While consumer stock fund managers are still facing the age-old question of "Do young people drink liquor?", gold shops have already welcomed their first batch of post-00s customers.

As one of the few businesses that has been aggressively expanding its offline stores in the past year, gold shops are doing well. In Deloitte's 2023 Luxury Companies Report, Chow Tai Fook ranks among the top ten in the world with sales exceeding Hermes and Rolex. In another report, "2023 China Gold Jewelry Retail Market Insights", young people aged 18 to 34 have taken over from the "Chinese aunties" in the 2013 gold craze and become the main force of gold jewelry consumption.

As a "price-following" consumption, the demand for gold jewelry often keeps pace with the rise of international gold prices. However, when the international gold price hits new highs, driving the domestic gold price to jump almost every day since March, from 630 yuan per gram to 730 yuan per gram, consumers gradually turn to wait and see.

The real big gold traders are still producing steadily.

Central bank data released on April 7 showed that despite the recent rapid rise in international gold prices, the pace of China's central bank's gold reserves remained basically stable, with gold reserves of 72.74 million ounces at the end of March, an increase of 160,000 ounces from the end of February. This is the 17th consecutive month that the People's Bank of China has increased its gold reserves since October 2022, setting a record for the longest period of increase.

However, with the U.S. non-farm data last Friday exceeding expectations and the market having doubts and disagreements about the path of interest rate cuts this year, the short-term game surrounding international gold prices is heating up dramatically.

So, where is this golden cycle that will reach its climax in October 2022 but was foreshadowed as early as 2018?

Betraying the interest rate anchor

Since the collapse of the Bretton Woods system and the decoupling of the US dollar from gold, we are experiencing the third round of gold bull market after 1971-1980 and 2002-2011. However, in terms of details, this gold rush has its own special features. It is actually the combination of two small cycles.

In the first stage, from the fourth quarter of 2018 to August 2020, the Federal Reserve shifted from normal interest rate cuts to drastic money printing, driving the start of this round of gold bull market.

Starting from the fourth quarter of 2018, as the market speculated that the Fed's interest rate hike process was nearing its end, the London gold price began to perform. In March 2019, the Fed hinted at no interest rate hikes during the year at the FOMC meeting. By July, the Fed cut interest rates for the first time in a decade, and in September and October, it cut interest rates for the second and third time of the year. During this period, the gold price rose rapidly from $1,270/ounce to $1,530/ounce.

In December, the Federal Reserve said that interest rates would remain unchanged in 2020 and would remain at 1.75% for a period of time, which made gold prices lose the momentum to continue to rise. However, just two months later, the rampant spread of the new crown epidemic not only frustrated the Federal Reserve's plan to maintain interest rates, but also drew the steepest interest rate decline curve since the 21st century.

In response to the impact of the pandemic on the economy, the Federal Reserve slashed interest rates by 150 basis points from 1.75% to 0.25% in the first two weeks of March 2020. Stimulated by the Fed's interest rate cut and safe-haven demand, the London gold price broke through $2,000 in August 2020, surpassing the 2011 high to set a new record high.

In the second stage, from August 2020 to December 2022, the interest rate cuts ended, the Federal Reserve gradually entered the "inflation warrior" mode, and the gold price fluctuated under the shadow of war and inflation.

In the summer of 2020, people began to regain their rationality from the doomsday panic at the beginning of the pandemic. Most economies also gradually recovered under the positive effects of fiscal policy and epidemic prevention and control. Global GDP growth gradually rebounded and came out of the trough. It has also become a consensus in the global market that the Federal Reserve will not maintain zero interest rates for a long time. As the US dollar index rebounded, the London gold price showed a volatile downward trend throughout 2021.

The pullback was interrupted by a hot war that continues to this day. In February 2022, Russia's blitzkrieg on Kiev failed, and driven by the risk aversion of geopolitical conflicts, gold briefly returned to its previous high.

However, the actual yield of US Treasury bonds still plays a more important role in the pricing of gold. The strong recovery of the US economy after the epidemic has caused the inflation data in March 2022 to explode, and the figure of 8.5% set a 40-year record. Since then, the Federal Reserve has started the main task of fighting inflation. The price of gold has retreated step by step in the rhythm of 7 interest rate hikes totaling 425 basis points this year, giving up half of the previous gains.

So far, it is still a familiar pattern, with tightened liquidity and falling gold prices, with U.S. bonds and gold playing their roles competently on both sides of the scale. But at the end of this year, the trend of gold began to show subtle changes, and it was no longer satisfied with its limited role under the dollar order.

The third stage, from the beginning of 2023 to the present , is the most special stage of this round of gold bull market. The negative correlation between gold and US dollar interest rates has shown a historically rare divergence.

Since 2023, the price of gold and the real yield of U.S. Treasury bonds have risen rapidly in sync - when the U.S. dollar interest rate rose by 32 basis points, the international gold price also rose by more than 20%, breaking the gold analysis framework centered on the real yield of U.S. Treasury bonds.

This divergence has been even more extreme in the market conditions since the beginning of this year.

To a certain extent, the market attributes the "gold fever" that has gradually accelerated this year to the institutions' advance response to the previous expectation of "three interest rate cuts by the Federal Reserve this year". However, after the release of the March non-farm data, the 303,000 new non-farm jobs that exceeded expectations reversed the expectation of a rate cut.

However, on the same day, after a slight drop at the opening, gold quickly rebounded and closed higher, with the COMEX gold price rising to $2,349.10 per ounce, setting a new record. Gold, which had risen due to the expectation of a rate cut, did not fall back due to the delay in the rate cut progress, but instead climbed to a record high.

David Einhorn, founder of hedge fund giant Greenlight Capital, said bluntly: The Fed may not have a chance to cut interest rates this year[6]. The second half of his sentence was: "But the Fed's policy shift will not hinder the upward momentum of gold prices... Gold is one of our important investments... It is a way for us to hedge against possible adverse situations in the future. "

This is also a key node in the development of this round of "gold fever" to today: when a large number of analysts around the world use the negative correlation with the actual yield of US Treasury bonds as the anchor of gold, what does the occurrence of divergence and the failure of the anchor mean for gold investment?

The Golden Age

Today's investors are accustomed to the inverse relationship between gold and U.S. real bond yields, but this simple negative correlation is not all there is to gold prices.

Gold is an extremely special metal whose value is almost engraved into human DNA. It is both a commodity, an investment and a general equivalent. Its price is determined by three factors: short-term, medium-term and long-term[2].

In the short term, gold prices are affected by both risk aversion and speculative trading.

The world since 2019 can be said to be the opposite of calm. The COVID-19 pandemic that has swept the world, the US government's debt ceiling that has been constantly touched, the Russian-Ukrainian war and the chaos in the Middle East have made "Season 3" a concern for more and more people. Every risk event is driving gold prices up in a pulsed manner.

At the same time, speculative trading is also accelerating the sprint of gold prices. On March 4, the closing price of gold hit a record high, and it was at this time that speculative long positions in gold increased rapidly and short positions decreased rapidly[3]. Historically, every time the gold price breaks through a new high, it will continue to rise rapidly for a period of time, which is exactly the same as this round of performance.

Of course, the big guys usually say it more directly: those who are afraid of heights are miserable people.

In the medium term, gold prices are affected by commodity supply and demand as well as liquidity.

Gold demand is mainly divided into four parts: gold jewelry manufacturing, industry, investment, and central bank net purchases. The proportion of industrial gold is relatively low and does not fluctuate much. Although the demand for gold jewelry is high, its demand is relatively stable, with only a significant decline in 2020 in the past decade. Therefore, the main factors affecting gold prices are investment demand and the net purchases of central banks of various countries.

The central bank's net purchases have surged in the past two years, but judging from the overall changes in gold demand, this obviously cannot explain this round of gold bull market, as well as the more general bull market in precious metals and resource products among commodities.

This is the result of excessive liquidity. In 2020, the Federal Reserve and the US government used the most radical fiscal and monetary policies to prevent the US economy from falling into recession, but this was not without cost. Skyrocketing commodity prices and high inflation are not only the number one enemy of the United States, but also a headache for the whole world.

London copper futures rose more than 100% from March 2020 to March 2022, and WTI crude oil rose an astonishing 20 times from April 2020 to May 2022. In comparison, the increase in gold prices can only be described as moderate.

In fact, medium-term factors are often an important support for driving a gold bull market, and are often the driving force behind breaking the negative correlation between gold and US Treasury real yields.

The last time gold and U.S. Treasury real yields diverged was at the beginning of the last round of gold bull market. In the golden decade from 2002 to 2012, gold prices rose more than five times. Before the outbreak of the financial crisis and the decline of the dollar, from 2005 to 2007, the U.S. real interest rate rose in prosperity, but the gold price also sounded the horn of the bull market at the same time - the global commodity bull market and the continuous decline in gold production pushed the gold price higher.

The long-term factor affecting gold prices, namely credit hedging, is a slow variable. It is not the main determinant of short-term prices, but the subtle changes that are taking place at this moment will be reflected in the pricing of gold in a longer process of realization.

Since 2018, trade protectionism has re-emerged, the global value chain has shown a trend of shrinking, and geopolitics has become an important basis for companies to choose their supply chain layout[4].

The heart of the US dollar system is also not at peace. The weaponization of the US dollar settlement system - sanctions against Iran, Russia and other countries, makes over-reliance on this fiat currency no longer the best option. According to public reports alone, countries such as Brazil, ASEAN, India, Malaysia, Saudi Arabia and others are actively developing diversified trade settlement tools. At the same time, the proportion of the US dollar in global foreign exchange reserves has also declined year by year since 2018.

According to a 2023 survey by the World Gold Council, more than half of the 57 central banks surveyed will reduce the proportion of US dollars in their total reserves in five years, and emerging economies are particularly willing to reduce their US dollar reserves. 62% of the central banks surveyed said they would increase the proportion of gold in their total reserves in the next five years, while this figure was only 42% in 2022[1].

The specter of re-inflation under the non-farm payrolls data makes the future purchasing power of all fiat currencies questionable, leaving few options for central banks, of which gold is the most obvious. In 2022, central banks' net purchases of gold more than doubled compared to 2021, and strong net purchases have continued to this day, contributing the largest marginal change in gold demand.

When short-, medium- and long-term factors converge on the trend of gold prices, it may not be a golden age, but it is definitely the gold of the era.

Hedge against fate

The cyclical king Zhou Jintao summarized the investment in gold with his most classic Kondratieff perspective: the trend of gold can be seen as the opposite of economic growth. Taking the long wave recession period as the starting point, gold assets will enter a long-term bull market and obtain significant excess returns in the 5-10 years of super market during the depression period.

From this perspective based on the ultra-long Kondratieff cycle, ALL IN gold is not a good idea for ordinary people. In fact, judging from the positions of futures and options, the current gold long trade has reached the most crowded level since the COVID-19 outbreak. As long positions stop profiting and short positions stop entering the market, a "long kills long" decline may occur.

Gold has never been a good commodity for betting on short-term fluctuations. The overall volatility of gold is slightly lower than that of the CSI 300, but because gold is affected by the macro economy and will fluctuate downward for many years, the payback period for buying gold at a high point is not short. For example, investors who followed the trend and bought gold in 2013 will have to wait seven years to get out of the trap.

On the other hand, participants in the short-term gold game are facing a powerful opponent who is almost omnipotent. In addition to professional asset management institutions, another major buyer in the gold market is the central banks of various countries. In 2023, the central banks' net purchases of gold exceeded 1,000 tons, becoming the second largest source of demand after gold jewelry manufacturing.

In other words, central banks, which can determine the trend of gold prices in their own currencies to a certain extent by adjusting nominal interest rates, are also the biggest players in the gold market. This makes it unwise for small investors to try to win money from the referee.

But when we step out of the perspective of short-term speculation and examine gold from the perspective of long-term asset allocation , it becomes one of the few "fate hedging tools" for most ordinary people.

On the one hand, for many families who consider outperforming inflation as a wealth management requirement, although the price of gold is somewhat volatile, it has been rising steadily over the past 50 years. A study found that the increase in the price of gold is about 3.2 times the inflation rate[2].

From a broader perspective, if we are destined to experience the end of the Kondratieff cycle, where recession turns to depression, then gold's historical excess returns in this environment may offset some of the helplessness in our fate; of course, if we are lucky enough to usher in a new cycle and find a fast lane to economic prosperity in the technological singularity, non-interest-bearing gold will only cause us to lose a limited holding cost in our lives.

This is the charm of gold in foggy times: in every short term, traders are wrestling with the central banks of various countries on their own; but in the longer-term economic laws, the Kondratieff cycle has written the wealth destiny of a generation.