Gold, known as a “hard currency,” has always been favored as a safe haven asset. However, recent trends have made the market feel like a roller coaster ride.
During the National Day holiday this year, international gold prices fell continuously. From September 25th to October 5th, the settlement price of New York gold futures fell for 9 consecutive trading days, from $1936.60 per ounce to $1831.80 per ounce, reaching a 7-month low. During this period, the prices of domestic gold and gold jewelry in China also decreased.
But with the escalation of geopolitical conflicts and the continued enthusiasm of central banks around the world to buy gold, the gold price has recently experienced a rebound. As of October 13th, both COMEX gold futures and London spot gold prices were above $1920 per ounce.
What caused the recent fluctuations in the gold price? Why do central banks continue to buy gold and will they continue to do so in the future? How should we correctly view the investment value of gold? In response to these questions, the CEO of the World Gold Council China, Wang Lixin, was interviewed by reporters from the Economic Daily.
Short-term fluctuations in gold prices are normal
Analyzing the recent trend of gold prices, Wang Lixin explained to reporters that short-term fluctuations in gold prices are mainly influenced by the real interest rates of the US dollar. The price of gold has a negative correlation with the real interest rates of the US dollar, and the real interest rates of the US dollar are affected by the interest rate levels set by the Federal Reserve and the inflation rate in the United States.
Due to the increase in US bond yields and the strength of the US dollar, the gold price fluctuated during the National Day holiday. However, recently, influenced by international geopolitical conflicts and global central banks’ purchases of gold, the gold price has rebounded.
At the same time, Wang Lixin emphasized that as a unique financial product, fluctuations in the price of gold are a normal phenomenon. He pointed out, “In the past, the price of gold dropped from over $1900 per ounce to about $1800 per ounce, and at its highest point, it may have dropped more than $100 per ounce. This decrease may seem significant, but when calculated as a percentage, the decrease is not that large.”
Therefore, he believes that although the gold price has fluctuated recently, it cannot be called a “big rise and fall” and remains within a normal range.
Wang Lixin also pointed out that there is a price difference between domestic and international gold prices, and one factor behind this price difference is the changes in supply and demand within China. China’s gold supply is over half reliant on imports, which are regulated to a certain extent. Therefore, gold in the domestic market has become a relatively scarce commodity. The fluctuation of domestic gold prices is influenced by both international gold prices and the scarcity of gold in the domestic market and certain import costs.
Regarding the investment value of gold, Wang Lixin stated that, first of all, the average annual return rate of gold priced in US dollars over the past ten, twenty, or even thirty years is around 6% to 8%. This sustained and stable return is not commonly seen in financial products. Many people only focus on short-term price changes and forget about long-term changes. Therefore, we should emphasize that buying gold for value preservation should be viewed from the perspective of long-term investment.
Secondly, gold has the characteristic of being an internationally tradable financial product that can be exchanged for any currency, which is not possessed by many other financial products.
Thirdly, the volatility of gold is not significant compared to many other financial products. The expected annual return of many financial products may be high, but the risk of losing the principal is also high, and the principal may even fall by 30% to 40%.
Finally, any good financial product must consider liquidity. It is important to have a deep market when selling.
Central banks around the world will continue to increase gold reserves
Data shows that the People’s Bank of China has been increasing its gold reserves for 11 consecutive months. On October 7th, the State Administration of Foreign Exchange announced that as of the end of September, the official gold reserves reached 70.46 million ounces (about 2,191.55 tons), an increase of 840,000 ounces (about 26.12 tons) compared to the previous month. The gold reserves of the central bank have increased for 11 consecutive months, accounting for 4% of the total official reserves of the country. This is the first time that China’s central bank’s gold reserves have surpassed the 70 million ounces mark.
At the same time, the enthusiasm of global central banks to buy gold has continued to rise this year. According to a report released by the World Gold Council on October 9th, global central banks’ gold reserves increased by 77 tons in August, a 38% increase from July. Among them, the central banks of China, Poland, and Turkey once again became the major official buyers of gold. In addition, there were no significant sales of gold reserves by central banks that month.
Analyzing the reasons for central banks around the world to reserve gold, Wang Lixin stated that over the past 10 years, central banks have undergone a process of diversifying their reserves, transforming the previously relatively single reserve assets into a more diverse trend. For example, increasing the proportion of other mainstream convertible currencies, the euro, the renminbi, and gold.
“During this period of change, the performance of gold during various economic crises has once again been recognized by the reserve managers of central banks due to its unique functions of hedging, reserve, and risk diversification. Therefore, compared to the changes in reserve assets over the past 10 years, the increase in gold reserves is relatively large, and the proportion of the US dollar in the reserve assets of central banks in general has decreased.” said Wang Lixin.
When asked whether central banks will continue to increase their gold reserves in the future, Wang Lixin said, “A recent survey report by the World Gold Council shows that more central banks believe that they will consider increasing their gold reserves in the next one or two years, which is a clear trend. In addition, based on the numbers, the increase in central bank gold reserves this year compared to last year will certainly happen, but the increase may not exceed the overall increase of last year.”
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