The center of gravity of precious metals will continue to shift upward

Looking back at the first quarter, with repeated expectations of an overseas economic recession and a Federal Reserve rate cut, the price of precious metals rose and then fell in January and February. In March, under the influence of the Silicon Valley Bank crisis, as market panic spread, safe-haven assets such as gold and US Treasuries rebounded sharply, with gold prices breaking through the $2,000 per ounce mark. Entering the second quarter, Finland's accession to NATO exacerbated geopolitical tensions in Northern Europe, and the recent poor performance of US economic data strengthened market expectations that the Federal Reserve will pause rate hikes and begin rate cuts. Under the dual boost of rising risk aversion and expectations of a Fed rate cut, precious metals have risen sharply again. Looking ahead, I believe that the central price of precious metals is still expected to move upward, and it is recommended to continue to maintain a long position. Especially gold, the following four factors indicate a steady recovery in bullish sentiment, and the gold price is expected to hit a new historical high.

Four Factors Supporting Gold Price Trends

First, the demand for safe havens will continue to highlight the long-term value of gold. Although the risk of an overseas banking crisis has temporarily eased, with the yield curve remaining inverted, the rapid bankruptcy of Silicon Valley Bank and others indicates that there may be more problems in the overseas banking system. In addition, Finland officially joined NATO on April 4, becoming its 31st member. This is the first expansion of NATO since North Macedonia joined in 2020, and Russia responded by saying it would take military action. Based on the increased instability in the global financial market and geopolitical situation, the demand for safe havens will continue to support gold prices in the long term.

Second, the shift in the Federal Reserve's monetary policy will benefit assets such as gold in the long term. Although the Fed may still raise interest rates by 25 basis points in May, the US CPI is likely to fall significantly in the second quarter due to the high base effect, and high interest rates and the banking crisis will most likely lead to a self-induced "credit crunch" in the overseas financial system. From the transmission mechanism, the self-induced deleveraging of the overseas financial system will reduce corporate investment and consumer spending, thus exacerbating downward pressure on the US economy. Therefore, it is expected that the Fed may still cut interest rates in the fourth quarter. For the precious metals market, the shift in the Federal Reserve's monetary policy will benefit precious metal assets in the long term. During this process, the US nominal interest rate will most likely oscillate slowly downward, but the realization of the decline in the inflation rate will lead to a gradual stabilization of inflation expectations, thus limiting the upside space of the real interest rate. Once the Fed enters the rate-cutting phase, it is not ruled out that the US real interest rate may turn downward again, which will bring strong upward momentum to the gold price, and the gold price is expected to form a new round of upward trend.

Third, the mismatch between US and European monetary policies, weakening support for the US dollar index, will also support precious metals. The resilience of the US economy will continue to support the US dollar index in the short term, but in the long term, under the influence of factors such as increasing downward pressure on the US economy and US debt problems, the support for the US dollar index will continue to weaken, thus supporting precious metal prices.

Fourth, the continued net gold purchases by global central banks will provide a solid foundation for the upward trend of gold prices. According to the World Gold Council, global central bank gold purchases totaled 1,136 tons in 2022. In January of this year, global central banks again made net gold purchases of 77 tons, bringing the global gold reserve scale to 35,362.8 tons. Against the backdrop of a sharp increase in interest rates by global central banks, led by the Federal Reserve, and a sharp rise in gold prices, global central banks have been aggressively increasing their holdings of gold, which may mean that deglobalization is accelerating against the backdrop of the Russia-Ukraine conflict. Coupled with the recent banking crisis overseas and Finland's accession to NATO, it shows that the instability of the current global financial market and geopolitical situation may continue to increase. Therefore, global central banks' pursuit of asset diversification and hedging needs, as well as the wave of de-dollarization by non-US countries, will continue to favor gold, and the continued net gold purchases by global central banks will provide a solid foundation for the upward trend of gold prices.

Three Key Risk Points to Watch

Through the analysis of the above four factors that have a positive impact on precious metals, we believe that the future risk points in the precious metals market mainly focus on the Federal Reserve maintaining high interest rate levels for longer, the Fed's rate cut timing and magnitude being later than market expectations, and the resilience of the US economy. In the short term, the biggest risk point still lies in the significant divergence between the market's expectations for the timing and path of the Fed's rate cuts and the Fed's firm belief that it will not cut rates this year.

Under the influence of the banking crisis in March, the Federal Reserve abandoned raising interest rates "higher," but insisted on raising interest rates "longer." That is, the Federal Reserve will still maintain interest rate levels at around 5.1% by the end of the year, which means that the Federal Reserve will not cut interest rates this year. However, the market is clearly more pessimistic. The market believes that under the banking crisis and increasing downward pressure on the US economy, the Federal Reserve will start cutting interest rates as early as June, and the rate cut will reach 100 basis points this year. By comparison, we can see that there is a significant divergence between the Federal Reserve and the market in terms of the timing and magnitude of rate cuts. In this regard, we believe that under the current situation where the overseas banking crisis has temporarily eased and the US financial market remains stable, full employment and price stability are still the most critical factors affecting the shift in the Federal Reserve's monetary policy. Although the US labor market has cooled somewhat, it remains strong, and US inflation is also at a high level. If the US employment and inflation data in March perform well again, then the Federal Reserve's second 25 basis point rate hike in May may be a certainty, and the Fed's rate cut timing may be later than market expectations, and the rate cut magnitude will also be lower than market expectations. This risk point may trigger a short-term adjustment in precious metals.