Gold prices hit a new high! What's the outlook for ETFs with over 40% unrealized gains?

Gold prices hit a new high again! On July 17, Beijing time, the London cash price hit a new high of $2482.14 per ounce, just a step away from the $2500 mark. Looking at the longer term, gold prices have successively broken through the $2100, $2200, $2300, and $2400 levels since 2024. As a result, the year-to-date return of gold stock ETFs has exceeded 40%, and the returns of ETFs investing in gold spot contracts have mostly reached double digits.

Public fund analysts believe that the expectation of a Fed rate cut and risk aversion are the key reasons for the recent rise in gold prices, and the investment logic for gold has gradually shifted from short-term hedging needs to the medium- and long-term interpretation of the Fed's rate cuts. During the Fed's rate cut cycle, the central price of gold is expected to continue to rise.

Four levels broken in 2024

From the trend of London gold, the recent steady rise in gold prices began at the bottom in June this year. On June 26, the closing price of gold was $2298.16 per ounce. Subsequently, gold prices steadily climbed, first breaking through the $2300 mark, then the $2400 mark, and as of 4 pm, Beijing time, July 17, the intraday price has broken through $2480, setting another record and heading towards the $2500 mark.

In fact, the trend of gold prices has been accelerating in recent years, and the time interval between each "new record" is shortening. Specifically, the gold price first broke through the $2000 mark in August 2020, then entered a period of volatile decline, and then stood above $2000 again in March 2022. After that, the gold price experienced a period of about six months of volatile downward trend, then resumed its upward trend, and broke through the $2000 mark again in April 2023, only about 13 months after the last time it broke through this level. Since then, the gold price has been operating at a "high level" above $2000, especially in March 2024, successively breaking through the $2100 and $2200 levels, breaking through the $2300 level in April, and breaking through the $2400 level in May.

Most ETFs investing in gold assets have captured the returns from this market trend. Tencent iFinD data shows that there are currently 14 gold-themed ETFs in the entire market. In terms of year-to-date returns, ETFs tracking gold stock-related indices have seen the most significant returns.

Among them, the gold stock ETFs under Hua Xia Fund and Yong Ying Fund track the CSI Shanghai-Shenzhen-Hong Kong Gold Industry Stock Index. This index selects 50 securities of listed companies with larger market capitalization and businesses involving gold mining, smelting, and sales in the mainland and Hong Kong markets as index samples, reflecting the overall performance of securities of listed companies in the gold industry. As of July 17, the year-to-date returns of Hua Xia Gold Stock ETF and Yong Ying Gold Stock ETF exceeded 40% and 30%, respectively. Since the gold stock ETFs under Guotai Fund, Hua An Fund, ICBC Credit Suisse Fund, and Ping An Fund were established after April this year, their year-to-date returns are only in the single digits.

Secondly, ETFs investing in gold spot contracts have also mostly achieved double-digit returns this year. Among them, the year-to-date returns of gold ETFs under public funds such as Yi Fangda Fund, Boshi Fund, and Qianhai Kaiyuan Fund have all exceeded 18%, and the return of the Jianxin Shanghai Gold ETF under Jianxin Fund is about 18%.

Fed rate cut expectations and risk aversion are key

The rise in gold prices is multi-factorial, but the dominant factors at different stages vary.

Overall, Fuguo Fund stated that the rise in gold prices mainly comes from two levels: firstly, the upward shift in the central price caused by the continuous gold purchases by global central banks under the expectation of a US dollar credit crisis; secondly, the significant rise in gold prices brought about by the easing in the context of previous Fed rate cuts. The market is currently still waiting for further confirmation of rate cuts, and gold prices remain volatile, but the long-term trend remains unchanged.

However, for this latest round of gold price trends, the expectation of a Fed rate cut and risk aversion are key. Wang Xiang, fund manager of Boshi Gold ETF, told Securities Times reporter that the better-than-expected decline in US June CPI data last week (July 8-12) further removed obstacles to the Fed's rate cut, and international gold prices rose above the $2400 level under this support. The unexpected event in the US last weekend may bring greater volatility to subsequent gold prices, or amplify the reflation logic of overall commodities in the medium term, and the potential upside for gold may also open up.

Noah Fund analyzed that in addition to US monetary policy, changes in other central bank monetary policies and potential financial market fluctuations, as well as ongoing geopolitical risks, may increase the demand for gold allocation, "The investment logic for gold has gradually shifted from short-term hedging needs to the medium- and long-term interpretation of the Fed's rate cuts, showing a volatile upward trend."

In the view of Liang Pusen, fund manager of Qianhai Kaiyuan Gold ETF, the main driving force behind the rise in gold prices this year is not the financial attribute of gold, but its monetary attribute. Liang Pusen analyzed to the Securities Times reporter that gold and the US dollar have substitutability and usually show a certain inverse relationship. Based on the current controversy surrounding the US dollar system, central banks' purchase of gold as reserve assets has greatly boosted gold prices, and the core logic is that the US dollar's purchasing power has been significantly diluted in recent years due to the Fed's accelerated printing of US dollars.

Central price is expected to continue to rise

As the price approaches the $2500 per ounce mark, can gold prices continue to climb? Public fund forecasts show that after reaching a high level, gold prices may coexist with short-term volatility and long-term upward space. Wang Xiang believes that although the potential upside for gold may open up, this is not conducive to the short-term Fed policy, which may cause the easing to be further delayed, and the overall volatile tone of gold prices may be difficult to change.

"Gold and gold stocks may still have room for upside." Liu Tingyu, fund manager of Yongying Gold Stock ETF, analyzed to the Securities Times reporter that from a fundamental perspective, the continued decline in inflation and the rise in unemployment indicate that the conditions for the Fed to cut interest rates have gradually matured. Judging from previous rate cuts, gold returns have been very considerable before and after the Fed's rate cuts, and if the Fed cuts interest rates in the future, it may start a new round of main upward trend for gold. Secondly, from a trading perspective, Liu Tingyu believes that the holdings of the largest gold ETF (SPDR) and the net long positions of the most active gold futures (COMEX) are still far from their historical highs, and it is difficult to say that gold has reached its peak; in addition, the trend of global central bank gold purchases is expected to continue to provide long-term support for gold. From a geopolitical perspective, international geopolitical games are becoming increasingly intense, and geopolitical disturbances in the global election year may lead to a temporary increase in risk aversion.

Liang Pusen believes that the continuously increasing demand for gold is the basic support for the current gold price. He specifically stated that the gold purchasing behavior of central banks is relatively sustainable. The World Gold Council's "2024 Central Bank Gold Reserves Survey" shows that 81% of surveyed central banks believe that the global central banks' gold holdings will increase in the next 12 months, and the central price of gold is expected to continue to rise during the Fed's rate cut cycle.

In addition, mining costs also support gold prices. Liang Pusen pointed out that as humans continue to mine gold, the difficulty of mining increases, and the lower grade of gold mines also leads to rising mining costs. Continued cost inflation and tight labor markets will also continue to put pressure on gold mine operating costs. In the fourth quarter of 2023, the average all-in sustaining cost (AISC) of gold mining in North America increased by 2% quarter-on-quarter, "The continued increase in mining costs makes us optimistic about the gold price trend in the medium and long term."

For publicly listed gold companies, mining costs are related to operating performance. Liu Tingyu frankly stated that judging from the first quarter report of 2024 and the mid-year performance forecast, the performance of listed companies in the gold industry chain is eye-catching. The rise in gold prices has stimulated gold mining companies to increase capital expenditures, and subsequent production growth is expected. Companies in the gold industry chain may have entered a "Davis" double-click cycle of both volume and price increases.