Western Securities Co.Ltd(002673) : the event driven closing gold configuration window opens

summary

gold, like commodities, is not a friend of time "be a friend of time" is an investment concept aimed at interest bearing assets, while assets or investment tools that do not generate interest or even have time value are "enemies of time". Investors trading commodities, gold and other assets are not making friends with time, but studying and judging prices or trends.

theoretically, the trend of gold is the result of the "race" between nominal interest rate and inflation gold is a non interest bearing asset priced by monetary attributes. Under the US dollar pricing system, the US real interest rate drives the international gold price, but the negative correlation with the international gold price is not tips, but the year-on-year difference between the yield of 10-year US bonds and the US CPI. Theoretically, the direction of gold price is the result of the year-on-year "race" between the yield of 10-year US bonds and the US CPI. However, since 2016, this traditional perception has been overturned by negative interest rates.

the rise of negative interest rate makes nominal interest rate the main driving force of gold trend, and also turns gold into "inflation averse asset" 6 after the Bank of Japan announced the implementation of negative interest rate in early 2016, the scale of global negative interest rate debt increased sharply. The outbreak of the epidemic in 2020 further boosted the scale of global negative interest rate debt. Here, non interest bearing gold has "allocation value". On the other hand, there is a seesaw relationship between inflation and the scale of negative interest rate debt. The rise of negative interest rate debt has temporarily changed gold from anti inflation assets to inflation aversion assets.

Russia Ukraine event's impact on Gold: trigger short-term pulse; Establish medium-term trends 1) the short-term pulse impact of Russia Ukraine incident on gold has ended. As of March 16, the international gold price has fallen back to the pre war level. Similar situations occurred after European countries signed the sales restriction agreement in 1999, before and after the brexit referendum in 2016, and on the day of the 2016 US election. Under the event driven market, gold looks more like the "enemy of time", which is the main reason why we do not recommend event driven trading 2) the long-term significance of Russia Ukraine incident to gold is similar to "9.11" "9.11" kicked off the era of tripartite confrontation and weakened the international status of the US dollar; The Russian Ukrainian incident may accelerate the tendency of some countries to decentralize their currencies and get rid of the US dollar monetary system. Once so, the Russia Ukraine event may lay a long-term foundation for the gold trend 3) the Russia Ukraine incident established the medium-term upward trend of gold after the easing of the situation in Russia and Ukraine, the world's largest gold etf-spdr continues to increase its holdings of gold, which may be related to investors' concern that the conflict between Russia and Ukraine will eventually lead to energy and Shenzhen Agricultural Products Group Co.Ltd(000061) supply shocks.

in the coming year, the winning rate of bullish gold is high 1) the inflection point of structural high inflation after the epidemic is approaching, and the lethality of this factor to negative interest rate bonds will weaken 2) the US economy may slow down in Q4, and the risk of recession next year is very high. If the conflict between Russia and Ukraine triggers a supply chain crisis, the United States and even the world will usher in an economic recession earlier. In the coming year, the profitability of US stocks will gradually weaken, and the demands of institutional investors for the allocation of safe assets such as gold will rise 3) the expectation of table contraction has been partially digested. The probability of 10-year US bond yield rising above 2.5% is not high, and it is expected to reach the high point or before and after the landing of table contraction boots. With the landing of the scale reduction boots, the approach of the mid-term election and the emergence of downward pressure on the economy, the yield of 10-year US bonds may enter the downward cycle from the end of Q2 to the beginning of Q3. The scale of global negative interest rate bonds is expected to rebound again, and gold will also rebound for about a year. At present, although it is still slightly on the left, the allocation value of gold has been very significant.

body

I. at present, the influence weight of nominal interest rate on gold is higher than that of inflation

(I) gold, like commodities, is not a friend of time

The investment concept of "being a friend of time" is aimed at interest bearing assets, while non interest bearing assets and even assets or investment tools with time value are "enemies of time". For example, the negative correlation between the price trend of gold and the nominal interest rate can confirm that gold is an "enemy of time" rather than a friend. In theory, investors trading commodities, gold and other assets are not making friends with time, but studying and judging prices or trends.

(II) theoretically, the trend of gold is the result of the "race" between nominal interest rate and inflation

In the report "economic cycle signal provided by commodity price comparison", we pointed out that gold is a non interest bearing asset priced by monetary attribute, which has anti inflation function and risk aversion function. Its essence is that gold has a negative correlation with the rate of return on capital (real interest rate). Under the dollar pricing system, the real interest rate that drives the international gold price is often the real interest rate of the United States. In addition, in our previous report, we also pointed out that the difference between the yield of 10-year US bonds and the yield of tips represents inflation expectations, and the anti inflation function of gold is not to "resist inflation expectations", but to "resist real inflation", that is, CPI Furthermore, the negative correlation with the international gold price is not the 10-year tips yield, but the year-on-year difference between the 10-year US bond yield and the US CPI. Theoretically, predicting the trend of gold is the result of the "race" between the yield of 10-year US bonds and the year-on-year US CPI. However, since 2016, the relevant characteristics of gold, inflation and nominal interest rate have overturned this traditional cognition.

(III) since 2016, the impact weight of nominal interest rate on gold has been significantly higher than that of inflation

Logically, in the stage when the real interest rate is higher than 0, there must be some interest bearing assets with investment value, and it is difficult to pay attention to gold without interest; Gold will be favored only when the real interest rate turns negative.

The reason why there is the argument of stagflation buying gold is that in history, the impact of inflation on gold is much higher than the nominal interest rate. With the anti inflation function and the rigid constraint that the nominal interest rate is not lower than 0, only under the background of high inflation can the US real interest rate be expected to turn negative, making gold shine. However, table 1 can draw two conclusions:

First, the negative correlation between the international gold price and the US real interest rate is not significant in the non trend stage of gold (such as the 1990s), but there is a strong negative correlation between the price trend stage of gold and the US real interest rate;

Second, in the long run, there is a downward trend in the year-on-year positive correlation between the international gold price and the US CPI, while the international gold price and the 10-year US bond yield gradually change from strong positive correlation to strong negative correlation. It can be seen that the main driving force of gold in the 1970s and 1980s was inflation. From the 1990s to the financial crisis, inflation and nominal interest rate had the same weight on gold. However, after the financial crisis, especially since 2016, nominal interest rate (10-year US bond yield) seems to have become the main driving force of international gold prices.

In fact, since 2016, the rise of negative interest rates has been the main reason why nominal interest rates have become the main driving force of international gold prices. In 2012, Denmark reduced the benchmark interest rate to the negative interest rate range, becoming the world's first "crab eating" central bank. In June 2014, the European Central Bank followed Denmark in implementing negative interest rates, but the scale of global negative interest rate bonds did not expand significantly in the following year and a half. Until the Bank of Japan announced the implementation of negative interest rates on January 29, 2016, the scale of global negative interest rate bonds began to increase sharply.

At the beginning of 2020, the global outbreak further depressed the level of global interest rates, and the scale of global negative interest rate debt soared to $18.38 trillion. The rise in the scale of global negative interest rate bonds from 2016 to 2020 led to the "allocation value" of non interest bearing gold, which is one of the reasons why nominal interest rates have dominated the trend of gold since 2016. On the other hand, there is a seesaw relationship between inflation and the scale of negative interest rate debt. The rise of negative interest rate debt has temporarily changed gold from anti inflation assets to inflation aversion assets. After September 2020, higher inflation killed the scale of negative interest rate debt and weakened the value of gold allocation.

II. Impact of Russia Ukraine event on Gold: trigger short-term pulse; Establish medium-term trend

(I) the short-term impact of the Russia Ukraine incident on gold is similar to 1999 fixed-term gold sales agreement

On September 26, 1999, the "Central Bank gold agreement" (CBGA) was launched at the beginning of the establishment of the eurozone, which stipulates that in the next five years, the signatory countries are only allowed to sell 400 tons of gold a year, avoiding the uncontrolled selling of gold by the central banks of member countries. As all economies with strong comprehensive strength need gold reserves for credit endorsement of their own currencies, the event ensured that the total amount of external gold reserves in Europe was higher than that in the United States, thus establishing the position of the euro in the global reserve currency and shaking the position of the US dollar. Driven by monetary attributes, Comex gold rose 21.1% in the eight trading days after September 26, 1999, but fell 14.8% in the following two months.

A similar scene seems to have happened in the near future. From the war between Russia and Ukraine on February 24 to March 8, Comex gold rose 7.1% and once stood at $2000 / oz. However, after the war between Russia and Ukraine eased, the international gold price began to fall. As of March 16, Comex gold almost fell back to the level before the war. Similar situations occurred before and after the brexit referendum in 2016 and on the day of the 2016 US election. Under the event driven market, gold looks more like an "enemy of time", which is also the main reason why we do not recommend event driven trading.

(II) the long-term significance of the Russian Ukrainian incident to gold: similar to 1999 fixed-term gold sale agreement and "9.11"

In the long run, the biggest hidden danger of the United States is the "failure of the US dollar system". The stability of the US dollar monetary system needs two foundations: the unity of the monetary policy framework of the Federal Reserve and non US central banks is the foundation of global economic stability and cycle operation; The stability and security of US debt and the high rate of return of US stocks are the basis of US dollar liquidity cycle. Since the financial crisis, the Federal Reserve has incorporated fiscal factors into its policy framework, and the US dollar system has been weakening. In the post epidemic QE process, the proportion of the US dollar in the world's confirmed foreign reserves fell below 60% for the first time.

After Biden took office in 2021, he could have used the budget reconciliation process under the fiscal year 2021 budget resolution to increase taxes and open up revenue for the United States, so as to avoid the monetization of fiscal deficits in the event of another economic recession in the future and reverse the weakening trend of the US dollar monetary system. However, Biden's choice to get rid of the interference of the Republican Party and the opportunity for the Democratic Party to dominate the internal affairs gave the third round of fiscal transfer payment, which not only exacerbated the inflation situation in the United States and delayed the taper time of the Federal Reserve, but also may make the United States have no chance to implement the tax increase policy. Looking back, once the United States faces another recession and uses QE, the share of the US dollar in the world's confirmed foreign reserves will decline further. In other words, the weakening of the dollar monetary system may be a fait accompli.

In this context, the move of Europe and the United States to impose financial sanctions on Russia and remove some of its banks from the swift system is likely to accelerate the decentralization of some countries' currencies and get rid of the US dollar monetary system. Furthermore, we may regard the Russia Ukraine incident as a "catalyst event" for the further weakening of the US dollar system. In fact, just as the conflict between Russia and Ukraine escalated, the international gold price also broke through the downward trend line since August 2020, which also shows that the "conflict between Russia and Ukraine" may have milestone significance in the long-term trend of weakening the US dollar monetary system. It can be seen that the impact of the Russian Ukrainian conflict on gold is similar to the sales restriction agreement on September 26, 1999 and the "9.11" incident

(III) but the medium-term impact of the Russia Ukraine incident on Gold: more positive than 1999 fixed-term gold sales agreement and "9.11"

The reserve currency status of the euro was established on September 26, 1999, and the "9.11" incident also opened the prelude to the era of the tripartite confrontation between the United States and Europe (for a detailed analysis, see the report on March 1, "will U.S. stocks reach a new high?", However, these two events did not push gold into the medium-term upward trend. After a short rise, the gold price returned to the starting point, and the gold bull market was not established until the emergence of other catalysts.

But the conflict between Russia and Ukraine seems different. Despite the recent return of gold prices to pre war levels, the world's largest gold etf-spdr continues to increase its holdings of gold. As of March 18, SPDR's gold holdings were 108244 tons, an increase of 20.61 tons over the 15th, 53.13 tons over February 23 and 101.58 tons over January 20. We believe that Russia and Ukraine are both resource countries, and the current financial sanctions against Russia by Europe and the United States may eventually lead to energy and Shenzhen Agricultural Products Group Co.Ltd(000061) supply shocks in Europe and even the world. In addition, the rising risk of economic recession in the United States has also pushed up investors' demands for additional allocation of safe assets.

III. The winning rate of bullish gold will be higher in the coming year

(I) the inflection point of structural high inflation after the epidemic is approaching, and the lethality of this factor to negative interest rate bonds will weaken

Since Q4 last year, high inflation in the United States has been mainly driven by three sub items: energy, used cars and housing.

Last year, the oil price center gradually rose. Under the base effect, unless the conflict between Russia and Ukraine is out of control, the probability that energy factors will further push up the CPI of the United States this year is not high on a month on month basis. The high price of second-hand cars is actually driven by the rising demand of low-income groups and college students who no longer use public transport to commute after the epidemic. Once the impact of the epidemic cools down or the demand for second-hand cars has been generally met, the impact of this factor on inflation will also weaken. As shown in Table 2, the contribution of the sub item of used cars (transportation products, excluding vehicle fuel) to the US CPI in February has decreased to 5.7% month on month, and the impact is expected to weaken further. Residential inflation is a lagging indicator of the growth of US house prices, with a lag of about one year. The growth of US house prices peaked from May to July last year, and the CPI residential sub item is expected to fall back at a high level at the end of Q2 this year. Overall, CPI inflation in the United States is expected to usher in an inflection point in Q2, and the situation in other countries may be basically similar.

As mentioned above, (high) inflation has a seesaw relationship with the scale of global negative interest rate debt. Since the year-on-year rise of CPI in the United States and even the world in early 2021, the scale of global negative interest rate debt has fallen sharply. Once the pressure of high inflation is relieved, the scale of negative interest rate debt is expected to stabilize.

(II) the U.S. economy may slow down on q4, with high recession risk next year

At the interest rate meeting in March, the central and US Federal Reserve significantly revised this year's economic growth expectation from 4.0% in December to 2.8%, PCE inflation expectation from 2.6% in December to 4.3%, and core PCE inflation expectation from 2.7% in December to 4.1%. It can be seen that the Fed defaults that the US economy has appeared or is close to stagflation. Theoretically, the US economy will benefit from the post epidemic opening-up in the first half of the year, so the economic growth rate is probably high in the first half and low in the second half.

We pointed out in our report "if the U.S. economy declines next year": the unemployment rate drops to a low level; After the epidemic, there is a two-way pulse in economic indicators. First, the upward pulse creates a "prosperity" scene, and then there is a temporary fatigue like the normal convergence. Most of the U.S. economic indicators will converge to the normal level next year, but this process will show a temporary economic recession. Specifically. First of all, the average comprehensive cost of American enterprises in Q4 last year has risen to the highest since 1985. Superimposed on the disturbance of the situation in Russia and Ukraine, the increased cost pressure and uncertainty will restrict the behavior of enterprise capital expenditure. Secondly, as shown in Figure 7, the fixed interest rate of 30-year mortgage loans has risen rapidly in the past year. As of the week of March 17, it has exceeded 4%. The sales of new houses have slowed down, and the heat of real estate construction will also cool down in the second half of the year. In addition, the University of Michigan consumer confidence index fell to 59.7 in March, the lowest level since October 2011.

If the resource supply chain crisis driven by the conflict between Russia and Ukraine breaks out, the economic recession in the United States and even the world may come ahead of schedule. Further, the profitability of US stocks will gradually weaken in the next year. With the advancement of the process of raising interest rates, but the cost of capital will continue to rise. Superimposed on the background of high valuation, the probability of significant adjustment of US stocks during the year is not low. Under this expectation, the institution is expected to allocate additional security assets. The recent increase in SPDR gold holdings can explain such allocation demands.

(III) the reduction of the table will not significantly increase 10y US bond yield

The influencing factors of 10-year US bonds are complex, including the US economy, inflation factors, epidemic fluctuations, table reduction policy and institutional allocation behavior. First of all, the Federal Reserve is likely to give a timetable for the reduction of the table at the interest rate meeting in May. From May to June this year, the Federal Reserve may officially start the reduction of the table. According to the way of no renewal at maturity, until the end of next year, the Federal Reserve's holdings of federal bonds will be reduced by $1.46 trillion, accounting for 4.8% of the current total size of federal bonds. In contrast, from Q4 of 2017 to Q2 of 2019, the reduction of the Federal Reserve's holdings of US bonds accounted for only 1.9% of the total scale of US bonds before the reduction. However, after Powell made it clear that the scale will be reduced soon, the yield of 10-year US bonds did not accelerate, indicating that the market has partially digested the scale reduction expectation, and monetary policy is not the decisive driving variable of 10-year US bonds. Under the expectation of economic recession, global institutional investors will gradually allocate more long-term US bonds.

In addition, as shown in Table 3, the experience from 1980 to 2016 shows that the central shift of 10-year US bond yield in the three months before the mid-term election and the general election is a high probability. The mid-term election in early November this year has great uncertainty, and then entering the Q3 market will start pricing for this, and the 10-year US bond yield center is also expected to fall from its high level.

In short, we expect that the high yield of 10-year US bonds may appear before and after the landing of the Fed's table contraction in Q2, or slightly higher than 2.2%, but the probability of breaking 2.5% is still low. Looking back, with the landing of the scale reduction boots, the approach of the mid-term elections and the emergence of downward pressure on the economy, the yield of 10-year US bonds may enter a downward cycle, the scale of global negative interest rate bonds will rebound again, and gold will also rebound for about a year. At present, although it is still slightly on the left, the allocation value of gold has been very significant.

risk tips

(I) the US economy exceeded expectations

(II) the global epidemic exceeded expectations

(III) the Fed's monetary policy exceeded expectations

(IV) us and global inflation levels exceeded expectations

(V) the conflict between Russia and Ukraine exceeded expectations

- Advertisment -