Zhou Junzhi: Behind the surge in gold and silver is the reshaping of the international financial system, with silver performing even more vigorously this year

Recently, both gold and silver have reached historical highs, with gold breaking through the $4,200 per ounce mark and silver also surpassing the critical $50 threshold. How should we understand this round of correlated increases in gold and silver, as well as the macroeconomic narrative behind gold?

Zhou Junzhi, Chief Macro Analyst at CITIC Construction Investment, shared several important judgments at an event themed "Witnessing the Historical Market of Gold and Silver."

Key points:

1. Since 2022, the traditional framework for explaining gold price fluctuations has become ineffective. The correlation between the U.S. dollar index and gold prices has weakened, and this weak correlation is also reflected in U.S. Treasury yields and real interest rates.

2. This year, the increase in tariffs due to trade disputes globally is historically rare. If we trace back, it resembles the 1920s and 1930s, which also led to a reshaping of the global trade system.

3. The financial system is built on the flow of goods in global trade, and the reshaping of trade, including supply chains, is the underlying reason for the significant rise in gold and silver.

4. Mainstream currencies represented by the U.S. dollar, as well as the yen and euro (with a loosening of the system), are a reason behind the emergence of a credit currency system—fiscal policies are easier to loosen than to tighten.

5. After the reshaping of the game, whether a new reserve currency will emerge or whether there will be a complete overhaul of the credit currency system is worth paying attention to. Of course, the time for verification will be longer, which is also a very long-term pricing logic for gold.

6. Gold is different from stocks and bonds; (stocks and bonds) have an inherent concept of implied yield, while gold is a non-yielding asset, making it quite difficult to establish a pricing anchor for gold, and the answer may only be found in history.

(Using third-person perspective, some content has been abbreviated.)

The Framework for Judging Gold After 2022 Has Changed

Gold, including silver, has performed particularly well recently, and when looking back over the year, precious metals including gold and even silver have shown outstanding performance, making them some of the best-performing assets globally this year.

Regarding the performance of gold and silver, there are three judgments:

First, since 2022, the entire framework for explaining gold prices has changed, and the old framework has become ineffective.

For example, the U.S. dollar index, U.S. Treasury yields, and even the real interest rate system (these analytical models for gold) have all become ineffective.

Moreover, where is this ineffectiveness interesting?

It would be acceptable if the relationship shifted from positive to negative, but from 2022 to now, the relationship between the U.S. dollar index and gold has sometimes been positive and sometimes negative.

In previous years, the U.S. dollar index was very strong, and gold rose; this year, the U.S. dollar index has actually weakened. In the entire monetary system this year, weak dollar trading has become a very popular overseas trading theme, yet gold has risen even more sharply. This indicates a weak correlation between the U.S. dollar index and gold prices.

This is similarly reflected in U.S. Treasury yields and real interest rates.

This indicates that the underlying logic of the macroeconomic environment or gold prices has undergone significant changes, leading to the conclusion that the indicators used to explain gold in the past 10 or 20 years are no longer applicable, and deeper, more long-term changes are currently occurring This conclusion is drawn from the phenomenon of various past popular indicators decoupling from gold.

The Dollar System Has Cracks

Second, there has been a significant change in the macro trends reflected by gold and silver, which is the crack in the dollar system. However, this time, the cracks in the dollar system can be subdivided into three factors in the eyes of macro researchers.

First, the U.S. economy is weakening, especially in the short cycle. This is why the rise in gold prices after August this year is closely related to the U.S. monetary easing and the liquidity of the dollar.

Why is the U.S. easing? Clearly, it is not primarily due to inflation issues, but more because of economic problems. This is also why Powell is essentially being pushed to (cut interest rates), facing certain risks of inflation that cannot be suppressed. So one reason is the short-cycle recession in the U.S.

The second reason is the increase in tariffs globally due to trade disputes this year, which is historically rare. Involving so many countries with such significant tariff levels, the game is played by the most important major powers today, which is not commonly seen in history.

If we trace back, it is very similar to the 1920s and 1930s. This has also led to a reshaping of the trade system.

The financial system is built on the flow of goods in global trade, so this round of tariff adjustments or the restructuring of the supply chain also means a reshaping of the financial system. This is also the underlying reason why gold and silver have seen a relatively crazy rise this year, as the entire financial order system has significantly impacted the credit system of the dollar.

Mainstream Economies Find It Easy to Ease Fiscal Policy but Hard to Tighten

In October this year, during the long holiday, the price of gold broke through the historical key level of $4,000 per ounce, which also relates to the aforementioned third reason, which is a direct triggering factor: the U.S. government shutdown, along with the potential marginal fiscal easing that the newly appointed Japanese Prime Minister might introduce, and the instability in the political situation in Europe, especially France.

These are certainly triggering factors and can be considered minor factors. What can be captured through these minor factors is that globally, especially in mainstream economies, their policies are characterized by easy fiscal easing but hard tightening. The recent U.S. government shutdown essentially reflects the Democratic and Republican parties' game over whether to cut spending related to social welfare. Japan has also shifted from earlier fiscal tightening this year back to a level of fiscal tightening that is less than expected, and the same reasoning applies to Europe.

Therefore, another clue is that represented by the dollar, the current mainstream currencies, such as the dollar, yen, and euro, are fundamentally a reason behind the credit currency system—easy fiscal easing but hard tightening, which essentially loosens the value of these countries' credit currencies.

Thus, the core point this year globally, especially overseas, is the loosening of the dollar system. This loosening is reflected in the small cyclical downturn in U.S. demand and monetary easing; it also manifests in the restructuring of supply chains and financial systems; more importantly, the world has realized that the fiscal easing of the past few years cannot be reversed

Will the Global Credit Currency System Change?

So these factors combined have actually raised a very important question for the world. The current credit currency system, or the Bretton Woods system after the 1960s, is essentially a national credit currency system. Is it still operating as robustly as it did in the past, or has it undergone new changes?

When the market expresses doubts about this issue, it manifests in the soaring price of gold.

Silver is essentially a story of the gold-silver ratio. Of course, there is another reason: the entire global economy this year, especially the exports of emerging countries, including China, tells a story that part of the growth is stronger than expected at the beginning of the year, especially after experiencing the trade war in April, so metals with certain industrial properties, like silver, will perform more vigorously. Copper has shown similar performance.

Three Clues for the Future

Looking ahead, the conclusion is quite clear. Since this historical-level market situation raises questions about the dollar system, or the entire credit currency system centered around the dollar.

Next, it’s simple: look at the recession in the United States. How will the short-term recession develop? Will there be a short-cycle stabilization next year, and will this cause some disturbances to gold prices in the short term?

Secondly, how will the U.S. economy perform in the medium cycle? This may be closely related to its technology spending or technology cycle. Therefore, in the medium cycle, it may be necessary to monitor some trends in technology-related industries.

Looking at a longer time frame, since this is a reshaping of the global credit currency system, it essentially involves the game between major powers, the reshaping of supply chains and financial systems. After the reshaping game, will there be a new reserve currency emerging, or will there be a need to completely overturn the credit currency system? This is worth paying attention to. Of course, the time for verification will be longer, and it is also a long-term pricing logic for gold in her mind.

Therefore, in the future, she believes that the rise and fall of gold can be explored along these three clues, which may indicate a direction for gold.

Gold Has Always Multiplied by 5 Times in History

Zhou Junzhi also talked about the target price for gold.

When gold breaks through 3000, people start to ask, how much higher can gold go?

At 3500, there was a saying in the market: which will break through 4000 first, A-shares or gold? Now that 4000 has been broken, the subsequent question is, at least for this round, what is the upper limit of gold, or is there a good anchor for its target price?

Chen Yi, a macro analyst at CITIC Construction Investment, stated that the entire pricing anchor for gold is very vague. It is actually difficult for the market to provide a very logical methodology to give a very accurate value through some quantitative calculations. However, relatively speaking, there are some expectations in the current market. At least Goldman Sachs has given a target of 5000, which seems to be a common belief that in a major bull market, gold will multiply by 5 times. This situation also occurred during the Bretton Woods system. If calculated based on 2017 and 2018, it was around 1000 USD per ounce If we draw an analogy with historical price increases, it is possible that some investors or institutions in the market have a basic judgment that the price will first rise to 5000. However, the overall demand for gold allocation may further expand in the future. If the macro logic does not change significantly, it is still possible to moderately open up the imagination space for predicting gold price levels.

Zhou Junzhi believes that such a review at least provides a historical reference anchor. Gold is different from stocks and bonds; (stocks and bonds) have an inherent implied yield concept. Gold is a non-yielding asset, so it is indeed quite difficult to establish a pricing anchor for gold, and the answer may only be found in history.

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 goals, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article align with their specific circumstances. Investing based on this is at their own risk