Guojin Song Xuetao: Chaos continues, gold does not stop

Gold has once again become the market focus. After April 8, London gold initially approached the $3,500 mark at a pace of nearly $100 per day, but then entered a period of rapid fluctuations over the following month.

Looking back at the milestone bull market in gold over the past three years, it took 1,466 days for the price of gold per ounce to rise from $2,000 to $2,500, 207 days to rise from $2,500 to $3,000, and only 35 days to rise from $3,000 to $3,500.

After repeatedly hitting new highs, followed by a significant correction, can gold still be bought?

I. Who are the traditional investors in gold?

According to the World Gold Council, global gold demand over the past decade has been around 4,500 to 5,000 tons, with investment demand (including physical gold, gold ETFs, OTC) accounting for nearly half. Investment demand mainly comes from four types of entities—central banks and sovereign funds, allocation-type institutions, trading institutions, and retail investors. The different purchasing rhythms of these four types of entities over the past three years correspond to changes in the driving factors for gold.

The main demand driving up gold prices in the first quarter of this year came from trading funds represented by gold ETFs (institutions + retail investors), which returned to the market in the second half of 2024 after nine consecutive quarters of net selling from Q2 2022 to Q2 2024, but made a large purchase of 552 tons in Q1 2025 (up 170% year-on-year).

Next is the demand for physical gold, which reached 325 tons in the first quarter, 15% higher than the average quarterly value over the past five years, with demand for physical gold from the Chinese region being an important support.

The central bank's gold purchasing scale has clearly stepped up since the third quarter of 2022. From Q1 2016 to Q2 2022, the global central bank's average quarterly gold purchase was 115 tons, which rose to 278 tons from Q3 2022 to Q1 2025, an increase of 141%. Central bank gold purchases send the signal that "gold is hard currency," which in turn stimulates market demand for gold investment.

Since 2022, gold has decoupled from the dollar, starting with the "technical default" of U.S. Treasury bonds on Russia.

After February 2022, the U.S. froze about $300 billion of Russia's foreign exchange reserves, part of which was used to provide war loans to Ukraine, which was a significant blow to the credibility of the dollar. Central banks around the world have become acutely aware that U.S. Treasury bonds could be "locked" for political reasons, accelerating the "diversification of foreign reserves." Since then, the main pricing driver for gold has been the notion that "the dollar lacks credibility." During this period, gold began to decouple from the US dollar, and the price of gold in US dollars rose significantly. Central banks in major geopolitical countries such as China and Turkey, as well as geopolitical neutral countries represented by Singapore, increased the proportion of gold reserves, which was an important support for the significant rise in global central bank gold purchasing demand after the third quarter of 2022. Meanwhile, from 2022 to 2024, the proportion of the US dollar in global currency reserves slightly decreased from 60% to 58%.

Since the fourth quarter of last year, Trump began to hype a new round of global trade war after winning the election. Trump's anti-globalization tendencies and geopolitical contraction strategy will inevitably reduce other countries' demand for the US dollar, leading to a revaluation of gold against the dollar.

In the fourth quarter of 2024, the US Trade Policy Uncertainty Index (TPU) soared, and its rolling correlation with gold prices also increased, making the demand for safe-haven assets due to uncertainty a dominant factor in gold pricing. In the fourth quarter of 2024, the scale of global central bank gold purchases was 1.8 times that of the third quarter, and the People's Bank of China also restarted gold purchases in November 2024 after a 7-month hiatus.

II. Why has gold volatility increased recently?

This round of rapid gold price increase began on April 8, when White House economic advisor Stephen Miran stated in a speech at the Hudson Institute that "the US dollar and US Treasury bonds are global public goods provided by the US to the world," and blatantly suggested that non-US countries should "pay money" directly to the US Treasury, which is consistent with his debt reduction ideas in the "Mar-a-Lago Agreement."

At the same time, Trump has repeatedly threatened to replace Federal Reserve Chairman Powell, which the market sees as an erosion of the Fed's independence. The independence of the Federal Reserve is one of the core pillars of the US dollar's international status, and Trump's repeated questioning and attacks on the Fed's independence have broken the international consensus on "central bank independent decision-making."

The market is concerned that Trump may choose a poor model for the "White House - Federal Reserve" relationship: Nixon - Burns. In 1972, US President Nixon pressured then-Fed Chairman Burns to implement an expansionary monetary policy, which is seen as the beginning of the stagflation of the 1970s; after the global public health crisis in 2020, Turkey frequently replaced its central bank governor, leading to several collapses of the lira exchange rate. Such precedents have made the market worry that Trump's crude intervention could accelerate the erosion of the long-term credibility of the US dollar.

In the short term, gold has become a "call option" for all uncertainties, and the sentiment of abandoning US Treasury bonds in favor of gold has reached a climax. The holdings of gold ETFs, represented by retail investors and momentum institutions, surged rapidly, pushing up gold prices and increasing volatility. On April 25, 2025, the volatility of gold ETFs reached the 93rd percentile level since 2020 and the 85th percentile level since 2008 Gold has transformed from a nominal safe-haven asset into a substantial risk asset.

III. Improvement in Risk Appetite is Temporary, Dollar Credit Outlook Remains Chaotic

Recently, negative factors for gold have been continuously released. First, on May 5, Trump accepted an interview and changed his statement, saying "there is no plan to fire Powell." Then, on May 12, China and the U.S. issued a "Joint Statement on the Geneva Agreement," with both G2 countries significantly lowering the previously imposed tariff rates, cooling down the global tariff game from its most intense situation.

Due to the influx of speculative funds earlier, the volatility of gold increased as market risk appetite rebounded. From May 7 to May 19, during 9 trading days, the spot price of London gold fell by a cumulative 6.2%.

However, the outlook for dollar credit remains chaotic. After the easing of tariffs between the U.S. and China, recently, negotiations between the U.S. and non-China countries have accelerated. If the U.S. continues to use the dollar (forcefully devalued) and U.S. Treasury bonds (mandatory purchases) as negotiation conditions (such as based on the Mar-a-Lago framework, selling century-long zero-interest U.S. Treasury bonds), then the upward momentum for gold will not stop.

Furthermore, as negotiations between the U.S. and non-China countries conclude, coupled with the slowdown of U.S. endogenous momentum, Trump's "detoxification" economic recession, and the Federal Reserve's interest rate cuts gradually taking effect, U.S. Treasury yields may decline, and the chaotic period for dollar credit may also phase out. At that time, gold may undergo adjustments. If Trump's fiscal tightening policy of "internal austerity and external resource expansion" reduces government debt repayment pressure, it may amplify the correction of gold.

But in the long run, unless the U.S. can truly improve production efficiency and fiscal efficiency, allowing the U.S. economy to break free from the track of stagflation and maintain the dollar's status as a globally recognized reserve currency, gold will have its moments of resurgence. At that time, the dollar index, dollar assets, and stablecoins shadowed by Trump's dollar hegemony may all stand in opposition to gold.

Article authors: Song Xuetao, Chen Hanxue, Source: Xuetao Macro Notes, Original title: "Song Xuetao: Chaos Continues, Gold Does Not Stop"

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