Reasons hindering the continued rise of gold: The narrative of "dollar credit collapse" has been interrupted

On Thursday, May 15, spot gold fell by 1.5% during the day. As of the time of writing, it was reported at $3,146.31 per ounce, having retreated 10.1% from the high of 3,500 yuan.

The Chen Meng team from Dongxing Securities released a research report on the 14th, suggesting that while the medium to long-term trend for gold may still be upward, the short-term upward momentum has weakened, leading to increased trading divergence.

Specifically, the narrative of "dollar credit collapse" supporting gold's rise is being challenged. According to the Ministry of Commerce, China and the U.S. have canceled a total of 91% of the additional tariffs and suspended the implementation of 24% counter-tariffs. The conclusion of the China-U.S. trade agreement, the improvement in U.S. fiscal revenue, and the expectations of interest rate cuts by the Federal Reserve may all lead to a stronger dollar, thereby weakening the attractiveness of gold.

In addition, while central bank gold purchases support gold prices, they are not sufficient to be the sole reason for a sustained rise in gold prices. The gold market may be undergoing a healthy adjustment, and investors should remain vigilant about short-term risks.

"Dollar Credit Collapse" Narrative Interrupted

Dongxing Securities stated that since November 2021, gold has cumulatively risen by over 100%, and the gold price adjusted for M2 has basically reached the historical peak range of 2011.

However, there are clear signs of cooling market speculation, with multiple technical indicators issuing warning signals: net long positions in gold have declined, and the price deviation has reached a maximum of 11% (close to the peak level of the 2011 bull market), while the trading volatility of gold prices has shown a downward trend.

The report suggests that one of the logics of this round of gold bull market—the narrative of "dollar credit collapse"—is being challenged. Historically, gold bull markets are often driven by multiple factors, while the onset of bear markets is usually closely related to a strengthening dollar.

Dongxing Securities reviews two typical cases of gold peak and decline: In 1980, the Federal Reserve raised interest rates significantly to curb inflation, and the tightening policy boosted the dollar, leading to a decline in gold prices; in 2011, the Federal Reserve signaled an exit from QE, the European debt crisis temporarily eased, and the dollar rebounded from its lows, causing gold prices to weaken.

The report believes that there are currently three key factors supporting that the dollar will not continue to weaken:

• Trade agreements gradually reached: On May 8, the UK and the US confirmed the first tariff agreement; according to the Ministry of Commerce, on May 12, China and the US issued a joint statement on economic and trade in Geneva. The reduction of trade uncertainty risks will lessen the disruption to the US economy.

• Improvement in US fiscal revenue: The Trump administration has improved fiscal conditions through tariff revenues, with US tariff revenues accumulating to $13.5 billion since April 2. Even if a 10% tariff is imposed globally for the remaining time, it will add nearly $35 billion. This is expected to reduce this year's fiscal deficit rate from 6.2% to 5.8%.

• Fed rate cuts approaching but not necessarily weakening the dollar: Although US economic data remains strong, the possibility of a Fed rate cut in Q2 still exists. The report believes that this round of preemptive rate cuts is not aimed at weakening the dollar but rather to support the US economy, thereby enhancing the attractiveness of dollar-denominated assets. Therefore, rate cuts may actually strengthen the dollar, which in turn could weaken the appeal of gold.

Central bank gold purchases provide limited support, insufficient to sustain a bull market

The report believes that although central bank gold purchases are one of the factors driving up gold prices, there are also risks involved.

After the 2008 financial crisis, global gold reserves continued to grow, with emerging markets becoming the main buyers of gold, aiming for diversified asset allocation to reduce the impact of fluctuations in dollar assets. However, historical data shows that central bank gold purchases have not sustained a continuous rise in gold prices or maintained a persistent bull market In addition, the increase in the proportion of gold in international reserves also brings risks: On one hand, if the price of gold falls, it will directly affect the book value of foreign exchange reserves; on the other hand, if the central bank purchases gold with foreign exchange without sufficient offsetting, it may lead to a decrease in the money supply, adversely affecting the economy in a deflationary environment. Therefore, central bank gold purchases are not sufficient to be the decisive factor for the continuous rise in gold prices.