Editor's note: Recently, international gold prices have experienced significant fluctuations, dropping from a historic high of US$4,300 per ounce on October 20 to below the US$4,000 mark, where they have since been hovering. What factors have triggered this volatility, and will the upward trend in gold prices come to an end?
【Anchor】Hello everyone, welcome to DDN Business Insider. I am Yunfei Zhang. Recently, international gold prices have experienced significant fluctuations, dropping from a historic high of US$4,300 per ounce on October 20 to below the US$4,000 mark, where they have since been hovering. What factors have triggered this volatility, and will the upward trend in gold prices come to an end? To discuss these issues, we have invited Professor Jing Chuan, economist and guest professor at Xi'an Jiaotong University, along with Yang Delong, chief economist of First Seafront Fund.
First, I'd like to ask Mr. Yang about the reasons for the recent sharp pullback in gold prices.
【Yang】The recent significant pullback in gold prices can be attributed to several factors. On one hand, the easing of international tensions, such as the potential for negotiations to end the Russia-Ukraine conflict, has reduced safe-haven demand. Additionally, substantive progress in the Sino-U.S. trade negotiations, including a meeting between Chinese and U.S. leaders at the end of the month during the OPEC meeting in South Korea, has alleviated investor concerns regarding trade disputes. These developments have acted as key catalysts for the decline in gold prices. Fundamentally, however, the sharp rise in international gold prices earlier this year created substantial profit-taking opportunities. Gold prices surged over 50% from around US$2,900 per ounce at the beginning of the year. This significant profit-taking has led to a technical correction. While this adjustment is a normal phenomenon, the rapid pace and extent of the recent market correction have exceeded many expectations.
Despite this, the underlying logic for gold prices rising remains unchanged. The U.S. government's debt has surpassed US$38 trillion, hitting a new historical high. Due to the inability of both parties to reach a consensus on the debt ceiling, the U.S. government has been in a shutdown since October 1, raising doubts about the creditworthiness of the U.S. government. The long-term logic for rising gold prices remains intact, and after a period of decline, gold prices may return to an upward trend.
【Anchor】Thank you. Now, how does Professor Jing view the reasons for the fluctuations in gold prices, and is the current volatility within a reasonable range?
【Jing】The recent sharp pullback in gold prices has complex causes. The rapid rise in gold, followed by this decline, is driven by market dynamics. Earlier this year, after hitting US$3,500, the market entered a four-month period of fluctuating conditions. At the same time, the buying activity of central banks, which has been a major force in gold buying over the past three years, has shown signs of weakening. Additionally, there has been a significant increase in global ETF inflows, indicating a rise in speculative activity, which has also led to increased leverage and a noticeable rise in gold leasing interest rates. This shift in speculative sentiment has resulted in heightened volatility in the gold market.
Furthermore, the recent interactions between high-level officials from China and the U.S. have released signals of easing tensions, and progress in ceasefire negotiations regarding the Russia-Ukraine conflict has also emerged. The two parties in the U.S. are nearing consensus on the budget, reducing geopolitical and policy uncertainties, which have driven down the risk premium for gold.
It's also worth noting that gold reached a historical high during its continuous rise, showing technical signs of being overbought. Short-term investors chose to realize profits, increasing selling pressure and contributing to the adjustment in gold prices. Although gold prices have seen a significant pullback, this adjustment can be viewed as a normal phenomenon within the market's operational rhythm. Previously observed upward trends driven by speculative positions were not sustainable.
【Anchor】Mr. Yang just mentioned that gold prices still have room for long-term growth. What specific factors are you considering?
【Yang】Currently, the U.S. government needs to pay over US$1 trillion in interest on its national debt each year. This has raised concerns among many investors about the increasing burden of U.S. government debt, potentially leading to a significant depreciation of the dollar's value in the future. The devaluation of fiat currencies is a key driver behind the long-term rise in gold prices. Additionally, with the ongoing internationalization of the renminbi, the dollar's position in international payments is eroding. These factors are all critical in driving gold prices upward.
From the demand side, many central banks, including the People's Bank of China, have significantly increased their holdings of physical gold to replace U.S. Treasury bonds, which has, to some extent, boosted demand for gold.
【Anchor】Alright, how does Professor Jing view the future trend of gold prices?
【Jing】Overall, this adjustment will not fundamentally damage the long-term bull market for gold. Currently, it seems that the first phase of the adjustment is basically complete, and there may be a short-term rebound. However, there is still the possibility of further declines. The easing of geopolitical tensions appears to have some sustainability. The dollar, supported by relative economic resilience and interest rate differentials, still has some backing, and the rise in real interest rates has not fully alleviated the pressure. Therefore, there is still short-term pressure on gold prices. However, the crisis regarding U.S. national debt has not been resolved, the government shutdown is ongoing, and the Russia-Ukraine conflict has not fully ended. The weakness in dollar credibility is likely to persist for some time, with long-term factors remaining the main foundation supporting the gold bull market.
【Anchor】Given the significant fluctuations in gold prices recently, will its property as a safe-haven asset be temporarily weakened?
【Yang】Theattributeof gold as a safe-haven asset will not be weakened. In fact, it may attract even more attention from investors. Many investors may take the opportunity to buy gold at lower prices during this adjustment. If international gold prices stabilize or rebound significantly in the future, the precious metals sector could also follow suit. Investors can seize this opportunity to position themselves. In the long run, gold's investment value remains promising. Gold is a natural currency, and its value has been recognized by humanity for thousands of years. In contrast, the dollar's status as a fiat currency has only about a century of history. As doubts about U.S. government credit arise, the long-term upward trend in international gold prices will not change. More investors will likely choose to allocate gold, silver, and other precious metals for value preservation and appreciation, and this trend is unlikely to change significantly.
【Anchor】Professor Jing, what are your thoughts on this?
【Jing】The property of gold as a safe-haven asset has not been weakened. Against the backdrop of a restructuring global trade system and currency credit system, the trend of de-dollarization and central banks' gold-purchasing activities has not significantly changed. This will continue to support the demand for gold as a safe-haven asset and its investment properties.
【Anchor】Although gold prices have recently experienced a pullback, they remain at relatively high levels. What risks should be noted for the gold market moving forward?
【Yang】Historical experience with international gold prices indicates that a bull market for gold tends to be relatively short-lived, with prices rising very quickly. Conversely, when a bear market begins, it can last for years. Therefore, investors need to be mindful of market rhythms. There are no assets that only rise without ever falling, nor are there assets that only fall without ever rising. The primary factor driving the recent drop in gold prices is the excessive short-term increase.
【Anchor】Alright, Professor Jing, what risks do you think are worth paying attention to in the gold market?
【Jing】The Federal Reserve's interest rate decisions and the direction of monetary policy will continue to significantly impact gold prices. Regarding geopolitical issues, although there has been some easing of tensions currently, it is still worth monitoring whether the situation will fluctuate again. Additionally, changes in economic data will continue to affect expectations for gold demand. We have also seen a substantial increase in ETF investments, and the uncertainty around market sentiment and expectations may lead to increased volatility in gold prices in the near future.
【Anchor】Moreover, other precious metals like copper and aluminum have also seen price pullbacks recently. What are the similarities and differences between the factors driving these pullbacks and those affecting gold prices? For investors, is it now a good time to enter the market, or should they watch for key indicators or events before making investment decisions, Professor Jing?
【Jing】Under the common financial attributes driving non-ferrous metals, with the gold-silver ratio and gold-copper ratios constantly climbing, the rise and adjustment of gold prices will bring certain adjustment opportunities for these metals. Meanwhile, the continued rise in gold prices is expected to provide support or a driver for silver and non-ferrous metals in the future. After this round of adjustments, a new entry opportunity will emerge. It is advisable to build positions gradually or through dollar-cost averaging investment. Key factors to focus on include the Federal Reserve's policy guidance, changes in geopolitical situations, global economic data, and market capital flows. Given that gold prices have already experienced a huge increase, investors should still pay attention to market sentiment and the uncertainties surrounding predefined and market expectations. Changes in macroeconomic data and the complexity of geopolitical risks are still worth our attention. Overall, despite the noticeable pullback in gold prices, the market generally believes that the medium-to-long-term trend remains positive. Central banks around the world remain the main driving force behind the gold bull market. Investors should make appropriate decisions based on their own risk preferences and asset allocation needs, while closely monitoring changes in relevant indicators and events.
【Anchor】Alright, Mr. Yang, do you think now is still a good time to allocate to gold assets?
【Yang】From a medium-to-long-term perspective, the upward trend remains unchanged. Investors can appropriately allocate gold assets based on their risk preferences and the situation of their investment portfolios. Attention can be paid to physical gold, paper gold, and gold ETFs. Allocating some holdings to gold assets to hedge against the risk of fiat currency devaluation remains an effective investment strategy.
【Anchor】OK, thank you to all the guests. That's all for this episode. Remember to follow us on YouTube or download our APP. I'm Yunfei Zhang, thanks for watching, and see you next time.
Anchor: Laura Cheung | Edited: Kelly Yang, Laura Cheung, Rachel Liu | Translate: Kato Ip | Proofread: Chris Liu
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