Dongfang Securities: The main driver of this round of gold price increase may be domestic institutions in the United States, with subsequent price increases primarily driven by upward risk assessment

According to the Zhitong Finance APP, Dongfang Securities released a research report stating that in addition to the certainty of interest rate cuts, there are also risks on the upside. The current round of gold market trends that started last week is significantly different from the previous upward trends from January to April this year, with the main increase in gold prices shifting from the past Asian trading hours (9 AM to 3 PM) to the US trading hours (10 PM to 12 AM), indicating that the leading investors in this round of gold price increase may be domestic institutions in the United States. The bank believes that the main driving force for the subsequent rise in gold prices, in a market where expectations for interest rate cuts have been fully priced in, comes from the upward revision of risk assessments, considering the recession risks facing the US economy, the volatility risks in the US stock market, and the credit risks facing the Federal Reserve and the US dollar.

The main viewpoints of Dongfang Securities are as follows:

Views of some investors

The increased certainty of the Federal Reserve cutting interest rates in September is the main reason for the rise in gold prices. Based on the content of Powell's speech on August 22, the probability of a rate cut in September indicated by the Fedwatch Tool, and the recent trends in the yields of US ten-year and thirty-year Treasury bonds, most investors believe that the certainty of a rate cut by the Federal Reserve in September has increased, and the subsequent opening of rate cut space is the main reason for the current rise in gold prices.

US economic risk perspective

Weak job growth and rising unemployment indicate that the recession risk in the US may be more severe. The US non-farm payrolls for August, released on September 5, showed an increase of only 22,000 jobs, significantly below the expected increase of 75,000. Although the unemployment rate of 4.3% met expectations, it still rose slightly from the previous value of 4.2%. Furthermore, the bank believes that the apparent moderate rise in the US unemployment rate conceals deeper economic weaknesses. According to data from the US Department of Labor, the seasonally adjusted labor force participation rate fell from 62.6% in April this year to 62.3% in August, indicating that some workers have permanently exited the job market and are thus excluded from unemployment statistics. Therefore, the unemployment rate data only shows a slight increase. If this factor is not considered, the US unemployment rate may rise further, and the recession risk facing the US economy may be more severe.

US stock market volatility risk perspective

Dollar liquidity risks are emerging, and concerns about US bubbles are increasing. After the passage of the Great America Beautiful Act in June this year, the US Treasury is continuously raising funds through the issuance of government bonds. Considering the bond market interest rate situation, US Treasury Secretary Yellen stated in early July that about $200 billion would be absorbed through overnight reverse repos. Currently, the Federal Reserve's overnight reverse repos have significantly dropped to $21 billion, a 99% decrease from $2.55 trillion in 2022, marking the lowest level since 2021. Behind the emerging dollar liquidity risks, market concerns about the valuation bubble in the US are continuously rising. The current Buffett Indicator has reached a historical high of 2.1, approximately 2.9 times above the long-term average, and the significant acceleration of US stock market capitalization growth compared to M2 growth indicates that the market is assigning a valuation premium above economic fundamentals. From the perspectives of valuation and liquidity, the bank believes that the US stock market may face volatility risks, and the risk aversion demand from US institutional investors is expected to continue to drive up gold prices.

US dollar credit risk perspective Trump's influence continues to grow, raising questions about the independence of the Federal Reserve. On September 4th, Trump's legal team submitted new documents to the court, providing new legal arguments for Trump's dismissal of Federal Reserve Governor Cook. Previously, Trump had repeatedly negotiated with Powell over interest rate cuts, so Powell's unexpected dovish turn may indicate that Trump's sustained pressure on the Federal Reserve is gradually taking effect. The bank believes that the credibility of the dollar comes from the data dependence and independence of Federal Reserve decisions. As Trump's influence over the Federal Reserve Chairman, governor candidates, and interest rate decisions continues to increase, the independence of the Federal Reserve may face more serious challenges, leading to a continued rise in the credit risk assessment of the dollar and a potential sustained increase in gold prices.

Investment Recommendations and Targets

Gold Sector: Assuming costs remain unchanged, companies with self-owned gold mines or those that gain greater profit elasticity during rising gold prices will maintain continuous performance growth. It is recommended to pay attention to Chifeng Jilong Gold Mining Co., Ltd. (600988.SH, Buy), as the company continues to increase investment in exploration and surveying, solidifying its resource assurance capabilities. Its Laos Sepon Gold-Copper Mine SND project, after exploration, is estimated to increase the total gold resources controlled by the company by 5.7% by the end of 2024, alleviating market concerns about the company's mid-term growth; it is also recommended to pay attention to Zhuzhou Smelter Group Co., Ltd. (600961.SH, Buy), as its acquired Kangjiawan Mine has a high associated gold and silver grade, with a gold grade of around 3g/t, and is currently undergoing a technical renovation project, which is expected to further increase gold reserves after completion; other gold-related targets include Shandong Gold International Mining Co., Ltd. (000975.SZ, Not Rated) and Zhongjin Gold Corporation (600489.SH, Not Rated).

Risk Warning

Slowing macroeconomic growth; tariffs and other factors affecting export demand and industrial chain stability; fluctuations in raw material prices; changes in China-U.S. relations