Gold's 'crazy' rise and real interest rates' divergence '
2024-04-10
The international gold price has soared since the end of February and has continuously hit a new record high
At present, the gold price shows a pattern of rising with the US bond yield and the US dollar, which is significantly different from the cognition of negative correlation in the past, reflecting the traditional gold pricing logic has been weakened to a certain extent
Some analysts believe that the new gold pricing mechanism with global central bank buying as the core variable is "taking root".
Gold, continued to "surge".
On April 9, the international gold price reached a new high. As of 17:00 Beijing time on the 9th, flush data showed that the highest London gold cash (spot gold) rushed to $2358.77 / ounce. COMEX gold futures peaked at $2,378.2 an ounce.
Analysts offer a variety of answers as to what is driving gold's rise. However, market participants also found that the current gold price has shown a pattern of rising with US bond yields and the US dollar, which is significantly different from the previous negative correlation. The traditional gold pricing logic has been weakened, and the new gold pricing mechanism with global central bank buying as the core variable is "taking root".
Gold diverges from real interest rates
The international gold price has soared since the end of February and has continuously hit a new record high. Up to now, spot gold has broken through the $2,300 / ounce mark and continued to rise close to the $2,400 / ounce mark. The rise in spot gold prices has led to higher futures prices, with COMEX gold prices up more than 15 per cent since March.
What's driving the surge in gold prices? The traditional analysis framework believes that the gold price is mainly affected by the US dollar index, real interest rates, interest rate cut expectations, risk aversion and other factors. Yan Xiang, chief economist of Huafu Securities, told reporters that the traditional gold pricing mechanism is mainly determined by the actual interest rate of US Treasuries and risk aversion, of which the former is reflected in the opportunity cost of holding gold, and the latter is reflected in the risk aversion of gold.
Analysts said that in general, gold is denominated in dollars, and there is a certain substitution relationship between the two in the monetary system, so the price trend of gold is often negatively correlated with the dollar. In addition, according to historical experience, in a low interest rate environment, gold also has a strong negative correlation with the real interest rate of US Treasuries.
However, according to market observers, the recent rise in gold prices has significantly deviated from the above explanatory logic. Guosheng Securities research report believes that this round of gold price trend can be divided into two stages: in the initial stage, the sharp rise in gold prices still has fundamental support, when the U.S. manufacturing PMI released in February was significantly lower than expected, the Federal Reserve interest rate cut expected to rise, the dollar and U.S. Treasury interest rates fell. However, since late March, a number of data released by the Federal Reserve have continuously suppressed interest rate cut expectations, and the US dollar and US Treasury interest rates have entered the rising channel, while gold has continued to "surge".
One of the big data evidence is that after the strong US non-farm data on Friday (April 5) triggered the hawkish pricing of the bond market, the international gold price still rose strongly, closing up 1.7% on the day, and the cumulative increase of more than 4% for the week. Hua 'an Futures said that the recent negative correlation between gold prices and real interest rates and the US dollar index has gradually decreased, and the positive correlation with inflation expectations has been rising.
Traditional gold pricing logic has been weakened
Why gold prices deviate from 'common sense'
On the one hand, gold's short-term departure from fundamentals may be influenced by trading factors. Jerry Chen, senior analyst at Gain Group, said that the rise in US dollar and US Treasury yields in recent weeks could not stop the "perfect storm" for gold, and the impact of economic data and interest rate outlook on gold prices is fading, replaced by gold's own momentum, market sentiment, and safe haven factors.
"The momentum effect after the new highs and 'forcing the short' may be the main cause." Guosheng Securities chief economist Xiong Yuan analysis said that after the gold price hit a record high in early March, the rapid increase of speculative long positions and the rapid reduction of short positions may trigger a large number of momentum strategies to buy, and in the process, a large number of short stops to leave the market, and the "forcing" effect also expanded the rise of gold. From a historical perspective, after each time gold breaks a record high, it usually continues to rise rapidly in the short term, which is also consistent with the performance of this round.
On the other hand, the weakening of the traditional gold pricing logic may be related to the enhancement of gold's monetary attributes under the "de-dollarization" narrative. The analysis of Huatai Securities fixed income team believes that from the perspective of monetary attributes, the Federal Reserve continued to expand its balance sheet after the epidemic, and the debt problem led to a "crack" in the credit of currencies such as the US dollar, and the "de-legalization" attribute of gold was highlighted.
Yan Xiang believes that the real interest rate of US Treasuries and the trend of gold prices continue to diverge, reflecting the traditional gold pricing logic has been weakened to a certain extent. The monetary attribute of gold has been greatly enhanced, especially in the context of increasing anti-globalization, the lack of constraints on European and American debt, the credibility of the US dollar has been shaken, and the alternative value of gold compared with the US dollar has been continuously paid attention to.
The global central bank "gold buying fever" has become an important marginal force
The alternative value of gold relative to the US dollar can be seen in the "gold rush" of central banks around the world.
According to the latest data released by the International Monetary Fund (IMF), the world's official gold reserves increased by 39 tons in January 2024; At the end of January 2024, the world's official gold reserves totalled 35,938.6 tonnes. The World Gold Council said central bank demand for gold purchases in 2023 was the second highest on its record, just shy of the all-time record set in 2022.
The global central bank's demand for gold has become an important factor that continues to push up the gold price center in recent years. Ming Ming, chief economist at CITIC Securities, told reporters that in the context of rising global inflation expectations, increasing financial instability and frequent geopolitical conflicts, global central bank demand for gold has risen rapidly. At present, the purchase of gold by global central banks has become an important marginal force in determining the trend of gold prices.
In the context of the increasingly weak explanatory power of the traditional gold price pricing logic, some analysts believe that the new gold pricing mechanism with the global central bank buying gold as the core variable is "taking root."
Huatai Securities fixed income team said that in the past two years, the geographical situation changes combined with high interest rate environment, resulting in the old gold pricing system explanation power is getting weaker and weaker, and the central bank gold buying as the core variable of the new gold pricing mechanism gradually surfaced. The team further analyzed that behind the global central bank's gold purchasing behavior is a concentrated reflection of the demand for "decentralization" and geo-hedging. Central bank purchases not only reflect the recognition of gold's safe-haven properties, but also show concerns about the stability of the traditional monetary system in the context of the continued expansion of the Federal Reserve's balance sheet.
There are also views that the traditional analytical framework has not failed, and the actual interest rate is still an important factor in determining the trend of gold prices. Yan Xiang said that compared with industrial metals and energy, gold's supply and demand balance sheet does not have a prominent impact on the price of gold, and theoretically gold does not have a particularly strong pricing anchor. However, in recent years, under the background of the sustained impact on the credit of the US dollar, the continuous purchase of gold by global central banks has indeed had a greater driving effect on the rise in gold prices.
"In the medium to long term, the core factors in gold pricing remain real interest rates, risk aversion and monetary attributes relative to the US dollar. The subsequent US interest rate cut cycle, the decline in real interest rates is still a high probability event, and the central bank has not finished buying gold, which will support the medium and long term gold price." Yanxiang said.
At present, the gold price shows a pattern of rising with the US bond yield and the US dollar, which is significantly different from the cognition of negative correlation in the past, reflecting the traditional gold pricing logic has been weakened to a certain extent
Some analysts believe that the new gold pricing mechanism with global central bank buying as the core variable is "taking root".
Gold, continued to "surge".
On April 9, the international gold price reached a new high. As of 17:00 Beijing time on the 9th, flush data showed that the highest London gold cash (spot gold) rushed to $2358.77 / ounce. COMEX gold futures peaked at $2,378.2 an ounce.
Analysts offer a variety of answers as to what is driving gold's rise. However, market participants also found that the current gold price has shown a pattern of rising with US bond yields and the US dollar, which is significantly different from the previous negative correlation. The traditional gold pricing logic has been weakened, and the new gold pricing mechanism with global central bank buying as the core variable is "taking root".
Gold diverges from real interest rates
The international gold price has soared since the end of February and has continuously hit a new record high. Up to now, spot gold has broken through the $2,300 / ounce mark and continued to rise close to the $2,400 / ounce mark. The rise in spot gold prices has led to higher futures prices, with COMEX gold prices up more than 15 per cent since March.
What's driving the surge in gold prices? The traditional analysis framework believes that the gold price is mainly affected by the US dollar index, real interest rates, interest rate cut expectations, risk aversion and other factors. Yan Xiang, chief economist of Huafu Securities, told reporters that the traditional gold pricing mechanism is mainly determined by the actual interest rate of US Treasuries and risk aversion, of which the former is reflected in the opportunity cost of holding gold, and the latter is reflected in the risk aversion of gold.
Analysts said that in general, gold is denominated in dollars, and there is a certain substitution relationship between the two in the monetary system, so the price trend of gold is often negatively correlated with the dollar. In addition, according to historical experience, in a low interest rate environment, gold also has a strong negative correlation with the real interest rate of US Treasuries.
However, according to market observers, the recent rise in gold prices has significantly deviated from the above explanatory logic. Guosheng Securities research report believes that this round of gold price trend can be divided into two stages: in the initial stage, the sharp rise in gold prices still has fundamental support, when the U.S. manufacturing PMI released in February was significantly lower than expected, the Federal Reserve interest rate cut expected to rise, the dollar and U.S. Treasury interest rates fell. However, since late March, a number of data released by the Federal Reserve have continuously suppressed interest rate cut expectations, and the US dollar and US Treasury interest rates have entered the rising channel, while gold has continued to "surge".
One of the big data evidence is that after the strong US non-farm data on Friday (April 5) triggered the hawkish pricing of the bond market, the international gold price still rose strongly, closing up 1.7% on the day, and the cumulative increase of more than 4% for the week. Hua 'an Futures said that the recent negative correlation between gold prices and real interest rates and the US dollar index has gradually decreased, and the positive correlation with inflation expectations has been rising.
Traditional gold pricing logic has been weakened
Why gold prices deviate from 'common sense'
On the one hand, gold's short-term departure from fundamentals may be influenced by trading factors. Jerry Chen, senior analyst at Gain Group, said that the rise in US dollar and US Treasury yields in recent weeks could not stop the "perfect storm" for gold, and the impact of economic data and interest rate outlook on gold prices is fading, replaced by gold's own momentum, market sentiment, and safe haven factors.
"The momentum effect after the new highs and 'forcing the short' may be the main cause." Guosheng Securities chief economist Xiong Yuan analysis said that after the gold price hit a record high in early March, the rapid increase of speculative long positions and the rapid reduction of short positions may trigger a large number of momentum strategies to buy, and in the process, a large number of short stops to leave the market, and the "forcing" effect also expanded the rise of gold. From a historical perspective, after each time gold breaks a record high, it usually continues to rise rapidly in the short term, which is also consistent with the performance of this round.
On the other hand, the weakening of the traditional gold pricing logic may be related to the enhancement of gold's monetary attributes under the "de-dollarization" narrative. The analysis of Huatai Securities fixed income team believes that from the perspective of monetary attributes, the Federal Reserve continued to expand its balance sheet after the epidemic, and the debt problem led to a "crack" in the credit of currencies such as the US dollar, and the "de-legalization" attribute of gold was highlighted.
Yan Xiang believes that the real interest rate of US Treasuries and the trend of gold prices continue to diverge, reflecting the traditional gold pricing logic has been weakened to a certain extent. The monetary attribute of gold has been greatly enhanced, especially in the context of increasing anti-globalization, the lack of constraints on European and American debt, the credibility of the US dollar has been shaken, and the alternative value of gold compared with the US dollar has been continuously paid attention to.
The global central bank "gold buying fever" has become an important marginal force
The alternative value of gold relative to the US dollar can be seen in the "gold rush" of central banks around the world.
According to the latest data released by the International Monetary Fund (IMF), the world's official gold reserves increased by 39 tons in January 2024; At the end of January 2024, the world's official gold reserves totalled 35,938.6 tonnes. The World Gold Council said central bank demand for gold purchases in 2023 was the second highest on its record, just shy of the all-time record set in 2022.
The global central bank's demand for gold has become an important factor that continues to push up the gold price center in recent years. Ming Ming, chief economist at CITIC Securities, told reporters that in the context of rising global inflation expectations, increasing financial instability and frequent geopolitical conflicts, global central bank demand for gold has risen rapidly. At present, the purchase of gold by global central banks has become an important marginal force in determining the trend of gold prices.
In the context of the increasingly weak explanatory power of the traditional gold price pricing logic, some analysts believe that the new gold pricing mechanism with the global central bank buying gold as the core variable is "taking root."
Huatai Securities fixed income team said that in the past two years, the geographical situation changes combined with high interest rate environment, resulting in the old gold pricing system explanation power is getting weaker and weaker, and the central bank gold buying as the core variable of the new gold pricing mechanism gradually surfaced. The team further analyzed that behind the global central bank's gold purchasing behavior is a concentrated reflection of the demand for "decentralization" and geo-hedging. Central bank purchases not only reflect the recognition of gold's safe-haven properties, but also show concerns about the stability of the traditional monetary system in the context of the continued expansion of the Federal Reserve's balance sheet.
There are also views that the traditional analytical framework has not failed, and the actual interest rate is still an important factor in determining the trend of gold prices. Yan Xiang said that compared with industrial metals and energy, gold's supply and demand balance sheet does not have a prominent impact on the price of gold, and theoretically gold does not have a particularly strong pricing anchor. However, in recent years, under the background of the sustained impact on the credit of the US dollar, the continuous purchase of gold by global central banks has indeed had a greater driving effect on the rise in gold prices.
"In the medium to long term, the core factors in gold pricing remain real interest rates, risk aversion and monetary attributes relative to the US dollar. The subsequent US interest rate cut cycle, the decline in real interest rates is still a high probability event, and the central bank has not finished buying gold, which will support the medium and long term gold price." Yanxiang said.
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