With foreign central banks tapering treasuries, gold's appeal is rising again

On December 16, U.S. Treasury yields rose sharply. The 10-year U.S. Treasury yields fluctuated 4.43 basis points in the short-term, reaching a maximum of 1.4684%. The current daily increase is about 2.7 basis points. The 2-year U.S. Treasury yield soared nearly 5.0 basis points in the short-term after the Fed’s decision was issued, reaching a daily high of 0.7155%, while the U.S. Treasury Department’s $60 billion 30-year and 5-year Treasury bonds won the bid for yields a week ago. The rate is higher than the pre-issuance rate of return, and it is the lowest bid-winning level since January, showing slow sales.

Although interest rates in the United States may rise, the price of gold is still rising. On December 17, spot gold stood at US$1,800 per ounce, the first time since November 30.

According to a report by Jim Reid, a senior analyst at Deutsche Bank, at present, in the U.S. bond market, 85% of U.S. bond products of various maturities, including high-yield junk bonds, have a negative actual yield, which is lower than The current inflation rate.

In addition, according to the latest international capital flow report released by the U.S. Department of the Treasury on December 16 (the official data of U.S. debt is subject to a two-month delay convention), foreign capital, including global central banks, sold 43.5 billion U.S. dollars in October. U.S. Treasuries, this is the largest capital outflow since May of this year. Among them, global central banks have reduced their holdings of U.S. Treasuries for the sixth consecutive month.

It is worth noting that the US Treasury Department’s report shows that after a small increase of US$600 million in September, China increased its holdings of US$17.8 billion in U.S. Treasury bonds in October, increasing its holdings of US Treasury bonds to 10.65 million. Billion US dollars, ending August’s substantial reduction of US$21.3 billion in holdings. In August this year, China’s holdings of US debt hit the lowest level since 2010, but China’s US debt holdings are still at a low value, close to July 2021 The level of the month.

According to data from the U.S. Treasury Department, overall, in the first 10 months of 2021, China has reduced its holdings of U.S. debt by 6.9 billion US dollars. In the month, I reduced my holdings of U.S. Treasuries, amounting to US$53 billion. In addition to the substantial reduction in August, the other two substantial reductions in US Treasuries were in May and June, reducing holdings of US$17.7 billion and 165 billion respectively. One hundred million U.S. dollars.

At the same time, Japan also substantially purchased US$20.8 billion in U.S. debt in October, increasing its scale to US$1.32 trillion, a record high. In addition, the United Kingdom and Ireland each increased their holdings of US$14 billion in US debt. Since March 2020, the supply of U.S. bonds has continued to soar. The high inflation and the downward trend of the U.S. dollar index that have continued for several months have devalued U.S. dollar debt assets and significantly reduced their attractiveness.

What worries the market the most is that the Fed, the largest purchaser of U.S. debt, has also reduced its purchases of U.S. debt since November, and has just announced a double reduction in U.S. debt. With the arrival of the Fed’s quantitative easing tightening phase, if 3 Months later, the Fed gradually withdrew from the final buy order, so the global central banks that chose arbitrage at the beginning may face a shift in demand for U.S. bonds. In fact, since March last year, the U.S. federal debt deficit has rapidly expanded and the zero interest rate policy has been implemented. The real yield of the 10-year U.S. Treasury bond, which is the anchor of global asset prices, is even more negative. (For specific data, please refer to the figure below. ), resulting in a decrease in attractiveness.

It is against these backgrounds that some smart international funds have begun to be transferred from the US asset market to replace non-dollar assets such as gold, which shows that gold is returning from the edge of currency history to hedge the risk of US debt exposure. According to the data provided to us by the IMF and the World Gold Council, we have noticed that the exchange trend from bonds to gold has continued in recent months.

According to the latest report released by the World Gold Council on December 10, in November, global gold ETF net inflows were 13.6 tons (approximately US$838 million, AUM increased by 0.4%), and the total global gold ETF holdings rebounded to 3,578 tons ( (Approximately US$208 billion), the world’s official gold reserves total 35,582.3 tons. According to data, in the first three quarters of 2021, the global central bank’s net purchases of gold reached 393 tons. It is worth noting that according to the latest "Global Gold Demand According to the report, in the third quarter of 2021, China's gold consumption and investment demand will also see an explosive growth, and gold imports will rebound significantly.

The report shows that in the third quarter of 2021, China’s total gold imports reached 228 tons, a year-on-year increase of 300%. This also brought China’s total imports from March to September 2021 to 513 tons, and the demand for gold jewellery reached 157. Tons, a year-on-year increase of 32%, and the total sales volume of gold bars and gold coins reached 65 tons, a year-on-year increase of 12%.

In this regard, Wall Street veteran, well-known economist Jim Rickards, author of the American "Currency War", also believes that this is not surprising. Before the system, gold has been flowing to the US market. According to the latest report released by the World Gold Council in November, gold still plays the role of an anchor of trust in the currency and the global financial system, while the U.S. dollar cannot do this in the long run under the high inflation environment of the United States, which continues to release water. This may really prompt non-dollar countries to develop their own digital currency trading systems backed by gold, oil, and national currencies as soon as possible.