As of October 4, 2024, the gold price in London has risen by 3.3% since the Federal Reserve's interest rate cut on September 18, and has accumulated a 28.6% increase this year. The strength in gold prices is not entirely attributed to the Federal Reserve's rate cut. Typically, a rate cut by the Federal Reserve is favorable for gold prices to rise. However, considering that gold prices had already shown significant strength before this round of rate cuts, the robust performance after the rate cut still exceeded expectations. In the month prior to this round of rate cuts, the 10-year U.S. Treasury futures price and the U.S. Dollar Index rose by 1.5% and fell by 1.4%, respectively, which roughly matched the 2.5% increase in the spot price of London gold. However, in the 13 trading days following the rate cut, the 10-year U.S. Treasury prices weakened (the 10-year Treasury yield rebounded by 33 basis points, and the real interest rate rebounded by 22 basis points), and the U.S. Dollar Index rose by 1.5%, which cannot fully explain the 3.7% increase in gold prices. Moreover, although short-term U.S. Treasury interest rates once fell, their boost to gold prices was also relatively limited.
Gold benefits from the decreased attractiveness of U.S. Treasuries. Since 2022, the traditional negative correlation between gold prices and the 10-year U.S. Treasury real interest rates has continued to weaken, overall presenting a "gold strong, bonds weak" pattern. Traditional analytical frameworks based on the U.S. dollar system, such as the Gold Price Return Five Factors Model (GRAM) by the World Gold Council, struggle to explain the degradation of the correlation between gold prices and U.S. Treasuries. Since 2022, the "overshooting" of gold prices reflects market concerns about U.S. fiscal policy and the credit of the U.S. dollar. Since 2024, the U.S. government debt has continued to expand, with the interest payment pressure rising rapidly, and the upcoming presidential election does not change the prospect of fiscal expansion. Recently, concerns about U.S. fiscal issues have been intensifying: firstly, the U.S. government is facing the risk of another shutdown, with fiscal risks prompting a warning from Moody's; secondly, geopolitical tensions in the Middle East and other regions continue to escalate, with the conflict between Lebanon and Israel intensifying, leading to expectations of increased U.S. military spending. Current speculative positions indicate that gold is more favored by investors compared to U.S. Treasuries. Due to the U.S. Treasury market being much larger than the gold market (in the past five years, the ratio of the increase in gold demand to the increase in U.S. Treasury supply and overseas demand is only 0.5% and 3.1%, respectively), the spillover funds from the U.S. Treasury market (or the reduction in inflow funds) may have a significant pulling effect on the gold market.
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Gold prices may face short-term adjustment risks. Against the backdrop of the Federal Reserve's interest rate cuts, gold has been more attractive than U.S. Treasuries in this round, making gold有望表现更加强劲. However, gold prices may face certain adjustment risks in the short term. First, the crowded long positions in gold may affect the sustainability of gold price increases due to "fear of heights." The proportion of non-commercial long positions in COMEX gold has been maintained above 60% since June. In the past two decades, this proportion has not been above 60% for long, and the longest duration did not exceed four months. Second, the recent rebound in U.S. Treasury interest rates has gradually accumulated pressure on gold prices. Although the correlation between gold prices and U.S. Treasury (real) interest rates is not as strong as before, it has not disappeared. Finally, with the improvement of China's economic prospects, the demand for gold allocation by Asian funds may cool down. Since March of this year, as the 10-year Chinese government bond yield broke below the 2.3% threshold, gold prices once accelerated their rise. This was due to a significant increase in the demand for gold allocation in China and the Asian region. With the significant implementation of China's stable growth policies, Asian funds that were actively allocating gold are expected to flow back to China, which may trigger an adjustment in gold prices.
As of October 4, 2024, the gold price in London has risen by 3.3% since the Federal Reserve's interest rate cut on September 18, and has accumulated a 28.6% increase this year. At the same time, the 10-year U.S. Treasury interest rate and the U.S. Dollar Index did not fall, and the strength in gold prices cannot be entirely attributed to the Federal Reserve's rate cut. We believe that the sustained strength in gold prices reflects market concerns about U.S. fiscal policy and the credit of the U.S. dollar, thereby making gold more attractive than U.S. Treasuries. Recently, the U.S. government faced another shutdown, coupled with the escalation of geopolitical tensions in the Middle East, further intensifying market concerns about U.S. fiscal and debt issues. Looking ahead, gold is expected to perform more strongly in this round of the U.S. interest rate cut cycle, but considering the current crowded speculative positions, the recent rebound in U.S. Treasury interest rates, and the potential cooling of Asian allocation demand with the improvement of China's economic prospects, gold prices may face certain adjustment risks in the short term.