Gold has gone crazy again.
On October 18th, COMEX gold futures prices surged again by 1.07%, climbing to $2736.4 per ounce. This is the first time in the history of gold that it has broken through the $2700 mark, with a cumulative increase of 32% since the beginning of the year, and it is the 34th time this year that it has set a new historical high.
The gold jewelry market is rising rapidly. According to media reports, the domestic gold jewelry prices announced by Chow Tai Fook, Chow Liu Fook, and Chao Hong Ji on the 19th have exceeded 800 yuan/gram, setting a new high.
Faced with such an extremely rare market trend, many investors have bluntly stated that they can no longer understand gold at all, and it seems that no matter what the news is, it has turned into a bullish trend. So, how to seize potential investment opportunities in gold?
01
From a medium to long term perspective, the main pricing logic for gold includes real interest rates and global central bank gold purchases. From the perspective of the short to medium term, gold is susceptible to the hedging effect brought about by rising geopolitical risks.
Recently, the global geopolitical situation has been quite tense. On the one hand, there are signs of expansion in the conflict situation of the Middle East war. Firstly, Israel recently killed Hamas leader Sinwar. Secondly, the conflict between Lebanon and Israel is intense, and Hezbollah has issued a statement stating that "the confrontation with Israeli enemies has entered a new stage of escalation." Thirdly, US media recently reported that Israel's plan to attack Iran is "ready.
On the other hand, the situation on the Korean Peninsula has deteriorated. In addition to the tense relations between North and South Korea, according to the South Korean intelligence agency, the National Intelligence Service, North Korea has decided to send four brigade sized special forces soldiers to Russia to participate in the war, with a total of 12000 personnel.
The deterioration of the situation in the Middle East and the Korean Peninsula is the biggest driving force behind the sustained rise of gold prices in recent days. Of course, the surge that began in July this year is also closely related to the main pricing factor of gold - the real interest rate.
According to terminal displays, US real interest rates have been on a downward trend since July, while gold has maintained an upward trend. Real interest rates are starting to weaken, due to signs of weakness in core macroeconomic data such as non farm payroll employment in the United States, leading to a cooling of the US economy. Against this backdrop, the Federal Reserve achieved its first interest rate cut in four years on September 18th, with a magnitude of up to 50 basis points, exceeding market expectations.
The Federal Reserve also expects the federal funds rate to be 4.4% by the end of 2024, 3.4% by the end of 2025, and 2.9% by the end of 2026. There is no turning back from the bow, and the Federal Reserve will enter a multi-year cycle of interest rate cuts, whether it will be faster or slower.
Although the recently released retail data in the United States exceeded market expectations and the unemployment claims data were lower than expected, causing the Federal Reserve to waver in the magnitude of its November interest rate cut, returning to the expected rate hike of 25BP, no longer the previous 50BP, it does not hinder the overall trend of future interest rate cuts. This will be one of the important driving forces for the continued strength of gold in the future.
In 2022-2023, despite the rise in US real interest rates, gold still recorded a considerable upward trend, mainly driven by the crazy buying behavior of global central banks. However, this driving logic has weakened somewhat this year.
According to data from the World Gold Council, global central banks increased their reserve purchases by 6% to 183 tons in the second quarter, and are expected to reduce purchases by 150 tons throughout 2024 starting from 2023.
With the continuous surge in gold prices, the net buying volume of central banks in various countries decreased to 8 tons in August this year. The People's Bank of China is more cautious, with gold reserves at 72.8 million ounces at the end of September, unchanged from the previous month. This is the fifth consecutive month that the People's Bank of China has suspended its purchases of gold, after increasing its holdings for 18 consecutive months.
Central banks around the world have slowed down their gold purchases in the short term due to the surge in gold prices, but the overall trend remains unchanged as global central banks continue to distrust the US dollar dominated global monetary system and are concerned about the expansion of future global geopolitical conflicts. Gold plays a crucial role as a strategic asset and is increasingly recognized by central banks worldwide.
02
Looking ahead, the upward trend of gold is not over, and many international investment banks have raised their target price for gold from June to December to $3000. So, in addition to participating in futures and spot gold investments, investors can also explore high-quality gold companies in the A-share market for asset allocation.
From the perspective of the gold industry chain, the upstream mainly engages in gold smelting and mining, with leading companies including Zijin Mining, Shandong Gold, Hunan Gold, Western Gold, etc. The downstream mainly engages in the production and sales of gold and jewelry, with leading companies including Lao Fengxiang, Zhou Dasheng, Zhou Dafu, etc.
Among the upstream resource leaders, Zijin Mining has the strongest competitive strength - achieving lower cost mining capabilities compared to its peers. On the one hand, Zijin Mining has mining technologies that its peers do not have or cannot achieve, which enables it to extract low-grade ores efficiently. On the other hand, Zijin Mining is good at taking advantage of cycles and acquiring at low prices against the trend, with a gold resource reserve of 1322 tons (3528 tons, ranking first in China).
The mining cost is relatively lower, and the terminal gold price continues to rise, which provides a realistic basis for Zijin Mining's high performance growth.
On October 18th, Zijin Mining announced its third quarter report for this year. In the first three quarters, the revenue was 230.396 billion yuan, a year-on-year increase of 2.39%, and the net profit attributable to the parent company was 24.357 billion yuan, a year-on-year increase of 50.68%. Among them, the company's copper and gold production increased month on month in the third quarter, with gold prices increasing and copper prices decreasing, maintaining good performance.
In terms of profitability, as of the end of the third quarter, Zijin Mining's gross profit margin was 19.53%, setting a new high since 2013. The sales net profit margin was 12.88%, an increase of 3.83% from the end of 2023, reaching a new high since 2012. It can be seen that the continuous and significant rise in gold prices has a significant effect on improving profitability. Moreover, starting from October, the gold price continues to rise, and the operating profit margin is likely to remain at a high level in the fourth quarter, with the possibility of further upward movement.
Based on good potential growth, domestic and foreign institutions express their attitudes with real money and silver. As of September 30th, Northbound Capital holds 31.4 billion yuan in Zijin Mining, ranking 10th on the A-share market. In addition, as of the end of June, Zijin Mining held 63.2 billion yuan in public funds, accounting for 13.54% of the total share capital, ranking the third largest stock position, only second to Kweichow Moutai and Ningde Times.
Apart from Zijin Mining, Shandong Gold ranks second in terms of scale in the gold industry. In the first three quarters of this year, the performance is also expected to be positive. According to the disclosure, the attributable net profit was 1.85 billion yuan to 2.25 billion yuan, a year-on-year increase of 37.52% to 67.26%.
The continuous outbreak of gold prices is beneficial for upstream gold resource enterprises, but there is significant operational pressure for downstream gold and jewelry enterprises.
Because the higher the gold price, the more it suppresses the demand for gold jewelry consumption. According to data from the National Bureau of Statistics, sales of limited gold, silver, and jewelry enterprises continued to decline from April to September, with year-on-year growth rates of -0.1%, -11%, -3.7%, -10.4%, -12%, and -7.8%, respectively.
From April to May this year, Chow Tai Fook's revenue decreased by 20% year-on-year. Lao Fengxiang's performance in the first half of this year also showed significant pressure, with revenue of 39.959 billion yuan, a year-on-year decrease of 0.95%, and net profit attributable to the parent company of 1.028 billion yuan, a year-on-year increase of 10.28%, showing a significant marginal decline compared to previous quarters.
The capital market has also responded negatively. Since March this year, the stock price of Chow Tai Fook has plummeted by 42%, while Lao Fengxiang has changed its face and plummeted by more than 30% since April.
In fact, in addition to the impact of the skyrocketing gold price on the sales side of gold jewelry, gold jewelry companies also face the dilemma of long-term weak growth.
Firstly, after significant expansion in previous years, the market for gold and jewelry stores has become relatively saturated, with a noticeable decline in single store foot traffic and business revenue. And this has been an important engine for the growth of gold jewelry companies' performance for many years, but now it is facing heavy pressure.
For example, China's largest gold and jewelry company, Chow Tai Fook, has started a trend of store closures this year, with a net closure of 88 stores in the first three months. This marks a turning point for the high growth engine of the past, and the future performance will enter a low-speed growth or even stagnant state.
Secondly, the macro economy is facing considerable pressure, and consumers have a tendency to downgrade non essential consumption, placing increasing emphasis on cost-effectiveness. In this context, various gold jewelry companies are engaged in a price war, focusing on intermediate processing fees, resulting in a decline in profitability. In addition, compared to gold jewelry, diamond businesses with higher gross profit margins are also facing fierce pressure from artificial diamond prices, and the central unit price may continue to decline.
In short, the continuous outbreak of gold prices is more favorable for upstream resource gold enterprises, while it is somewhat unfavorable for downstream gold jewelry enterprises, and investment opportunities are mainly focused on the upstream.
03
When investing in gold enterprises, one should also pay attention to potential risks and keep track of them. On the one hand, during the continuous upward trend of gold prices this year, several gold enterprise resource stocks have accompanied the continuous rise, and their valuations have reached a reasonable, even relatively high level. For example, Zijin Mining's latest PB is 3.75 times, ranking above the median in the past 10 years and relatively close to the upper limit range.
On the other hand, it is necessary to consider and assess the sustainability of the rise in gold prices. Will it continue to rise on an annual basis in the future? Or will it consolidate in the medium to long term after reaching a certain price point (similar to the period from 2013 to 2019)? Now, in the Fed's interest rate cut cycle, the upward trend of gold is not easy to end, but how much pricing does the current price include for interest rate cuts?
However, overall, we can maintain a relatively optimistic attitude towards upstream gold leaders at present, as the expectation that performance is an important driving force for gold prices to maintain an upward trend has not changed, and the recent volatile upward trend in the market under a package of policy stimuli is not expected to end so quickly, which will help with the valuation repair of individual stocks.