Recently, supported by a series of factors such as rising market risk aversion, the price of gold has once again hit a historic high. At around 8am Beijing time on April 3rd, the COMEX gold futures contract (code: GC00Y) listed for trading on the New York Mercantile Futures Exchange rose above $2300 per ounce, setting a new historical record.
In my opinion, there are several reasons behind the significant increase in global gold prices in this round that deserve special attention.
Firstly, the first factor is the uncertainty brought about by international geopolitical conflicts and local regional turbulence regarding the prospects of global economic growth. At this time, the risk aversion in the global market is rapidly heating up, while the tendency to reduce other investments and consumer spending is increasing. Another factor is the inflation level in developed countries. At present, the US and European Central Bank has given up the option of continuing to raise interest rates very cautiously. Japan has also ended its negative interest rate policy not long ago, and has adjusted the policy direction of putting money into the market by purchasing a large number of treasury bond. However, it should be noted that in the past two years, it has mainly been the interest rate hikes by the US and European Central Banks that have tightened global liquidity. After the Federal Reserve recently released the expected signal of this year's interest rate cut, the market expects the tightening of liquidity to ease. So, from the previous two months of Bitcoin's "frenzy" as a way to address inflation challenges, to the recent battlefield of fund conversion to the gold market, it is actually liquidity factors that are at work behind it.
The third factor is that sovereign wealth fund investment strategies in some countries, including China, are currently facing adjustments. The structural optimization and adjustment of foreign exchange reserves have increased the demand for gold by global central banks, which is also a strategy adopted by many central banks to hedge against potential currency instability of the US dollar in the future. Due to the long-term decline of US Treasury bonds and the continuous increase in yields, the problem of US fiscal deficit is intensifying. The market expects that in order to address the deficit gap, the monetization of future fiscal deficits will further expand, thereby affecting the stability of the US dollar and causing the wealth returns of US dollar denominated financial assets to shrink to varying degrees.
So, a considerable number of investors in the global market have made adjustments to their asset allocation. Gold, as a natural attribute of reserve assets, naturally becomes a substitute for the weakening of the US dollar caused by the Federal Reserve's interest rate cuts this year. During this process, it is not difficult to find that a considerable number of Middle Eastern and Southeast Asian countries that have close economic and trade cooperation with China are increasingly using the renminbi as a safe asset due to the consideration of not putting eggs in the same basket, continuously increasing the proportion of renminbi reserve assets.
Finally, due to the unsatisfactory performance of global financial markets in recent years, coupled with the continued downward trend of the global economy, a considerable number of investors have seen their wealth shrink. Therefore, the market is expecting a new investment target to bring wealth effects. Recently, the market has seen the investment opportunities of gold, and its financial and monetary attributes have made the gold trend expected by the market. The greater the unilateral price rise of gold, the foam phenomenon will naturally occur, leading to the arrival of the adjustment period, which may also have a certain impact on the wealth value of these investors.
With the increase in consumption and investment, in an international environment of increased uncertainty, changes in gold prices may be linked to Bitcoin and the US dollar index. The above characteristics all reflect that the current risk aversion sentiment in the market is still relatively strong. Then, the problem of certain asset foam caused by investors' behavior of "covering their money bags" to avoid risks is also a risk factor that needs to be focused on at present. Therefore, in order to avoid the foam problem and the demand for wealth growth and risk aversion in the market, it is necessary to actively guide funds to invest in value investments that can develop for a long time, and truly reduce the impact of multiple uncertainties in the global market. Fundamentally, it is to optimize the financial ecosystem, return finance to the essence of serving the real economy, and achieve long-term healthy development.