Since August 2018, the price of gold has risen rapidly, rising from a price level of 1,200 US dollars per ounce to more than 1,500 US dollars per ounce in August 2019, which has attracted worldwide attention. The market generally believes that there may be a big wave of gold in the market, and some even predict that the price of gold will soon exceed 1800 US dollars per ounce, setting a record high.
At present, a new operating pattern of the world economy characterized by multipolarization and anti-globalization has taken shape. This will have a profound impact on future gold demand, investment and prices. It is necessary to look at gold as a special commodity from a wider perspective.
Multiple international economic risks make gold the preferred safe-haven asset
The most serious challenge currently facing the world economy is undoubtedly economic and trade frictions. Affected by the tariffs imposed on China and Canada, the prices of some consumer goods in the US market have risen. Some international authoritative organizations have made statistics. The Sino-US trade friction has now progressed, and the average increase in household expenditure in the United States is 700-800 US dollars. In view of the lack of substitution of many products exported from China to the United States, and China’s manufacturing sector is relatively complete, most of Chinese products still perform well in the US market. And most of the authoritative research institutions have strong evidence to prove that more than 80% of the tariffs imposed on Chinese products by the United States are borne by American consumers. As more than 60% of the remaining US $ 300 billion of Chinese exports to the United States are consumer products, the imposition of tariffs on these products will undoubtedly greatly increase the living burden of American consumers and weaken their spending power.
Increasing trade barriers have hit US exports and manufacturing. According to data from the US Department of Commerce, from January to May 2019, US exports of goods fell by 0.1% year-on-year, a significant drop compared to the 9.7% increase in exports during the same period in 2018. The U.S. manufacturing purchasing managers index (PMI) fell to 49.1 in August, the lowest level since 2009. In the first half of 2019, US industrial output and manufacturing output have fallen for two consecutive quarters. The manufacturing industry accounts for 12% of the total US economy. The shrinking manufacturing industry will affect employment, which will put pressure on consumer spending. Since the second half of 2018, the US stock market has fluctuated sharply; the recent 10-year US Treasury yield and the 2-year Treasury yield have been inverted, which is considered to be a typical sign of a recession.
At present, the US economy is also under increasing downward pressure. The growth rate of the US economy in the first quarter was 3.1%. In the second quarter, the growth rate of the US economy was higher than market expectations. The revised figure was 2.0%, but it has slowed down significantly. According to various forecasts, the economic growth rate of the US in the third quarter may drop to less than 2%. Recently, the Federal Reserve released a report that the uncertainty caused by the trade war has escalated many times. By the beginning of 2020, the drag on GDP will reach more than 1.5%. Some research institutions have lowered their forecasts of US economic growth, and believe that the possibility of a recession in the next 12 months has increased significantly. In view of the fact that the US economic growth has been maintained for ten years after the global financial crisis in 2008, the possible recession in the US economy will be a periodic adjustment with a certain depth and length.
Under the influence of international economic and trade frictions, some emerging economies and developed countries are facing a new round of recession risks. The most typical example today is Argentina. In recent years, the country has experienced significant depreciation of its currency, large-scale capital outflows, and economic operations into a recession. At the same time, some important emerging economies have also begun to falter. For example, Brazil, Mexico and other important economies have experienced a marked deterioration in economic performance.
Not only emerging economies, but also the performance of several important advanced economies has been unsatisfactory recently. Britain, Germany, and Italy have all shown signs of recession. Especially the German economy, which is the backbone of the EU economy, has shown signs of recession. Brexit is the sword of Damocles hanging over the EU. At present, the situation is likely to be a hard Brexit. A hard Brexit is not good for Britain, and it will also bring tremendous pressure on the entire EU. The EU economy is likely to weaken overall in the second half of this year or early next year, which will further drag the already fragile world economy.
Easing monetary policy will increase demand for gold preservation and appreciation
In 2009, global monetary policy was substantially loosened. Quantitative loose monetary policy was carried out recklessly in developed countries. Ten years later, due to the cyclical fluctuations in the world economy and economic and trade frictions, global monetary policy has returned to its original pattern. Monetary policy cycles usually change in the opposite direction to economic cycles. As the downward pressure on the global economic operation gradually increases, more and more countries have begun to adopt loose monetary policies. Since 2019, about 28 countries have implemented interest rate cuts, including some important emerging economies and developed countries, especially the United States. Recently, the Fed Chairman acknowledged that the uncertainty of US economic and trade policies is causing problems such as the global economic slowdown, weak US manufacturing and capital expenditures, and the Fed will do its best to maintain the current economic expansion.
From the current perspective, the promotion of global loose monetary policy has just begun, and the magnitude is not large. It seems to be a preventive and forward-looking policy adjustment. With the increasing downward pressure on the economy, the trend of further loosening of monetary policy should be relatively clear. However, the current situation of the world economy is different from the financial crisis of 2008, when the crisis broke out instantly and global liquidity disappeared overnight. In this case, the problem can only be solved if monetary policy is implemented in a large and rapid manner. There is clearly no need for immediate easing.
At present, there is a hidden factor that continues to grow. It is worth noting that some countries have taken the lead in cutting interest rates before the current economic downturn. The important motivation behind this is to further weaken the national currency. Both theory and experience have proved that the devaluation of the local currency will help increase exports after two or three quarters. In fact, the United States and some developing economies have this motivation. This strategy is relatively taboo internationally, the so-called competitive currency devaluation. The development of this state will result in a larger range of currency depreciation, increasing the market demand for value-added assets, including increased demand for gold.
In the future, monetary policy will continue to be significantly looser, which will easily lead to further increase in global debt levels, further increase in bubbles, and the speed of devaluation of banknotes will accelerate significantly. According to data from the World Gold Council, if the US dollar and euro currency index levels fluctuated in the range of 70-100 in June 2007, the dollar index level in early 2019 would be only 44.9, and the euro would be 37.4. Easing monetary policy will definitely accelerate the pace of depreciation of banknotes, and gold is undoubtedly an object that investors can favor to preserve and increase their assets.
Gold supply continues to slow while consumer demand continues to grow
Gold has certain monetary attributes, but it is also a precious metal commodity. Its price is first affected by the relationship between supply and demand.
According to data from the World Gold Council, as of the end of 2016, the total underground gold mine reserves slightly exceeded 55,000 tons; even with the extremely high metallurgical recovery rate of 90%, at the current mining rate, this reserve is only enough to provide the industry with gold for about 15 years. The growth rate of production and supply of gold may further slow down. Although the stock of gold has more than doubled since 1970, the compound annual growth rate is only 1.7%, while global GDP has more than tripled. Due to stricter safety and environmental protection requirements and increasing investment, the number of gold mining projects continues to be squeezed, and the World Gold Association predicts that the output of gold mines will decline sharply in the next 5 to 10 years.
The demand for gold as a commodity accounts for about 60% of the total demand, and more than 85% of it belongs to the demand for gold jewelry. The demand for gold jewelry types is closely related to the level of economic development and traditional preferences. The regions of Asia other than the Middle East are regions with relatively rapid economic development, and their gold consumption demand accounted for 63% of the world’s total in 2016. China and India are the countries with the largest gold consumption in the world. At present, China and India account for 52% of the global demand for gold consumption. India’s population growth and economic growth are catching up with China. As India’s national traditions and habits are more like gold jewelry, India’s demand for gold will continue to grow with economic growth and per capita GDP.
With the development of China’s economy and the increase in per capita GDP, while the wealth is growing rapidly, China’s demand for gold consumption continues to increase.
In the next 10 years, it is estimated that more than 200 million people will enter cities in China, from farmers to citizens, and more than 200 million half citizens will become citizens. At present, China’s per capita GDP is only 10,000 US dollars, which is still far from the level of 50,000 to 60,000 US dollars in developed countries. As the per capita GDP level further rises, citizens’ demand for gold will further increase while their wealth has increased significantly. China ’s gold consumption in 2000 was 212.5 tons, and in 2018 it was 991.8 tons, an increase of 366.7%, with an average annual compound growth rate of 8.9%.
Gold is still a symbol of wealth, especially in a country like China that has a traditional preference for gold. Gold has the dual attributes of commodities and financial assets. In years of stable economic expansion, the demand for household consumption and technology applications will continue to grow. When the uncertainty of economic operation rises significantly, investment and hedging demand will rise significantly, and its financial attributes will be greatly enhanced. Since 2018, with the increasing uncertainty of the operation of the world economy, the demand for gold asset allocation and wealth preservation has increased significantly.
The evolution of the international monetary system will enhance the monetary function of gold
In the era of the gold standard and the gold exchange standard, gold was once the core and foundation of the international monetary system. So far, changes in the international monetary system still have an important impact on gold. It mainly involves two aspects, the monetary function of gold and its future role in the international monetary system.
Gold has historically served as the standard currency for a long time. In 1971, the United States announced the decoupling of the US dollar from gold, announcing the collapse of the gold exchange standard under the Bretton Woods system, and gold embarked on a path of non-monetization. Prior to this, the monetary function of gold has actually gradually faded, that is, the function of the most important value measure of currency, payment and circulation means has gradually lost, and eventually no longer exists. However, under the gold exchange standard, 35 dollars can be exchanged for 1 ounce of gold, and gold still plays part of the currency’s function through a fixed price relationship with the US dollar. After 1971, the dollar standard was gradually established.
From the gold standard to the gold exchange standard and then to the US dollar standard, it is the evolution path of gold non-monetization. The global currency system eventually formed a currency system based on paper money.
The essence of the dollar standard is the banknote standard. With the increasing trend of fiscal deficits, it is impossible for monetary authorities of various countries not to implement expansionary monetary policies, and inflation has therefore further developed. After the collapse of the Bretton Woods monetary system, global currency issuance, such as the runaway Mustang, has grown significantly. Especially the US dollar currency issuance. Some research institutions have pointed out that about two-thirds of the US dollar currency supply issued annually by the United States has flowed around the world. While global inflation or bubbles and rapid debt growth, the United States does not need to consider what responsibility it has to the world.
With the development of paper currency as the standard currency, the monetary function of gold has not completely disappeared. Gold has characteristics not found in other articles: it has been used as currency and has a high unit value; it has industrial use value and its supply is limited; it is uniform in texture and can be effectively divided; it has universal acceptability and good liquidity; it is suitable for cellar , Long-term return rate is high; complete hedging functions, can effectively spread risk, and so on. In terms of hedging and hedging, few other substances are comparable to gold.
Gold does not have the functions of a value scale, a means of payment, and a means of circulation, but it still has the functions of storage and world currency. It can be seen that gold is still playing some of the functions of currency. Gold has been and will be a long-term effective tool against inflation and currency depreciation under the paper currency standard.
From the current and longer-term perspective, the process of de-monetizing gold will slow down. At some stages, the means of gold storage and the monetary function of the world currency will be restored or even strengthened to a certain extent. To this end, more and more central banks are likely to use gold as one of their main international reserves.
In the process of diversified evolution of the international monetary system, games and competition between major currencies will inevitably begin. With its peculiar nature, gold should play the role of credit foundation, solvency and risk aversion in this historical process. Because of this, in recent years, more and more central banks have bought gold. In 2016, there were 8 central banks, and in 2018 it increased to 19 central banks. Since 2011, global central banks have transformed from gold sellers to gold buyers, with net purchases for 9 consecutive years; net purchases of 656 tons in 2018, and net purchases of 374 tons in the first half of 2019. Gold has become the third largest official reserve asset of global central banks, accounting for 10%, and in 2000, this proportion did not exceed 3%. Looking ahead, the devaluation of the currency under the note standard and the diversified development of the international monetary system will enhance the status and role of gold in the international monetary system.
Reasonably increase the proportion of gold in asset allocation
In the short and medium term, there are two main factors that affect the price of gold: the main risk line and the main inflation line. The main line of risk is more important for the price of gold. Monetary policy and inflation are the auxiliary lines of the factors that affect the price of gold. Risk is motivation, and inflation is both motivation and condition. Historical data has shown that when risk factors continue to increase, combined with loose monetary policy, the price of gold will continue to rise significantly.
At present and in the future, various intricate risk factors may continue to coexist. Various types of risk events such as economic and trade frictions, Brexit, the conflict between India and Pakistan, the situation on the Korean peninsula, and the geopolitics of the Middle East will come one after another, thereby driving the market to generate more willingness to maintain and increase value. At this time, gold is bound to play its special Features.
The comprehensive value-preserving and value-adding function of gold has been increasingly recognized by the market. Gold and traditional assets have a low correlation and a negative correlation, which can effectively diversify and hedge risks. In view of the development of trading products and venues, the liquidity of gold has increased significantly compared to the past. Historical data clearly shows that gold can effectively resist currency depreciation, and its long-term yield is higher than bonds and close to stocks. Therefore, at present and for a period in the future, investors can consider a modest increase in the proportion of gold in asset allocation, but they must pay attention to avoiding the risk of market fluctuations caused by the disturbance of risk factors and changes in monetary policy.
On October 6, 2019, China’s central bank released data showing that as of the end of September, China’s gold reserves were 62.64 million ounces, an increase of 190,000 ounces from August’s 62.45 million ounces. This is the 10th consecutive month of increase in China’s central bank’s holdings. gold. China is constantly increasing its holdings of gold, but it is clearly mismatched compared with its huge foreign exchange reserves, considerable GDP and total trade and investment. In the future, it is necessary to continue to increase gold holdings and increase its proportion in order to further enhance China’s international solvency and risk aversion capabilities and lay a more solid credit foundation for the internationalization of the RMB.
