Gold prices hit record high! Central banks of various countries buy, buy, buy!

TradeMax Global Markets

Driven by many factors such as strong consumer demand and exchange rate depreciation, domestic gold prices continue to hit new highs.

On Friday, the Shanghai Gold Futures Contract on the Shanghai Futures Exchange once hit 480 yuan/gram, setting a new historical high again. During the year, Shanghai gold futures rose by 15%, setting the best annual performance since 2019. The retail price of gold has risen above 600 yuan/gram, and gold jewelry continues to sell well.

Why can domestic gold prices reach new highs? As the price of gold continues to rise, whether a new round of gold bull market is coming has also attracted much market attention. Some institutions believe that after gold prices hit the largest internal and external price gap in history, domestic gold prices will remain strong in the short term, driven by asset shortages and the peak gold consumption season.

Boosted by two major factors, gold prices hit a new record high

In the first half of this year, driven by risk aversion brought about by various factors such as bank bankruptcy in the United States and the Federal Reserve's interest rate hikes, international gold prices continued to rise, reaching a record high of US$2,085 per ounce at one point.

As the liquidity crisis has been lifted, international gold prices have fallen from highs and are currently around US$1,930 per ounce. In contrast, domestic gold prices have performed strongly, hitting new highs all the way.

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On Friday, the Shanghai Gold Contract on the Shanghai Futures Exchange exceeded 480 yuan/gram for the first time in 13 years, setting another record high. It then fell back from the high and is currently oscillating around 470 yuan. During the year, Shanghai gold futures rose by 15%, also recording the best annual performance since 2019.

Yang Hong, chief researcher of precious metals at Ping An Futures Research Institute, said that there are two main reasons for Shanghai gold to hit new highs: First, the depreciation of the exchange rate of RMB against the U.S. dollar boosted the trend of RMB-denominated Shanghai gold; second, the strong domestic demand for gold pushed Increase domestic gold prices.

“In terms of the RMB exchange rate against the US dollar, due to the current domestic loose monetary policy to boost the economy, and the United States is in an interest rate hike cycle, the trend of Sino-US interest rate differentials has put the RMB under depreciation pressure, and the domestic economic recovery is weak. Trade data in August shows The domestic trade surplus has narrowed, and these factors have also increased the pressure for RMB depreciation." Yang Hong said.

At the same time, the rise in domestic gold prices has benefited from China's strong demand for gold and the central bank's vigorous gold purchases.

According to data from the China Gold Association, national gold consumption in the first half of this year was 554.88 tons, a year-on-year increase of 16.37%. Among them, gold jewelry accounted for 368.26 tons, a year-on-year increase of 14.82%, accounting for more than 60% of total consumption; gold bars and gold coins reached 146.31 tons, a year-on-year increase of 30.12%.

In terms of central bank reserves, according to data disclosed by the central bank, China's gold reserves stood at 69.62 million ounces (approximately 2165.43 tons) at the end of August, an increase of 930,000 ounces (approximately 28.93 tons) from the previous month, marking the tenth consecutive month that the central bank has increased gold reserves.

Gong Ming, a precious metals researcher at Jinrui Futures, said that gold is actually in a phase where the bad news is gradually being cleared: on the one hand, the Federal Reserve's high interest rates have lasted for a long time; on the other hand, under the strong economic resilience of the United States, the United States' high interest rate policy is expected to There is a certain degree of sustainability, and coupled with the continued strength of the US dollar, the trend of international gold prices is not very strong.

"But for Shanghai gold, it has hit new highs repeatedly. First, because Shanghai gold is denominated in RMB, the suppression caused by the strong US dollar has been greatly reduced. Second, for domestic funds, due to policy guidance since last year, individual investors have reduced the amount of money they can use through banks. The scale of gold investment through other channels such as products has increased, and the proportion of institutional investors has increased. Therefore, Shanghai gold investors are more rational, and their allocation may be more mid- to long-term. Recently, the internal and external market trends have been significantly differentiated. While the external market continues to fall, the internal gold price continues to strengthen , setting the largest internal and external price difference in history." Gong Ming said.

Global central banks record gold purchases, gold may continue to rise

As the price of gold continues to rise, whether a new round of gold bull market has arrived has also attracted much attention from the market.

Yang Hong pointed out that from the perspective of supply and demand fundamentals, the current gold supply is relatively stable and demand has increased significantly, especially the enthusiasm of global central banks to purchase gold. On the supply side, global gold supply will be 4,755 tons in 2022, a year-on-year increase of 1.28%. Global gold supply in the first quarter of 2023 was 856 tons, a year-on-year increase of 0.8%. The total global gold supply in the second quarter was 1,255 tons, a year-on-year increase of 7%.

In terms of demand, global gold demand in 2022 will be 4706.3 tons, a year-on-year increase of 18%, the highest in the past 11 years. Among them, gold jewelry manufacturing is the main demand, followed by gold bar and gold coin investment, accounting for an average of 47% and 26% respectively in the past ten years.

It is worth noting that the central bank’s demand for gold purchases has increased significantly in the past two years, especially in 2022, when the central bank’s gold purchases reached 1,135.69 tons, a new high in 55 years. In the first quarter of 2023, the central bank purchased 228 tons of gold, continuing to maintain a high level. In the second quarter of this year, global central bank gold purchase demand decreased to 103 tons compared with the same period last year, mainly due to the Turkish Central Bank selling a large amount of gold due to the domestic political situation and economic environment. However, even so, global central bank gold purchase demand still reached 103 tons in the entire first half of the year. A record 387 tons.

According to data from the World Gold Council, global central banks’ net purchases of gold reached 55 tons in July, and global official gold reserves continue to increase. In addition, data showed that China's gold reserves stood at 69.62 million ounces (approximately 2165.43 tons) at the end of August, an increase of 930,000 ounces (approximately 28.93 tons) month-on-month, marking the tenth consecutive month of increasing gold holdings.

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Looking to the future, Gong Ming believes that driven by the asset shortage and the peak gold consumption season, the internal gold price is expected to remain strong in the short term, and gold may be in a long-term bull market that will last for 2-3 years. In addition, against the background of generally high interest rates around the world, liquidity crisis and recession risks cannot be ignored. At the beginning of 2023, the market traded expectations of crisis and recession, but as the U.S. economic resilience has continued to exceed expectations this year, the market's sentiment towards the safe-haven value of trading precious metals has actually weakened. The current economic resilience of the United States mainly comes from the support of excess savings. There is a high probability that excess savings will be gradually exhausted in the third and fourth quarters of this year. Risk events that were previously concealed by faster economic growth are likely to be exposed at an accelerated pace. Gold is a safe haven. Value is likely to be taken seriously again.

In Yang Hong's view, for the international gold price, the price of gold is expected to fluctuate in the short term, and he will continue to be optimistic about gold in the medium and long term. On the one hand, the Federal Reserve's interest rate hike cycle is coming to an end. On the other hand, the pressure on the U.S. economy to recession is still high. The New York Fed estimates that the probability of the U.S. economy falling into recession in the next 12 months is 66%.

“The current fiscal expansion in the context of high interest rates in the United States has worsened the U.S. fiscal situation and has been downgraded by Fitch. At the same time, the U.S. banking industry is still facing risks. The three major rating agencies have downgraded dozens of U.S. banks; the U.S. economic recession and financial Risks in the system will boost the safe-haven demand for gold; at the same time, the continued high gold-buying demand from global central banks will also be positive for gold prices in the medium to long term."