Guotai Junan Securities: After half a year, once again bullish on gold

Subject:

As of the end of August, the closing price of Shanghai gold was 791.28 yuan/gram, and the closing price of London gold was 3446.805 USD/ounce. After a six-month hiatus, we are once again strategically bullish on gold, primarily due to the shift from "global shortage of safe-haven assets" to "doubts about the independence of the Federal Reserve," leading to a second depreciation of dollar credit. The ongoing allocation by global central banks remains a necessary condition for stabilizing gold prices, and the expansion of cryptocurrency supply is not the main trading theme impacting gold prices this year.

Viewpoint:

From "Global Shortage of Safe-Haven Assets" to "Doubts About the Independence of the Federal Reserve"

Since September 2023, we have consecutively published seven reports bullish on the gold market, the most recent being "The Logic of Gold's Rise: Global Shortage of Safe-Haven Assets," published on February 4, 2025, which sets the long-term trend for gold based on the supply-demand imbalance of safe-haven assets following the Ukraine crisis. After six months of volatile trading, gold is expected to welcome a new round of allocation opportunities. The triggering factor has now extended from "global shortage of safe-haven assets" to "doubts about the independence of the Federal Reserve."

Since the start of his second term, Trump has continuously criticized the Federal Reserve personnel led by Powell, recently calling for Federal Reserve Governor Cook to "immediately resign" through public channels, accusing him of mortgage fraud. At the global central bank annual meeting on August 22, Powell's speech released limited expectations for interest rate cuts, acknowledging risks in the job market while also worrying about inflation interference. As of August 30, 2025, the implied probabilities for the September Federal Reserve meeting from federal funds futures and OIS were as high as 87.9% and 88%, respectively, but the implied rates for the meetings by the end of 2025 were 3.769% and 3.770%, indicating a slow pace of rate cuts. Although gold reacted positively in the short term after Powell adjusted to a rate cut expectation, under the expectation of "weak rate cuts," whether to cut rates is not the primary principle for initiating a mid-term rise in gold prices. Since 2022, gold prices have been severely decoupled from liquidity factors, and the effective indicators we previously focused on, such as TIPs rates and the scale of global negative-yield bonds, have diverged significantly from gold prices. Although gold is considered a non-yielding asset, its allocation value is determined in comparison with interest-bearing bonds, but current U.S. Treasury rates remain high, with the central rate around 4.23%. Under the linear extrapolation of this "weak rate cut" expectation, the space for reduction is limited, making it difficult for the framework to revert to interest rate determinism in the short term. In other words, discussing gold and interest rates on a seesaw basis under preventive rate cuts or a central rate above 3% is meaningless.

The reconstruction of the pricing mechanism for gold in past market cycles has always stemmed from the credit reassessment of dollar assets. We are more concerned that the recent issues regarding the independence of the Federal Reserve will, on a second level, undermine the dollar's main body and the credit of dollar-denominated assets. The handling of Russian assets by the U.S. after the Ukraine crisis has already harmed dollar credit on the first level, leading global central banks to seek gold as a stable alternative reserve with good liquidity and reliable safe-haven characteristics The damage to the independence of the Federal Reserve will undoubtedly become another straw that exacerbates the credit discount of U.S. dollar assets.

Discussion on Global Central Bank Buying Power, Silver Elasticity in the Second Half, and Cryptocurrency Supply Impact

From the basic conditions of gold price logic, the continued purchases by global central banks constitute the foundation for rising gold prices, with a net purchase of 166.4 tons of gold by global central banks in the second quarter of 2025. In the distribution of global gold stock usage, jewelry accounts for 45%, while the proportion of gold reserves held by central banks is second, accounting for 21%.

We summarize the reasons based on the process of various central banks actively withdrawing funds from the London gold vaults: (1) Poland (2019): The Polish central bank withdrew 100 tons of gold from the Bank of England's London vault in 2019 and publicly announced the return of gold to domestic vaults in Warsaw and Poznań, citing "reducing geopolitical risks" and avoiding "the possibility of overseas assets being frozen," directly reflecting distrust in the Western financial system. (2) Hungary (2018-2021): The Hungarian central bank repatriated 94.5 tons of gold from London in two phases (28.4 tons in 2018 and 63 tons in 2021), explicitly stating that this move was to "enhance national financial sovereignty" and expressing concerns about sanction risks, especially following the freezing of Russian foreign exchange reserves. (3) India (2022-2024): The Reserve Bank of India (RBI) accelerated the repatriation of 215 tons of gold from London after the Ukraine crisis, ultimately transferring 58% of its gold reserves domestically. This action is related to India's strategy of joining BRICS and avoiding risks associated with the U.S. dollar system. (4) Turkey (2017-2018): The Turkish central bank and commercial banks like Halk Bank withdrew over 200 tons of gold from the Bank of England, primarily due to the lira crisis and geopolitical tensions with the U.S., facing sanction threats, which the Turkish government viewed as a key step towards "de-dollarization."

The common motivations for these countries' central banks or commercial banks to withdraw gold from the London vaults can be summarized in three aspects: firstly, sanction risks, such as the freezing of Russian foreign exchange reserves in 2022 becoming a catalyst; secondly, de-dollarization, replacing U.S. dollar reserves with gold to reduce dependence on Western financial infrastructure; and thirdly, domestic political pressure, such as nationalist policies in Poland and Hungary promoting "gold repatriation" as a symbol of sovereignty. Historical experience has shown that these uncertainties have instead led to an increase in gold prices Looking back at the historical trends of gold prices, there have been three significant periods of sharp increases: (1) In the 1970s, following the decoupling of the dollar from gold and the uncontrollable inflation during two oil crises, the gold price skyrocketed from $35 per ounce to $850 in early 1980; (2) In the 2000s, the burst of the internet bubble and the global financial crisis triggered a surge in safe-haven demand, with gold prices starting at $250, rising over a decade to break $1,000 in 2008, and reaching a historical high of $1,920 in 2011; (3) Entering the 2020s, the global response to the pandemic intensified monetary easing, and the combination of geopolitical conflicts and doubts about the dollar's credibility led to gold prices breaking $2,075 in August 2020, setting a new record. Although prices were briefly suppressed in 2022 due to aggressive interest rate hikes, they accelerated again from 2023 to 2025, repeatedly hitting historical highs and surpassing $3,400.

Historically, the M2/gold price ratio (the ratio of money supply to gold price), the U.S. stock market/M2 ratio (the ratio of the U.S. stock market to money supply), and the CAPE ratio (cyclically adjusted price-to-earnings ratio of the U.S. stock market) have shown long-term co-movement, reflecting the market's confidence in monetary credit and risk assets. A high CAPE ratio is usually accompanied by an increase in the U.S. stock market/M2 ratio in a context of stock relative to money supply premium, while the M2/gold price ratio declines in an environment where gold is undervalued, and vice versa. For example, during the stagflation period of the 1970s, all three indicators declined simultaneously due to the strength of gold, while during the technology bubble period from 1990 to 2000, all three indicators rose together, driven by stocks. A rare divergence occurred from 2023 to 2025: the CAPE ratio (34.97, in the 97th historical percentile) and the U.S. stock market/M2 ratio (overvalued) remained high, but the M2/gold price ratio significantly declined due to central bank gold purchases, geopolitical conflicts, and doubts about the dollar's credibility. This divergence indicates a crisis of trust in the fiat currency system, with funds bypassing traditional valuation logic and flowing directly into gold. If the U.S. stock market adjusts and leads to a mean reversion in the CAPE ratio, combined with the continuous expansion of M2 during the Federal Reserve's interest rate cut expectations, gold may see accelerated increases, especially with a focus on the catalysts of debt monetization and a second surge in inflation.

Additionally, by reviewing past commodity cycle trends, it can be observed that if the three upward processes are divided into the first half and the second half, in the second half of the commodity cycles of 1970 and 2000, silver showed stronger elasticity and outperformed gold. In the current phase, gold prices have remained dominant in the second half, largely due to silver's stronger substitutive properties in industrial applications, leading to a discount in its value as a precious metal. Therefore, in this round of the commodity cycle's second half, gold may not necessarily be surpassed by silver. From the perspective of the expansion of cryptocurrencies as substitutes for gold as a safe-haven asset, the short-term risks to gold prices are also relatively limited. According to estimates from institutions like LSGE, the rapid expansion of global cryptocurrencies is expected to occur after 2027, and the current substitution effect on gold-related safe-haven assets is not the overall trend for the year

Author of this article: Wang Kai, Source: GuoXin Securities, Original title: "Strategy Interpretation | Looking bullish on gold again after half a year."

Risk Warning and Disclaimer

The market has risks, and investment requires caution. This article does not constitute personal investment advice and does not take into account the specific investment objectives, financial conditions, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Investment based on this is at one's own risk