Is there still a chance to invest in gold (is it good to invest in gold now to make money?) Is it good to invest in gold now?

For several months, the price of gold has risen continuously. In the domestic market, some gold prices once reached 600 yuan/gram, compared with the quotation of 490 yuan/gram in October 2022, the price of gold rose by more than 20%.

"Buy up and not buy down" is also applicable in the gold market. According to the statistics of the China Gold Association, in the first quarter of 2023, our country's gold consumption increased by 12.03% year-on-year to 291.58 tons. Among them, gold jewelry increased by 12.29% year-on-year to 189.61 tons, and gold bars and coins increased by 20.47% year-on-year to 83.87 tons.

Domestic gold prices continue to rise, due to the "surge" of international gold prices. In early May, the international spot price of gold once hit a record high of $2,080 per ounce. However, as the expectation of the Federal Reserve's suspension of interest rate hikes fell, the international gold price also staged a "high platform dive". Under the "roller coaster" trend, can investment in gold still work?

Two bad news triggers gold prices to "dive high"

Recently, the price of gold has staged a "high platform diving", falling for many consecutive days.

In the international market, in just a few days, spot gold per ounce fell from above $2020 to below $1960. As of the morning of May 19, spot gold was reported at $1956.28/ounce. In China, according to the official website of Chow Tai Fook, the retail price of pure gold (jewelry, ornaments) on May 19 was 579 yuan/gram; the retail price of handicrafts (gold bars, gold medals) was 569 yuan/gram, a decline from the previous days.

The fall in gold prices is mainly due to the impact of two bearish trends in the short term.

First, expectations that the Federal Reserve will suspend interest rate hikes fell. On May 17, US retail sales data, known as "terror data", were released. The data showed that the monthly rate of US retail sales in April increased by 0.4%, lower than the expected 0.8%. The previous value was revised up from -1% to -0.7%; the monthly rate of core retail sales rose from -0.8% to 0.4%, better than expected 0.5%.

But retail sales, excluding cars and petrol, rose more than expected by 0.2 per cent in April and by 0.6 per cent month-on-month, suggesting that consumer spending remains strong and that the Fed still has work to do to achieve its price stability target. So the economic data is not enough to justify "a pause in rate rises at the Fed's June meeting". The renewed expectation of rate hikes sent gold prices tumbling.

According to the latest data from the CME's "Federal Reserve Watch" tool, the market expects a 71.6% chance that the Federal Reserve will maintain interest rates at current levels in June, after briefly exceeding 90% two weeks ago. The market view is that the Fed will start cutting interest rates this year no earlier than November.

President Joe Biden and Congressional Republican leader Kevin McCarthy on Wednesday stressed their determination to reach an agreement as soon as possible to raise the federal government's $31.40 trillion debt ceiling and avert a catastrophic economic default.

The comments underpinned risk appetite and helped lift the dollar. "To some extent, there has been some initial progress on the debt ceiling, which has removed some market uncertainty and moderately boosted sentiment," said Christopher Wong, FX strategist at OCBC. But at the same time, it has also weakened gold's safe-haven appeal.

Despite the "roller coaster" trend in international gold prices, it is still consolidating at a high level. Edward Meir, a metals analyst at Marex, said that the price of gold is likely to remain in the range of 1965-2020 US dollars in the next two weeks.

What factors are disrupting the price of gold?

The recent adjustment of gold prices is simply related to the recent strength of the US dollar index, the easing of risk aversion factors in the market, and the need for objective adjustment of gold prices. The continuous rise in gold prices this year can be divided into four stages, mainly the result of the superposition of three factors.

Let's take a look at the four stages of gold's trend this year.

First of all, the rally in gold in January this year was very good, mainly due to the decline in US inflation in early January, poor economic data, and the market's expectation that the Federal Reserve will suspend interest rate hikes, or that interest rate hikes will retreat. In this case, the price of gold rose from $1,800 to around $2,000, which is an upward channel.

Secondly, in February, from the perspective of the fundamentals of the US economy, due to the statistical caliber, inflation data soared again, GDP data and PMI data performed well, so gold overall showed a slow decline in February, basically giving up the gains in January.

Then, in March, the Silicon Valley banking crisis broke out overseas, including subsequent liquidity crises in other European and American banks. Under the support of risk aversion, the price of gold returned from $1,800 to around $2,000.

Finally, the price of gold has remained volatile since April, mainly because after the previous "N" trend, there are certain differences in the Federal Reserve's interest rate hikes and US economic data, so there are certain game elements in the gold trading process. The price of gold fluctuates around $2,000.

Let's look at the three main driving factors for the rise in gold prices. The first is the risk-off attribute, the second is the financial attribute, and the third is the credit attribute.

First of all, from the perspective of risk aversion, after the Silicon Valley banking incident broke out, market concerns had a greater impact on the real economy of the United States, causing a contraction in real credit and an increase in investor risk aversion. In terms of risk aversion, gold is a very typical safe-haven asset.

Secondly, from the perspective of financial attributes, the Federal Reserve's interest rate hike action, from tightening to gradual easing, liquidity is slowly easing. Liquidity is loose, and the level of interest rates decreases, resulting in a decrease in the ROI of money and a relative increase in the ROI of assets. A large amount of capital flows into the asset market, causing asset prices to rise. As an asset, the price of gold also rises.

Finally, there is the credit attribute. When analyzing gold in normal times, the relationship between the interest rate of US bonds and gold is often used to determine the trend of gold. In this process, the effect of the gold price anchor actually has a certain deviation, which has also triggered the market's discussion on the trend of de-dollarization.

In addition, global central banks have also continued to increase their holdings of gold due to the needs of hedging, anti-inflation, and foreign exchange assets, which has promoted the price of gold. In recent years, the process of global de-dollarization has indeed accelerated, and geopolitical and instability have increased. Gold has played a role in preserving and increasing value and diversifying risks in this process.

Looking at the follow-up trend of gold from the perspective of pricing logic

From the current point of view, is there any chance for gold's future market? This needs to be viewed from the pricing logic of gold. Summarized, there are three factors: the first is the interest rate of US bonds, the second is the exchange rate of the US dollar, and the third is short-term liquidity and risk aversion factors.

The first is that gold is a kind of physical currency, and the US dollar is a kind of credit currency. The supply of gold is limited, but the supply of credit money can be overissued in large quantities. In order to stimulate the economy, central banks may issue a large amount of credit money. This process will generate an evaluation of the purchasing power between the two currencies, and the overissuance of money will break its original evaluation of purchasing power.

Second, from the perspective of the actual interest rate of US Treasury bonds, holding gold does not generate interest, so the interest rate of US Treasury bonds can be used as the opportunity cost of holding gold. The interest rate of US Treasury bonds has a relatively large impact on the price of gold, and in the long run, it is a relatively obvious negative correlation.

Third, some geopolitical crises or sudden events will also stimulate the price of gold, such as financial marekt liquidity crisis will affect the price of gold.

Looking back at history, in the months following the Federal Reserve's termination of interest rate hikes, assets with stronger financial attributes and more sensitive interest rates, such as gold, will have a better increase, usually 20% to 25%. In the case of a hard landing, if the economy is particularly bad, it may reach a 50% increase.

From the analysis of the above factors, the short-term adjustment of gold does not change the medium-term good expectations, pullbacks or opportunities. Bank of China Fund Zhao Jianzhong is more confident in the follow-up trend of gold. At the end of this year or the beginning of next year, the Federal Reserve will start to cut interest rates, and the decline in interest rates will increase the price of gold significantly. For gold prices, there is a high probability that they will hit a new high in the middle of this year or next year.fxtmFXTChief Chinese market analyst Yang Aozheng also said that there is an opportunity for gold to reach a new record high in 2023.