This round of gold price highs was driven by purchases from Europe and the United States

Abstract

Since August, gold prices have continued to rise, reaching new historical highs. However, this round of gold price increases may primarily be driven by European and American investors, with Asian investors not showing signs of "passing the baton." What are the reasons for the divergence in investor allocation across different regions, and how will this affect gold prices going forward? For reference.

Hot Topic: Gold Prices, "Concerns" After New Highs?

(1) What are the main reasons for the recent new highs in gold? Rising expectations for Federal Reserve rate cuts, coupled with narratives of Fed "independence" catalyzing the situation.

Since late August, gold has surged significantly, primarily due to a decline in real interest rates amid rising expectations for rate cuts. Since late August, gold prices have risen from USD 3,315.7 per ounce on August 20 to USD 3,643.1 per ounce on September 12, repeatedly setting new highs, driven mainly by the decline in real interest rates due to rising rate cut expectations.

Lower-than-expected U.S. inflation pressures, weak employment data, and Trump's interference with the Fed's "independence" are the main reasons for the rising market expectations for rate cuts. 1) Inflation related to tariffs remained weak in August. 2) Non-farm payrolls added only 22,000 jobs in August, significantly below expectations. 3) Trump's interference with the Fed's "independence" further catalyzed the "fermentation" of rate cut expectations.

(2) Why is gold in the Asian market "lagging"? The A-share bull market is siphoning off allocation funds, and the rapid appreciation of the RMB also has an impact.

The recent rise in gold prices has mainly come from European and American investors, with no significant increase in gold prices in the Asian market. 1) Breaking down by trading session, since August 20, the cumulative growth rate of gold prices during the U.S. trading session has been 7.7%, which is the main driving force behind the rise in gold. 2) In terms of gold ETF flows, since August, European and American investors have increased their holdings by 37.1 tons and 20.8 tons, respectively, while Asian investors have reduced their holdings by 4.8 tons.

The "seesaw effect" caused by the A-share bull market may be the main reason for the "lag" in the Asian market. Historically, demand for gold from European and American investors is easily influenced by real interest rates, while Chinese investors' allocation to gold is more affected by the performance of the equity market. The strong performance of the A-share market recently, combined with the rapid appreciation of the RMB, may have suppressed domestic investors' demand for gold to some extent.

(3) Can gold prices continue to "break through"? Focus on overseas rate cut trading space and the domestic "equity-gold seesaw" dynamics.

As an asset priced by marginal flow funds, central banks, European and American investors, and Chinese investors are the three main pricing entities for gold; among them, central bank purchases are a "slow variable" and difficult to predict, so it is not advisable to overly expect short-term boosts to gold prices. In the first half of 2025, global central banks purchased 415 tons of gold, in line with the average of the past three years; there is unlikely to be a significant acceleration in central bank purchases in the short term, providing more medium-term support for gold prices.

The Federal Reserve's rate cut space and the subsequent performance of the Chinese stock market may be key to determining whether gold can continue to break through. 1) The current market expects the Federal Reserve to cut rates three times in a row, and this may have been relatively fully priced in. 2) Since August 26, the A-share market has consolidated, but investors have not increased their gold holdings, which is markedly different from last October; This may indicate that the bullish atmosphere in the A-share market is still present, and the "stock-gold seesaw" may continue.

Report Body

Since August, gold prices have continued to rise, reaching new historical highs. However, this round of gold price increases may primarily be driven by European and American investors, with Asian investors not showing signs of "passing the baton." What are the reasons for the differentiation in investor allocations, and how will this affect gold prices moving forward?

Hot Topic: Gold Prices, "Concerns" After New Highs?

(1) What are the main reasons for the recent new highs in gold? The risk of employment downturn strengthens expectations for Federal Reserve rate cuts, coupled with the narrative of the Federal Reserve's "independence" as a catalyst.

Since late August, gold has surged significantly, mainly due to the decline in real interest rates against the backdrop of rising rate cut expectations. Since late August, gold prices have risen from USD 3,315.7 per ounce on August 20 to USD 3,643.1 per ounce on September 12, repeatedly setting new highs. The main driving factor behind this is the decline in real interest rates caused by rising rate cut expectations: since August 20, the implied number of rate cuts by the Federal Funds Rate for 2025 has quickly risen from 2.2 times to 2.9 times; the real yield on 10-year U.S. Treasuries has rapidly fallen from 1.96% on August 18 to 1.67% on September 11 (-29bp). Additionally, since 1928, the seasonal performance of U.S. stocks in September has been relatively poor, and concerns about the "September curse" may further lead to greater elasticity of gold compared to U.S. stocks in this round of rate cut trading.

On one hand, the turmoil from tariffs has disrupted expectations for rising inflation, which have not materialized, leading to a warming of market rate cut expectations. In August, the U.S. core goods CPI rose by 0.3% month-on-month, accelerating from 0.2% in July; however, the inflation in August was mainly driven by new cars, used cars, and clothing, while washing machines, medical goods, audiovisual products, and toys performed weakly. The performance of tariff-related inflation components has been sluggish, corresponding to a decline in U.S. high-frequency online retail prices (imports), indicating that the transmission of tariffs to goods inflation remains limited. The overall moderate inflation performance has eased market concerns about the inflation effects of tariffs.

On the other hand, the weakness in employment data has further raised market expectations for interest rate cuts. Since the downward revision of non-farm payroll data in July, the market has been highly focused on the weakness in the job market; the weak JOLTS job openings, ADP employment, and initial jobless claims data have continuously confirmed market concerns. The August non-farm payrolls were significantly below expectations, with the unemployment rate rising to 4.3%, pushing market worries to a peak. Institutional surveys showed that the U.S. added 22,000 non-farm jobs in August, while the market expected 75,000; among them, the private sector added 38,000 jobs, also below the market expectation of 75,000. The weak employment data further strengthened market expectations for the Federal Reserve to accelerate interest rate cuts. In addition, narratives around Trump's interference with the Federal Reserve's "independence" have also further catalyzed the "fermentation" of rate cut expectations.

(2) Why is gold in the Asian market experiencing "stagnation"? The bullish sentiment in the A-share market is siphoning off allocation funds, and the rapid appreciation of the RMB also has a certain impact.

Gold prices have repeatedly hit new highs, but the underlying investment demand shows structural differentiation; breaking it down, the momentum for this round of increase mainly comes from European and American investors, while gold prices in the Asian market have not shown significant increases. 1) By trading session breakdown, since August 20, the cumulative growth rates of gold prices in the Asian, European, and American sessions have been 1.3%, 1.8%, and 7.7%, respectively, with the increase in gold prices mainly contributed by the American session. 2) By regional breakdown of ETF flows, since August, European and American investors have increased their gold ETF holdings by 37.1 tons and 20.8 tons, respectively, while Asian investors have reduced their holdings by 4.8 tons.

Historically, investment demand in Europe and the United States has been influenced by real interest rates; the recent decline in real interest rates amid rising expectations of interest rate cuts has once again prompted European and American investors to accelerate their purchases. Since 2022, the traditional framework of gold dominated by "real interest rates on U.S. Treasuries" has not completely failed. From a first-order perspective, the month-on-month fluctuations in gold prices have a long-term stable negative correlation with the month-on-month changes in 10Y U.S. Treasury real interest rates, which has remained negatively correlated since July 2022, and this negative correlation is even more pronounced than from 2018 to June 2022; European and American investment demand is primarily driven by this traditional framework. Since August, the rapid decline in U.S. Treasury real interest rates has once again driven European and American investors to allocate to gold.

In contrast, Asian investment demand is more susceptible to the logic of "equity-gold" allocation rebalancing. Since 2023, the stock and real estate markets have been relatively sluggish, leading to a rapid accumulation of household savings; during this time, the long-term logic of gold, which is similar to long-term bonds, has attracted allocation funds; this has also resulted in a "seesaw effect" for gold similar to that of long-term bonds: 1) Since 2024, during periods of poor performance in the A-share market, such as from June to August last year, there has been a significant influx of domestic funds into gold ETFs; conversely, during periods of improved market expectations, funds have shifted from gold to the equity market. 2) The only exception is from August to September 2024, when the A-share market continued to decline, yet funds flowed out of the gold market, primarily due to the appreciation of the renminbi.

The recent strong performance of the A-share market, combined with the rapid appreciation of the Renminbi, has once again suppressed domestic investors' demand for gold. 1) Since June, the Shanghai Composite Index has accelerated its rise, repeatedly reaching new highs since August 2015. During the same period, the A-share sentiment index rose from 30.2 on June 3 to 81.8 on August 25, touching the second-highest level since "924" in 2024. 2) Over the past two years, the fluctuations in the Renminbi exchange rate have been constrained by counter-cyclical factors and the midpoint mechanism, resulting in relatively muted volatility; against this backdrop, gold, as an internationally priced commodity, can serve as one of the currency hedging tools for domestic investors during certain periods. Since June, the Renminbi has appreciated significantly by 1.01%, reducing the hedging value of gold, causing Shanghai gold to "lag behind" London gold, and the Shanghai gold premium has quickly fallen from 15.4 on June 6 to negative.

(3) Can gold prices continue to rise in a "breakthrough" manner? Pay attention to the space for overseas interest rate cuts and the dynamics of the domestic "stock-gold seesaw."

As an asset priced by marginal flow funds, central banks, European and American investors, and Chinese investors are the three main pricing entities for gold; among them, central bank gold purchases are a "slow variable" and difficult to predict, so it is not advisable to overly expect short-term boosts to gold prices from them. According to survey data from the World Gold Council, more central banks are expected to join the gold purchasing ranks by 2025; however, small countries are limited by the scale of their foreign reserves, making their purchasing capacity relatively constrained, and the pace of central bank gold purchases mainly depends on a few economies such as China and Russia. Since 2025, China's gold imports have relatively slowed down, with only 42.2 tons imported from the UK and Switzerland in May; in the first two quarters, global central banks collectively purchased 415.0 tons of gold, basically in line with the average over the past three years. From this perspective, a significant acceleration in central bank gold purchases is unlikely in the short term, providing more medium-term support for gold prices

From the perspective of European and American investment demand, the current market's interest rate cut expectations have priced in one cut at each of the next three monetary policy meetings; if economic data does not show a "recession"-like weakening, the space for interest rate cuts may be constrained. Current interest rate futures have priced in about three cuts this year and next, with the implied terminal rate falling below 3%. Typically, significant easing expectations often correspond to recessionary trading, but from the performance of other markets, since August 9, U.S. stock cyclical sectors have outperformed defensive sectors by 11.6%, and risk assets overall have maintained an upward trend, indicating that the market does not have significant concerns about a recession. Therefore, if there is no significant surge in unemployment rates (such as rising to 4.6%), European and American investment demand may repeat the phase of profit-taking seen in the fourth quarter of 2024.

From the perspective of Asian investment demand, the recent adjustment phase of A-shares indicates that domestic demand has not rushed into the gold market, which may suggest that market sentiment is still present; the "stock-gold seesaw" effect also constrains further upward movement in gold prices. 1) Since August 26, A-shares have entered a consolidation phase, and market sentiment has somewhat receded, but investors have not increased their holdings in gold, which is "distinct" from the rapid shift of funds from A-shares back to the gold market around October 9 last year. Meanwhile, the overall position of private equity funds is not high, and although the issuance of public equity funds has shown signs of recovery, it remains at a near two-year low; the positioning in A-shares is not crowded, which also means that if the A-share bull market continues, the "stock-gold seesaw" may still have the potential to continue 2) The current expectation of RMB appreciation still exists, which will to some extent suppress the upward space for gold.

Through research, we found:

1. Recently, the upward momentum of gold mainly comes from European and American investors, while the Asian market shows relatively weak performance. Since August 20, the gold price has increased by 7.7% during the US trading hours, becoming the main driving force; in terms of ETF flows, Europe and the US increased their holdings by 37.1 tons and 20.8 tons respectively, while Asia reduced its holdings by 4.8 tons. The underlying reason is the decline in real interest rates and the warming of interest rate cut expectations, coupled with concerns about the "September curse" as US stocks hit new highs, prompting some funds to switch. Overall, European and American investors still operate within the traditional framework, while Asian demand is significantly lacking.

2. Historically, the stock-gold seesaw has repeatedly played out in the Chinese market, where funds often flow into gold during the downturn of A-shares, and shift to equities when the market warms up. Recently, on one hand, the strong performance of the A-share market has somewhat suppressed domestic investors' demand for gold. On the other hand, domestic investors' investment demand for gold is also partially influenced by exchange rate factors; the recent rapid appreciation of the RMB has also suppressed gold allocation to some extent.

3. Recently, gold pricing is still mainly influenced by central banks, European and American investors, and Chinese investors. Although central bank gold purchases continue, the global increase in gold holdings in the first half of the year was only 415 tons, basically in line with the average of the past three years, providing more mid-term support for gold prices. In contrast, short-term attention should be paid to the Fed's interest rate cut space and the performance of the Chinese stock market: on one hand, three interest rate cut expectations have already been factored in, and the space for easing may be limited; on the other hand, under the backdrop of A-share consolidation, investors have not significantly increased their gold holdings, contrasting with last October, suggesting that the stock-gold seesaw may still continue.

Authors of this article: Zhao Wei, Chen Dafei, Li Xinyue, Wang Maoyu, Zhao Yu, Source: Shenwan Hongyuan Macro, Original title: "Hot Topic Reflection | Gold Price, 'Hidden Worries' After New Highs? (Shenwan Macro · Zhao Wei Team)"

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