Upon waking up, both international and domestic gold prices have surged remarkably, with the domestic base gold price nearing 490 yuan/gram, and the gold price for gold jewelry skyrocketing to 637 yuan/gram, setting a new historical high. People working in the gold industry, with over 20 years of experience, claim they have never seen such high gold prices before.
In fact, since November 2022, gold has started on an upward trend. In March 2023, it broke through 2,000 USD/ounce, in December it surpassed 2,100 USD/ounce, and on March 4, it reached a historical record of 2,141.62 USD/ounce during trading.
Although the rise in domestic gold prices is not as dramatic as international prices, they have similarly followed the upward trend of international gold prices. Since February this year, domestic gold prices have been relatively stable, fluctuating within a 2-3 yuan range, but the overnight increase of 7-11 yuan per gram in branded jewelry stores on March 4 is considered a surge.
According to Shanghai Securities News, reporters learned from gold jewelry brands such as Chow Tai Fook, Luk Fook Jewellery, and Chow Sang Sang that the domestic pure gold jewelry price that day all surpassed 636 yuan/gram, reaching a historical peak. The prices for pure gold by Chow Tai Fook and Luk Fook Jewellery 999/pure gold were announced at 637 yuan/gram, and Chow Sang Sang's pure gold jewelry was priced at 636 yuan/gram.
Currently, the price of gold in well-known domestic brand stores is generally around 645 yuan/gram.
With the rise in gold prices, gold ETFs dance along, with 14 domestic themed funds hitting new net value highs
Apart from physical gold, futures, spot gold, and gold jewelry prices rising, the net value of 14 domestic gold ETFs tracking spot gold trends also reached historical highs on March 4. Among them, 11 gold ETFs have seen an increase of more than 3% in the past month. To put it into perspective, the current domestic bank one-year deposit rate is less than 2%, with most banks quoting only 1.95%.
Assets related to gold are soaring alongside gold prices. Can we still buy gold financial products? To answer this question, we need to identify the underlying logic influencing gold prices. The formation of gold prices is the result of multiple factors.
What are the main factors influencing the rise in gold prices?
Summarized below are several key factors:
1. Inflation
The most direct result of inflation is currency depreciation, and gold often maintains a relatively stable value. When inflation reaches a certain level, in the short term, the market expects central banks will raise interest rates, and financial market capital tends to opt for purchasing gold as a safe-haven asset. When considerable funds flow into the gold market, it will propel the short-term rapid rise in gold prices.
In the long run, as gold is seen as a scarce resource and "the ultimate currency" with a relatively limited overall supply, its anti-inflationary function causes its demand to constantly increase in the market. Supply and demand imbalance will also lead to a long-term upward trend in prices.
2. US Dollar Index
There is a certain correlation between gold prices and the US Dollar Index, generally showing an inverse relationship. When the US dollar strengthens, gold prices tend to fall, and vice versa. As the US dollar serves as the global reserve currency, its strength usually means an increase in returns for holding US dollars. The US dollar is linked to other currencies through exchange rates, and its appreciation means the relative devaluation of other currencies, reducing the willingness of non-US dollar holders to buy gold, as the same amount of money can buy less gold than before.
It is precisely because of the recent market expectation of a Fed rate cut this year, leading to a relatively weaker US Dollar Index, that gold prices have experienced a short-term surge.
Three, US Non-farm Payrolls
US non-farm payroll data is an important indicator of the US labor market condition, usually released monthly. If the data is strong, it means employment growth and enhanced economic vitality, typically seen as positive economic signals. If non-farm data is overly strong, it might signify increasing inflationary pressures, leading to expectations of interest rate hikes, causing the US dollar to strengthen and gold prices to fall. Conversely, if non-farm data is weak, indicating slow or stagnated employment growth, it may suggest the risk of economic recession. Gold, as a safe-haven asset, would then become a preferred investment for many institutions, potentially pushing gold prices up.
Four, Interest/Exchange Rates
Gold, unlike cash or digital currency, is a physical asset. Therefore, when market interest rates rise, investors may prefer holding cash or similar assets to earn interest income. This would lead to a decrease in demand for gold, exerting downward pressure on gold prices. Conversely, when market interest rates are low, holding physical assets like gold costs less, and due to its good value preservation and appreciation feature, investors may prefer exchanging their cash for physical assets like gold, which could cause gold prices to rise.
Moreover, the monetary policies of the RMB and US dollar can also affect gold prices. When the RMB appreciates against the US dollar, it means an increase in the purchasing power of the RMB. Since gold is priced in US dollars in international markets, RMB appreciation makes it less costly for investors to buy gold, stimulating gold purchases and driving prices up.
Changes in US monetary policy can also affect gold prices. If the Federal Reserve raises interest rates, increasing US dollar interest rates, investors holding US dollars can earn more interest, and it becomes more convenient to hold and circulate. Investors may then favor holding dollars over gold, which could cause gold prices to fall. Conversely, if the Federal Reserve cuts interest rates or implements a loose monetary policy, the dollar would lose its appeal, and investors may prefer holding gold, driving up gold prices.
Five, US Treasury Bonds
Over the past fifty-plus years, the scale of US national debt has grown from about 3.7 trillion USD in 1970 to 31.4 trillion USD in 2023, setting a new historic high. The rising national debt usually raises concerns about inflation. When the government accumulates substantial debt, it often resorts to printing more USD or increasing government spending to sustain debt operations, which could lead to inflationary pressures. Generally, in such situations, the market might opt for purchasing gold assets to hedge against inflation risk. Additionally, as debt levels rise, the market might witness events such as debt defaults or financial institution bankruptcies, such as the recent collapse of the New York Community Bank event, causing investors to be wary of the financial market's stability and similarly seek safe-haven assets like gold.
Looking at the nearly half-century relationship between gold prices and the total US debt, both have shown a nearly synchronous growth trend, meaning, as the total US debt increases, so does the price of gold.
Six, Global Central Banks Purchasing Reserve Gold
Central banks purchasing reserve gold is usually meant to increase foreign exchange reserves, serving as a hedge against economic uncertainty and inflation expectations. When the international economic situation is unstable or there’s financial crisis, central banks might shift funds towards assets like gold, driving up gold prices.
Data shows that as of the end of January 2024, our country's gold reserves stood at 72.19 million ounces, increasing by 320,000 ounces compared to the end of December 2023. This marks the 15th consecutive month of increasing gold reserves.
Seven, Geopolitical Risks
When geopolitical risks escalate, markets worried about potential conflicts, wars, economic instability, etc., tend to move funds to relatively safe assets. Therefore, demand for gold increases, driving gold prices up.
From the onset of the Russia-Ukraine war, central banks around the world have started increasing their holdings in gold as a risk-averse asset massivly. Last year, the war spread to Palestine-Israel, the conflict in Yemen with the Houthi militia, among others, accompanied by some trade wars and trade sanctions bringing investment risks of non-market factors. In these situations, the market may lose confidence in certain currencies, unwilling to accept them for international trade settlements, usually turning to gold, thereby pushing its price up.
Now is the time to allocate gold-related assets
According to a report by the World Gold Council, based on the 2023 global central bank gold reserve survey, more than 70% of the surveyed central banks expect global gold reserves to increase in the next 12 months.
The demand for purchasing gold by global central banks and official institutions has doubled, bringing significant structural changes to the gold market. This trend may continue for many years or even decades, and is expected to further support gold's performance. Additionally, gold has the dual attributes of being an investment tool, luxury good, and material for jewelry making. Therefore, as an important part of foreign exchange reserves, whether for investment or consumption purposes, gold-related assets are excellent tools for risk aversion and value preservation, making now a suitable time to allocate gold-related assets.
