Based on the logic of interest rate cuts, global economic slowdown, central banks continuing to buy gold, and increasing geopolitical risks, the bank believes that gold is still not fully priced, and that its price center in 2024 still has considerable room for growth.
The Zhitong Finance app learned that CITIC Securities published a research report saying that although from the perspective of fundamentals and expectations, the decline in US bond interest rates and the rise in gold prices will still be the main logic of 2024, on the one hand, the increase in gold prices in this round was quite large, reflecting some of these favorable factors in advance. Moreover, it has broken out of a downward trend. On December 5, the COMEX gold futures closing price reached 2019.6 US dollars/ounce. On the other hand, the bank expects that the Fed still does not want market expectations to break anchor. There is a risk that the Fed will once again correct market expectations through forward-looking guidance in the future. The possibility that interest rates on 2-year and 10-year US Treasury bonds will rebound slightly in the short term after this round of rapid decline is not ruled out. Therefore, the price of gold is expected to show a volatile trend in a short period of time.
This time, COMEX gold was suppressed by the 5.25% high federal funds rate, and only due to changes in expectations at the time of interest rate cuts, the bank determined that the gold pricing model was changing. Based on the logic of interest rate cuts, global economic slowdown, central banks continuing to buy gold, and increasing geopolitical risks, the bank believes that gold is still not fully priced, and that its price center in 2024 still has considerable room for growth.
The main views of CITIC Securities are as follows:
Incidents:
On December 1 (last Friday), COMEX gold futures closed at $2073.2 per ounce, breaking the historical high of $2058.3 per ounce on August 6, 2020. Then, on December 4 (this Monday), it once broke through $2150 per ounce in the intraday period. The current price of gold in London also hit 2,144 US dollars/ounce in the intraday period. Gold prices then declined.
The direct reason why the price of gold has broken through a record high this time is that the market's expectations of the Fed's interest rate cut have changed rapidly.
2-year US bonds are highly correlated with the Fed's monetary policy expectations, and can be viewed as the result of the market's comprehensive expectations of changes in policy interest rates within the next two years. In the trading day of the week from November 27 to December 1, interest rates on 2-year US Treasury bonds suddenly fell by 36BP to 4.52%, with a one-day decline of 17BP on December 1. It generally fell back to the beginning of June this year, and the market's expectations of the Fed's monetary policy turned to hawkish initial levels. Also, the Chicago Mercantile Exchange's FedWatch tool shows that the market expects the Fed to start cutting interest rates on December 1 was brought forward from the May interest rate meeting a week ago to March.
The immediate reason for the rapid change in market expectations of the Fed's monetary policy is that Powell's speech on December 1 was interpreted as more dovish.
Although Powell still repeated some common hawkish statements, such as “It is still too early to confidently assume that we have reached a sufficiently restrictive position, or to speculate when the policy may relax. We are prepared to further tighten our policies if appropriate.” However, in the speech, more emphasis was placed on policy balance, and the market chose to pay more attention to this part of the content. For example, “the Federal Open Market Committee has acted quickly and profoundly in the past, and insufficient austerity and excessive (bilateral) risks are being balanced, so the current actions are more cautious.”
This round of rising gold prices is a clear trend shaped by many reasons, and the favorable factors have not yet been fully realized.
(1) Hawkish expectations about the Federal Reserve have gradually decayed. Since the last rate hike in July this year, the Federal Reserve has continuously tried to revise expectations that interest rate cuts will begin too soon by releasing hawkish signals and games with the market. However, the Fed's effective guidance on market expectations began to fail after interest rates on 10-year US Treasury bonds broke through 5% at the end of October and turned downward. Therefore, after the brief increase in gold prices caused by the escalation of the conflict between Palestine and Israel ended, gold prices continued to have a positive impact on rising expectations of interest rate cuts.
(2) Recently, the market's medium- to long-term outlook for the US and the global economy has turned pessimistic. The market expects that it will be difficult for the long-term inflation center of the US to return to pre-pandemic levels. The endogenous growth rate of the economy tends to slow down, the real interest rate level is expected to be low, and the credit risk of US sovereign debt is rising. These changes in expectations are all important factors that benefit gold.
(3) Central bank gold demand is strong. The price of gold is not entirely determined by market transactions, supply and demand; the central bank system has always played a very important role. Currently, the total demand for gold from central banks around the world is still huge. According to statistics from the World Gold Council, the net purchases of central banks around the world reached 800 tons in the first three quarters of 2023, exceeding the net purchase volume for all full years up to 2022.
(4) The uncertainty of the geopolitical situation has increased extremely. Since 2022, the market's demand for gold to hedge against extreme risk situations has continued to grow.
We believe that the price of gold may show a volatile trend in the short term.
Although analysis from the perspective of fundamentals and expectations, the decline in US bond interest rates and the rise in gold prices will still be the main logic of 2024, on the one hand, the current round of gold price increases was quite large, reflecting some of these favorable factors in advance. Moreover, it has broken out of a downward trend. On December 5, the COMEX gold futures closing price reached 2019.6 US dollars/ounce. On the other hand, we expect the Fed to still not want market expectations to break anchor. There is a risk that the Fed will once again correct market expectations through forward-looking guidance in the future. The possibility that interest rates on 2-year and 10-year US Treasury bonds will rebound slightly in the short term after this round of rapid decline is not ruled out. Therefore, the price of gold is expected to show a volatile trend in a short period of time.
In 2024, gold still has good value for going long.
This time, under the pressure of the 5.25% high federal funds rate of COMEX gold, the highest price in history has been updated simply due to changes in expectations at the time of interest rate cuts. We judge that the gold pricing model is changing. Based on the logic of interest rate cuts, global economic slowdown, central banks continuing to buy gold, and increasing geopolitical risks, we believe that gold is still not fully priced, and that its price center in 2024 still has considerable room for growth.
Risk Factors:
The Fed's monetary policy falls short of expectations; the bilateral risk of a US recession or soft landing; and geopolitical risk disturbances.