The price of gold has continuously set new historical highs. As of press time, spot gold has risen in the short term and once again reached a new historical high of US$2,356.06 per ounce. Wall Street investment banks unanimously pointed out in their reports that gold price trends cannot be analyzed according to previous pricing models. So who is the "mysterious force" driving the sharp rise in gold prices this round?
On April 8, UBS analysts Joni Teves and Elena Amoruso issued a report stating that it is currently difficult to identify a single main source of buying for gold. Buying is relatively scattered. On the one hand, long positions in the gold market have increased significantly, but they are still far away from the historical high. There is a gap. Global physical gold ETFs continue to show an outflow trend. On the other hand, central banks are actively buying gold as gold rises. However, for most central banks, the proportion of gold in total reserves is still very low, and the central bank’s demand for gold purchases is still There is room for continued growth.
UBS analysts believe that investors currently have the following three motivations for buying gold:
1) The Federal Reserve’s monetary policy and inflation risk. As long as the Federal Reserve maintains a dovish stance, the risk of upward inflation means that real interest rates may fall further. The market’s concerns about long-term high inflation in the future have intensified, making gold more attractive as a traditional inflation hedging tool. attraction.
2) The geopolitical situation has caused investors to buy gold to avoid risks.
3) The potential impact of the US presidential election on fiscal policy. As the election approaches, concerns about the fiscal health of the United States may surface, and investors choose to increase their holdings of gold.
UBS said that the recent trend of gold has completely "deviated" from the trend of real interest rates, and the pricing model (key factors considered include: US dollar exchange rate, real interest rates, MOVE and VIX and other volatility indicators) can no longer explain the rise in gold prices.
However, UBS believes that in the long term, the correlation between gold, real interest rates, and the U.S. dollar still holds. U.S. real interest rates still represent the opportunity cost of holding gold, and the U.S. dollar is the main currency for gold pricing, so gold and macro fundamentals "Derailment" does not exist forever.
Who is buying gold?
UBS noted in a report that it is difficult to identify a single major source of buying. Commodity Trading Advisors (CTA) buying has increased significantly since February, with open interest in gold futures increasing by 24%, but levels are still only around 63% of all-time highs:
Whether we look at total speculative net positions or fund managers' net positions, these positions are only 57% and 50% of the historical high respectively. At the same time, gold ETFs are still falling, showing a trend of net outflows. The private wealth management field has not actively recommended gold allocation strategies. A considerable number of investors have almost no exposure to gold.
UBS pointed out that the above information has several important implications. First of all, data shows that gold buying is more dispersed rather than concentrated in a certain market segment or a small number of participants. Many investors who have been optimistic about gold since the fourth quarter of last year have not actually opened a position. Many people are on the sidelines on gold. Attitude awaits a correction in gold prices.
Secondly, there may be market participants purchasing gold in ways that are not easily traceable through public data, such as over-the-counter transactions or physical transactions. Third, a broad and dispersed investor base means the market is more resilient, which in turn helps gold prices stay at higher levels.
UBS emphasized that central bank demand for gold cannot be ignored. The specific purchase scale will be announced in a few months. However, global central banks have had strong demand for gold purchases in the past 13 years, with purchases of gold accounting for 27% in the past two years:
Purchases in 2022 and 2023 represent about 30% of mine supply, up from the previous 10-year average of about 15%. Nonetheless, we believe there is room for this trend to continue to the upside. For many central banks, gold remains a low proportion of total reserves.
UBS pointed out in a previously released report that existing statistics show that the central bank’s net purchases from January to February were approximately 65 tons:
Among them, data released by the State Administration of Foreign Exchange of China showed that in March, China purchased approximately 5 tons of gold, bringing the total purchase volume in the first quarter to 27 tons. China has increased its gold reserves for 17 consecutive months and is now the largest buyer among central banks, followed by Turkey and India.
Why buy now
UBS pointed out that there are several reasons for investors to increase their gold positions. First, some investors expect U.S. real interest rates to fall as the Federal Reserve begins its rate-cutting cycle. If the Fed remains dovish, upside risks to inflation suggest real interest rates could fall further, which would be more positive for gold. Rising oil and commodity prices driven by supply factors could exacerbate these concerns.
Secondly, the global geopolitical situation increases the reasons why investors may want to hold gold. With so many variables in geopolitics, it seems reasonable to use gold as a hedge against any potential escalation of geopolitical risks in this environment.
Finally, of the many elections taking place this year, November’s U.S. presidential election is likely to be increasingly watched by gold market participants. Concerns about rising U.S. debt and budget deficits are likely to surface as investors consider the potential impact on fiscal policy.
UBS believes that any one of these factors may not seem like a sufficient reason on its own, but taken together, it provides a fairly good reason for investors to increase their holdings of gold.
Will the "derailment" between real interest rates and the dollar persist for a long time?
UBS previously pointed out that as shown in the figure below, the model results show that the recent trend of gold has completely "deviated" from the trend of real interest rates. When real interest rates have fallen since this year, the relationship between gold prices and 10-year U.S. Treasury Inflation-Protected Securities (TIPS, real interest rates) The beta coefficient is negative; however, when real interest rates rise, this coefficient turns positive, which is contrary to the traditional understanding that rising real interest rates cause gold prices to fall.
UBS said that residual analysis shows that the model cannot explain most of the recent gold price increases. In addition to the traditional influencing factors of the U.S. dollar exchange rate, real interest rates and uncertainty indicators, there may be some other important driving forces. The recent rise in gold prices.
UBS noted that the relationship between gold and macro variables is not permanently broken. Revisiting the gold pricing model shows that gold's sensitivity to real yields has declined relative to historical levels over the past few years, and gold tends to be more sensitive to it when real rates are higher (such as currently and in the early 2000s). Low.
UBS believes that these relationships still hold in the long term, with U.S. real interest rates representing the opportunity cost of holding gold, and the U.S. dollar being the main currency for gold pricing, so there is an inherent negative correlation.