Since February this year, the geopolitical crisis, the Fed’s interest rate hike and other multiple macro events have superimposed, making gold face a more complex political and economic environment than ever before. The risk aversion, “de dollarization” and inflation expectations derived from these macro factors have an impact on gold prices from different directions, It also makes the gold price trend deviate from the traditional real interest rate pricing framework of US bonds to a certain extent. How to understand the driving logic of the current gold price and how to deduce the future price, this paper attempts to make some analysis and discussion from different dimensions.
The conflict between Russia and Ukraine is a typical black swan event, which has had a “0-1” impact on the financial market, and the volatility of the financial market has been amplified. As a traditional hedge asset, gold prices have risen sharply driven by risk aversion. At present, with the decline of risk aversion, this impact gradually subsides. However, as one of the most serious geopolitical crises since the end of the cold war, the conflict between Russia and Ukraine may still have an impact on gold prices in the medium and long-term time dimension.
First, the freezing of Russia’s foreign exchange reserves and confiscation of overseas assets by the United States and some European countries have undermined the security of one of the world’s most important security assets (US Treasury bonds) to some extent, especially for those countries that hold a large amount of foreign exchange reserve assets but are not us allies. Gold and silver are not money, but money is gold and silver. In the pursuit of safe assets, especially in the narrative of “de dollarization” of assets, the position of gold in asset allocation will be highlighted. Traditionally, there is a nearly perfect negative correlation between the real interest rate of US bonds and the price of gold, but this relationship has been broken since mid March. The 10-year real interest rate of US bonds rose from about – 0.70% in early March to near 0 at present, but the price of gold did not fall. One of the reasons behind this may be dominated by the narrative of “de dollarization”.
Secondly, the Russian Ukrainian conflict led to the rise in the prices of crude oil and other commodities, further strengthening inflation expectations. The 10-year breakeven inflation rate of US debt rose to 2.87%, which was at an all-time high. As a traditional anti inflation variety, gold also gained an important driving force.
At present, the conflict between Russia and Ukraine is still continuing, and the game between the two sides of the conflict and the stakeholders behind it is still continuing and escalating. The narrative of “de dollarization” of asset allocation caused by the conflict between Russia and Ukraine may still be in progress, and gold may gain the allocation premium caused by the geopolitical crisis.
In mid March, the Federal Reserve raised interest rates for the first time since 2018, entering the channel of raising interest rates and tightening liquidity, and the yield of 10-year Treasury bonds also showed a very significant upward trend, but the gold price did not show weakness. In addition to the impact of the above Russian Ukrainian conflict, another reason is that the purpose of the Federal Reserve’s interest rate increase is to curb inflation. If the Federal Reserve’s interest rate increase lags behind the inflation curve, Then the response of gold price to the rise of nominal interest rate is relatively passive. From historical experience, the Fed’s interest rate hike does not mean that the gold price is weak, but it may change the rhythm of the price trend.
More importantly, although the current 10-year US bond yield continues to rise, the interest rate curve continues to flatten, and the interest rate spread between the 10-year US bond yield and the two-year US bond yield is less than 20 basis points (there was a short upside down on April 1). The short-term interest rate reflects the tightness of spot monetary conditions, while the long-term interest rate reflects the prospect of future economic growth. The 10-year breakeven inflation rate reached 2.87%, which is at a historical high, but the interest rate curve is flat or even upside down. The combination of “high inflation + flattening of interest rate curve” largely reflects the stagflation state of the economy, and the gold price tends to be strong.
For China’s gold denominated in RMB, in addition to the factors discussed above, the depreciation expectation of RMB may also be a favorable factor supporting China National Gold Group Gold Jewellery Co.Ltd(600916) price. The main factors driving the appreciation of RMB in the past two years include the high outlook of import and export and the relatively high interest rate difference between China and the United States. These two factors may change to a certain extent in the near future. The nearly two-year appreciation cycle of the RMB may come to an end, and the range of two-way fluctuations will increase in the future, but there may be more room for depreciation. The devaluation of RMB is a positive factor for China’s gold denominated in RMB.
Risk tips
If the Fed’s tightening policy exceeds expectations and the liquidity ebbs, driving the real interest rate of US bonds to continue to rise, it may eventually have an adverse impact on gold prices.
