspension of continuous gold buying by the Central Bank of China and the impact of non-agricultural data in the United States in May.

China’s gold reserves stood at 72.8 million ounces at the end of May, unchanged from the end of April and ending an 18-month streak of increases, according to the official reserve assets table.

Liu Shiyao said: “In terms of the situation in 2019, after the Chinese central bank suspended its gold purchase, the central banks of emerging markets such as Turkey, India and Poland are still strongly involved, driving a significant rise in international gold prices.”

On the performance of the US non-farm data in May, Liu Shiyao analyzed that the current situation of the US labor market was not as strong as the non-farm data showed. In addition, recent economic data does not reinforce the Fed’s cautious stance on monetary policy, such as the U.S. inflation number has declined for two consecutive months, and the ISM manufacturing index has slowed for two consecutive months. Even if the dot plot and official statements released at the June Fed interest rate meeting show a more hawkish message, the Fed rate cut is increasingly likely to fall.

Fed rate cut could be watershed

In terms of the pricing factors that currently affect the trend of gold, such as the Federal Reserve’s interest rate cut, the central bank’s purchase of gold, the trend of the US dollar, and the demand for risk-averse allocation, the future may still bring positive support to the gold market.

“The ‘watershed’ for the gold market could be the Fed’s rate cutting boot.” Guo Zhaohui said that the policy shift before the interest rate cut, or the value of precious metals assets highlight the moment, the positive interest rate cut expected trading may continue. However, after the interest rate cut, the reflexivity of the market trading may trigger the bubble burst, when the interest rate cut expected trading to interest rate cut trading, as the economic expectations improve, the market or will turn to focus on the economy from the “slowdown” to the “expansion” of the cycle switch, compared with the counter-cyclical precious metal assets, pro-cyclical commodities may be more favored.

From the perspective of global gold reserves, global central banks continue to increase their holdings of gold, promoting the increase in gold demand to drive up prices. Zhai Kun, analyst of non-ferrous metals industry at Deppon Securities, said that as of May 2024, the global gold reserve scale was about 36,004.18 tons, up 194.91 tons from the end of 2023 and 65.27 tons from the previous month. Although China’s central bank did not increase gold storage in May, global gold reserves are still on an upward trend, and other countries still have momentum to increase storage. It is expected that the continuous increase in global gold reserves will boost the price of precious metals such as gold in the long term.

Short-term adjustments are unlikely to change the long-term upward trend

In the short term, Zhai said that the previous US non-farm employment data has been backtracked several times, and the credibility level of relevant data under the expected management of the Federal Reserve has declined, so the volatility of gold prices may increase.

CMX silver futures prices in the previous high platform of 29.5 US dollars/ounce to gain support, back to 30 US dollars/ounce, CMX gold futures prices rose sharply to nearly two weeks of shock platform high, the current price above 2380 US dollars/ounce, is expected to break through 2,400 US dollars/ounce.

On the news, the Bank of Italy announced a rate cut of 25bp, it is expected that the European Central Bank’s interest rate cut is imminent, weak US employment data, and the impact of other central banks’ interest rate cuts, the market expects the Federal Reserve to increase the probability of interest rate cuts in September.

Overnight, ADP employment data released on Wednesday showed that the US private employment increased by 152,000 in May, the smallest increase since February, significantly lower than the market’s previous estimate of 173,000, and April’s data was revised down from 192,000 to 188,000.

With data showing the U.S. labor market cooling and hawkish market expectations cooling, CME Group’s Fed Interest Rate Watch tool shows about a 70 percent chance that policymakers will cut rates in September. Both stocks and Treasuries extended their rally.

Mixed US economic data combined with slightly increased expectations of an interest rate cut contributed to a rally in precious metals prices yesterday evening and this morning.

The US ISM non-manufacturing index for May was released overnight, recording 53.8, significantly higher than market expectations of 51 and the previous value of 49.4, the largest increase in six months, including the business activity index the largest monthly increase since 2021, indicating that the US service economy is still resilient, and the financial market is less worried about the US recession.

In the short term, the United States has more economic data to show signs of turning point, the financial market in the face of weaker than expected data gradually believe that the United States short-term inventory cycle once again down the fact that the European Central Bank will hold an interest rate resolution meeting, the market is expected to cut interest rates, while the United States will release weekly unemployment applications, concerned about the disturbance to precious metals prices.

Guangzhou Futures suggested that this week focus on the European Central Bank’s interest rate resolution on Thursday and the performance of the US non-farm employment data on Friday, and overseas interest rate expectations will be revised based on the comprehensive performance of US employment.

At present, the overseas market is expected to cut interest rates again in advance, this week the European Central Bank or will start to cut interest rates, although the Federal Reserve has recently maintained a hawkish position, but it is still a greater probability event to start cutting interest rates within the year.

In the environment of falling interest rates, for zero interest assets silver as a whole, after the market correction or bring layout opportunities, short-term ideas suggest paying attention to unilateral long Shanghai silver opportunities.

Big futures analysis said that in the short term, whether the US economy can soft landing remains to be seen, the Federal Reserve hesitated to cut interest rates, or will continue to observe the performance of several periods of relevant data, in the short term, it is difficult for gold and silver prices to return to the upward trend, or continue to shock.

Affected by this news, non-ferrous metals also rose in the morning. As of press release, international copper and Shanghai copper both rose more than 1%