Factors Behind Gold Price Surge: Fed Pause on Rate Hikes, Continued Gold Purchases by Global Central Banks
Ye Mai Sui, a reporter from the 21st Century Business Herald, reported from Guangzhou: In the early morning of November 2, Beijing time, the Federal Reserve announced its November interest rate decision, keeping the target range for the federal funds rate at 5.25% to 5.5%, in line with market expectations. This is the second time the Fed has paused rate hikes since September. As for the reasons for pausing rate hikes, Fed Chairman Powell mentioned that the tightening of financial conditions brought about by rising US Treasury yields may affect the economy and inflation, and higher interest rates also seem to put pressure on corporate fixed asset investment. The "mountain" suppressing gold was temporarily removed, and gold rebounded slightly on November 2. As of 5:00 PM Beijing time, it remained near $1986 per ounce. The holdings of the world's largest gold ETF—SPDR—rose to 861.51 tons, up 2.02 tons from the previous day. Gold ETF holdings increased Tang Linmin, senior researcher at China International Futures, said in an interview with a reporter from the 21st Century Business Herald that the risk aversion caused by the recent situation in the Middle East is the main support for the strength of gold, and the Fed's softer stance compared to before is another major boost. The statement of the Fed's policy meeting this time is basically the same as the statement of the last policy meeting. There are two main changes: First, it further confirmed the resilience of the US economy, changing the description of economic activity from "moderate" to "strong," and adding the qualification of "third quarter" in time; at the same time, the description of the US labor market was changed from "slowing in recent months" to "slowing but strong since earlier this year." Second, "financial" was added to the original statement "tightening of household and business credit and credit conditions," changing it to "tightening of household and business credit and financial credit conditions." These changes are only minor adjustments and did not exceed market expectations. Coupled with the second consecutive pause in interest rate hikes, the market's reaction to the statement is generally dovish. After the Fed's speech this time, market expectations for the end of the Fed's current interest rate hike cycle have heated up. Tang Linmin said that he maintains his previous view that the Fed has completed this interest rate hike cycle and does not think that there is any value in discussing rate cuts now. However, since the results of this meeting are basically in line with expectations, the impact on gold, especially domestic gold futures, is relatively limited. It mainly plays a role in strengthening the confidence of longs and relatively improving the future upward space. In the short term, gold still needs to pay more attention to the changes in risk aversion caused by changes in the situation in the Middle East, and the soon-to-be-released latest US non-farm employment data. Due to the intertwining of various news this year, the trend of gold has shown a W shape. It once broke through its historical high during the session, reaching $2076.2 per ounce, but due to the Fed's continuous aggressive interest rate hikes, gold was also suppressed to around $1800 per ounce. However, recently, with the international situation becoming more complex and volatile, gold has regained its upward momentum, once surging above $2000 per ounce during the session. With the rise in gold prices (1992.79, -0.71, -0.04%), short-term funds have chosen to switch to long positions. As of the week of October 24, COMEX gold speculators' net long positions increased by 48,815 contracts to 90,682 contracts. At the same time, the holdings of the world's largest gold ETF—SPDR—have also increased, with the latest holdings at 861.51 tons. Global central bank gold buying spree Another driver of gold price increases this year is global central banks. On October 31, the World Gold Council released its latest Global Gold Demand Trends report, which shows that global central banks net purchased 337 tons of gold in the third quarter of 2023, the third highest quarterly net purchase ever. In the first three quarters of 2023, global central bank gold demand increased by 14% year-on-year to a record 800 tons. Among them, China has increased its gold holdings for 11 consecutive months, becoming the largest gold buyer, with a cumulative increase of 181 tons in the first nine months, a historical high. Poland (57 tons) and Turkey (39 tons) are the second and third largest buyers, with another 8 central banks purchasing more than 1 ton. The main reasons for the global central banks' rush to buy gold are, on the one hand, when global inflation rises, gold is often a good tool to hedge against inflation, and on the other hand, central banks are reducing their reliance on the US dollar. The demand from global central banks has helped gold withstand the pressure from soaring US Treasury yields and a strong US dollar, and its price is currently hovering slightly below $2000 per ounce. Given the enthusiastic demand for gold from global central banks, John Reade, chief market strategist at the World Gold Council, said the association expects the annual total of official gold purchases to approach or exceed last year's 1081 tons. It is worth noting that although countries report gold acquisitions to the International Monetary Fund (IMF), the global flow of gold shows that the actual purchases of official financial institutions are much higher than the officially reported levels. The World Gold Council estimates that global bank purchases in the third quarter were 129 tons higher than officially reported, bringing the total official sector purchases to 337 tons. This total is more than double the previous quarter but down 27% year-on-year. Due to the previous surge in gold prices, gold stocks have collectively reported good news in their third-quarter reports. Shandong Gold's 2023 third-quarter report shows that the company's revenue in the first three quarters reached 41.323 billion yuan, a year-on-year increase of 3.75%; its net profit attributable to the parent company reached 1.345 billion yuan, a year-on-year increase of 94.12%. On October 28, Zhongjin Gold released its third-quarter performance announcement, stating that its revenue in the first three quarters of 2023 was approximately 45.555 billion yuan, a year-on-year increase of 13.78%; and its net profit attributable to shareholders of the listed company was approximately 2.072 billion yuan, a year-on-year increase of 32.5%. In addition to upstream mining companies, the performance of downstream retail companies is also rosy. Lao Fengxiang's third-quarter revenue reached 21.722 billion yuan, a year-on-year increase of 9.72%, and its net profit reached 692 million yuan, a year-on-year increase of 48.52%; Caibai's third-quarter revenue reached 4.009 billion yuan, a year-on-year increase of 25.45%, and its net profit after deducting non-recurring gains and losses attributable to the parent company reached 156 million yuan, a year-on-year increase of 44.98%. Caibai stated that the reason for maintaining high growth in performance in the first three quarters of 2023 is mainly due to the increased willingness of consumers to buy, coupled with the impact of the fluctuating upward trend of gold prices, which further stimulated consumer vitality and improved the company's sales. At the same time, the company actively expanded its stores, achieved sales growth, and continuously optimized the operation of its e-commerce platform stores, contributing to revenue. Regarding the long-term investment value of gold, the bullish view remains mainstream. Citigroup expects the gold market to bottom out at the end of the third quarter or early fourth quarter and enter above $2000 per ounce in 2024. Greg Shearer, executive director of global commodity research at JPMorgan Chase, said that the precious metals market is in a very favorable position and recommends long-term allocation of gold and silver (22.81, -0.03, -0.14%), with prospects playing out in 12 and 18 months. The bank expects gold prices to reach $2012 in the second half of this year and $2175 next year. Bart Melek, managing director and global head of commodity strategy at TD Securities, said: "I do believe that gold prices will rise to trading levels above $2100 by the end of 2023 and early 2024."
Time:
2023-11-03 08:58
Ye Mai Sui, a reporter for the 21st Century Business Herald, reports from Guangzhou. In the early morning of November 2nd, Beijing time, the Federal Reserve announced its November interest rate decision, keeping the target range for the federal funds rate at 5.25% to 5.5%, in line with market expectations. This marks the second time the Fed has paused rate hikes since September. Regarding the reasons for the pause, Fed Chairman Powell mentioned that the tightening of financial conditions brought about by rising US Treasury yields could affect the economy and inflation, and that higher interest rates also seem to be putting pressure on corporate capital investment. With the pressure on gold temporarily lifted, gold saw a slight rebound on November 2nd, maintaining a price near $1986 per ounce as of 5 PM Beijing time. The holdings of the world's largest gold ETF, SPDR, rose to 861.51 tons, up 2.02 tons from the previous day.
Gold ETF holdings rise
Tang Linmin, senior researcher at China International Futures, said in an interview with a reporter from the 21st Century Business Herald that the recent geopolitical risks in the Middle East, leading to safe-haven demand, is the main support for the strength of gold, and the Fed's softer stance compared to before is another major boost.
The statement from this Fed policy meeting is largely the same as the previous one, with two main changes: Firstly, it further confirmed the resilience of the US economy, changing the description of economic activity from "moderate" to "strong," and adding the qualifier "in the third quarter." Simultaneously, the description of the US labor market was changed from "slowing in recent months" to "slowing but strong since earlier this year." Secondly, the phrase "tightening of household and business credit and credit conditions" was changed to "tightening of household and business credit and financial credit conditions." These changes are minor adjustments and did not exceed market expectations. Coupled with the second consecutive pause in rate hikes, the market's overall reaction to the statement was dovish.
Following the Fed's remarks, market expectations for the end of the current rate hike cycle increased. Tang Linmin maintained his previous view that the Fed has completed this rate hike cycle and does not believe that discussing rate cuts is worthwhile at present. However, since the outcome of this meeting largely met expectations, the impact on gold, especially domestic gold futures, is relatively limited, mainly serving to strengthen bullish sentiment and relatively improve future upside potential. In the short term, gold still needs to focus on changes in risk aversion due to the evolving situation in the Middle East, and the upcoming release of the latest US non-farm payroll data.
Due to various intertwined news this year, gold's price has shown a W-shaped pattern, once breaking through its historical high to reach $2076.2 per ounce. However, due to the Fed's continuous aggressive interest rate hikes, gold was also suppressed to around $1800 per ounce. Recently, however, with the increasingly complex international situation, gold has regained its upward momentum, once surging above $2000 per ounce.
With the rise in gold prices (1992.79, -0.71, -0.04%), short-term funds have chosen to switch to long positions. As of the week ending October 24, net long positions for COMEX gold speculators increased by 48,815 contracts to 90,682 contracts.
Meanwhile, holdings of the world's largest gold ETF—SPDR—have also increased, with the latest holdings at 861.51 tons.
Global central bank gold buying spree
Another driver of gold price increases this year has been global central banks.
On October 31, the World Gold Council released its latest Global Gold Demand Trends report, showing that global central banks' net gold purchases in the third quarter of 2023 reached 337 tons, the third highest quarterly net purchase in history. In the first three quarters of 2023, global central bank gold demand increased by 14% year-on-year to a record 800 tons.
Among them, China has increased its gold holdings for 11 consecutive months, becoming the largest gold buyer, with a cumulative increase of 181 tons in the first nine months, setting a new historical high. Poland (57 tons) and Turkey (39 tons) were the second and third largest buyers, with another 8 central banks purchasing more than 1 ton.
The main reasons for the global central banks' gold rush are, on the one hand, gold often serves as a good hedge against inflation when global inflation rises, and on the other hand, central banks are reducing their reliance on the US dollar. The demand from global central banks has helped gold withstand the pressure from soaring US Treasury yields and a strong US dollar, with its price currently hovering just below $2000 per ounce.
Given the strong demand for gold from global central banks, John Reade, chief market strategist at the World Gold Council, said the council expects the annual total of official gold purchases to approach or exceed last year's 1081 tons.
It is worth noting that although countries report gold acquisitions to the International Monetary Fund (IMF), the global flow of gold indicates that the actual purchases by official financial institutions are far higher than officially reported. The World Gold Council estimates that global bank purchases in the third quarter were 129 tons higher than officially reported, bringing the total official sector purchases to 337 tons. This total is more than double the previous quarter but down 27% year-on-year.
The significant rise in gold prices earlier this year has resulted in strong third-quarter earnings reports for gold stocks. Shandong Gold's 2023 third-quarter report shows that the company's revenue in the first three quarters reached 41.323 billion yuan, a year-on-year increase of 3.75%, and its net profit attributable to the parent company reached 1.345 billion yuan, a year-on-year increase of 94.12%. Zijin Mining Group released its third-quarter earnings announcement on October 28, reporting revenue of approximately 45.555 billion yuan in the first three quarters of 2023, a year-on-year increase of 13.78%, and net profit attributable to shareholders of the listed company of approximately 2.072 billion yuan, a year-on-year increase of 32.5%.
In addition to upstream mining companies, downstream retail companies also saw strong performance. Lao Fengxiang's third-quarter revenue reached 21.722 billion yuan, a year-on-year increase of 9.72%, and its net profit reached 692 million yuan, a year-on-year increase of 48.52%; Caibai's third-quarter revenue reached 4.009 billion yuan, a year-on-year increase of 25.45%, and its net profit attributable to the parent company after deducting non-recurring gains and losses reached 156 million yuan, a year-on-year increase of 44.98%.
Caibai stated that the reason for the continued high growth in performance in the first three quarters of 2023 is mainly due to increased consumer willingness to buy, coupled with the fluctuating upward trend in gold prices, further stimulating consumer vitality and leading to improved sales. At the same time, the company actively expanded its stores, achieving sales growth, and continuously optimized the operation of its e-commerce platform stores, contributing to revenue.
The bullish view on the long-term investment value of gold remains mainstream. Citigroup expects the gold market to bottom out at the end of the third quarter or early in the fourth quarter and reach above $2000 per ounce in 2024.
Greg Shearer, executive director of global commodity research at JPMorgan Chase, said that the precious metals market is in a very favorable position, recommending long-term allocation to gold and silver (22.81, -0.03, -0.14%), with the outlook taking effect in 12 and 18 months. The bank forecasts a gold price of $2012 in the second half of this year and $2175 next year.
Bart Melek, managing director and global head of commodity strategy at TD Securities, said: "I do believe that gold will rise to trading levels above $2100 by the end of 2023 and early 2024."
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