European Natural Resources Fund: The probability of the Federal Reserve cutting interest rates in June has decreased, still optimistic about gold
Li Gangfeng, an analyst at the European Natural Resources Fund, pointed out that market expectations for the Federal Reserve to cut interest rates in June have decreased from 73.7% to 30.2%. Although gold prices have rebounded from a low, they may come under pressure if the U.S. experiences a recession in the second half of the year. The strategy suggests holding gold and cash after the market stabilizes. Global gold demand increased by 1% year-on-year, with central bank demand at 244 tons and investment demand rising significantly by 170%. Global mined gold supply is growing slowly, and it is expected to take 1-2 years to catch up with high gold prices
According to the Zhitong Finance APP, Li Gangfeng, a special analyst for the European Natural Resources Fund, stated that the market believes the probability of the Federal Reserve cutting interest rates in June has decreased, dropping from 73.7% four weeks ago to 30.2% last Friday. The U.S. released better-than-expected non-farm payroll data for April, leading to a rebound in gold prices. Following this logic, if the U.S. officially enters a recession in the second half of this year (but not stagflation), gold prices may be dragged down. Strategically, at the appropriate time (such as after the financial market stabilizes/rebounds), shorting base metals, shorting U.S. stocks, going long on the gold-silver ratio, holding gold, and cash being king are all reasonable choices.
Li Gangfeng believes that the risk of an expected interest rate cut lies with the Federal Reserve—if inflation in the U.S. remains high in April and May, the Federal Reserve will eventually have to choose between protecting the economy/employment and maintaining the value of the dollar, and it may choose the latter. Even if the Federal Reserve does cut rates, returning to zero rates is nearly impossible.
It is expected that in 2025, Trump and the Federal Reserve will continue to wrestle, which may bring volatility to the dollar and theoretically benefit gold prices.
Gold prices have retreated from their highs, with reasons including reduced support for gold prices during China's May Day holiday and a market expectation of concessions on U.S. tariffs. Therefore, even though the U.S. reported a 0.3% contraction in the economy for the first quarter of this year (while the market expected a 0.3% growth), aside from the stock market and gold prices falling on that day, U.S. stocks have resumed a rebound trend.
According to the World Gold Council, global demand for gold in the first quarter of this year increased by 1% year-on-year to 1,206 tons. Among this, global central bank demand was 244 tons, which, although slower than the fourth quarter of last year, still aligns with the average level of the past three years; global gold investment demand (including gold ETFs) surged by 170% year-on-year to 552 tons.
Despite gold prices increasing by 38% over the past 12 months, global mined gold supply has only increased by 0.3% or 2.3 tons, reflecting that the supply of metal commodities is generally not sensitive to price changes. It may take another 1-2 years for mined supply to catch up with the already high gold prices. Lastly, excessively high prices may lead to a surge in mined supply, resulting in oversupply (as seen with lithium).
Additionally, according to the association, as of May this year, the U.S. is the country with the most gold held by central banks globally, totaling 8,133 tons, accounting for 78% of its reserves; China ranks only 7th, behind Germany, IMF, Italy, France, and Russia, with only 2,292 tons, which accounts for just 6.5% of its reserves. Over 20 years ago, many gold and economic experts believed that at that time, China's gold only accounted for about 3% of its reserves, and to align with developed countries that often hold over 60%, the appreciation potential of gold prices was significant. Now that gold prices have reached historical highs, China's gold reserves as a percentage of its total reserves remain at a low level.
Li Gangfeng stated that the global political risk is sharply increasing from this year into the next two years and should not be underestimated.
Trump's idea is to increase tariffs in hopes of directing American consumer behavior, while on the other hand, he hopes to cut interest rates to reduce the burden on the public. However, inflation caused by tariffs is fundamentally not necessarily related to inflation from currency depreciation, as the former increases costs/administrative expenses leading to higher prices.
The Federal Reserve manages the economy by raising rates to cool down an overheating economy and cutting rates to stimulate a struggling economy. The Federal Reserve leans towards theory, believing that high inflation will lead to a loss of value for the U.S. dollar, but in fact, tariffs themselves can already help strengthen the dollar Therefore, whether from the perspective of interest rate cuts or the American people, it is difficult for the US stock market to be favorable this year
