Gold Price Fluctuations: Direction for Investment
2024-09-06 News

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Gold Price Fluctuations: Direction for Investment

This year marks a bull market for gold, with the price rising from around $2080 per ounce at the beginning of the year to approximately $2480 per ounce in early September, representing an increase of about 20%. Many friends are again wondering, how should they invest next? Can gold still be held?

Let's start with the conclusion: Fundamentally, the Federal Reserve is expected to initiate a rate-cutting cycle in the medium to long term, coupled with frequent global risk events and the trend of "de-dollarization," which continues to be favorable for gold prices. Should gold prices experience a correction, it might be worth considering a layout at lower levels.

Firstly, how to invest? I choose the more secure gold ETFs!

Gold ETFs are divided into two main categories based on the tracking targets: The first type is gold ETFs, which track gold contracts and are pegged to gold prices, with their returns coming from the rise in gold prices. The second type is gold stock ETFs, which track a basket of stocks related to the gold industry.

In terms of price fluctuations, gold stock ETFs have greater elasticity. When the market is favorable, the increase in gold stocks can significantly exceed the rise in gold prices. If one is optimistic about the long-term increase in gold prices, then gold stock ETFs are a more suitable investment tool than gold ETFs because of the "human factor," which suggests that the upward potential of gold stocks could be greater than that of gold ETFs.

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However, I personally prefer to layout the gold market through gold ETFs for two reasons: On one hand, the impact of the bull and bear market environment in A-shares on stock prices is too significant, leading to excessive volatility in gold stock ETFs, which is not suitable for "conservative" investors like me. On the other hand, gold ETFs have greater liquidity than gold stock ETFs and offer a more flexible T+0 trading model.

Secondly, recognize the value of gold in asset allocation.

During periods of economic downturn and easing liquidity (which often correspond to the early stages of economic cycle recession and recovery), as well as frequent risk events, high overall uncertainty, and low market risk appetite, gold becomes more valuable in comparison to other assets. Therefore, gold may play a role in hedging and defense to some extent in asset allocation.

Looking at the current market environment, it is indeed the time for gold-related assets to shine:

On one hand, the Federal Reserve's rate cuts and the weakening of the US dollar. In an environment of declining interest rates, the value-preserving and appreciation characteristics of gold are highlighted. CITIC Securities stated that in the short to medium term, the trading of rate cut expectations is approaching an end. With the depreciation of the US dollar, gold becomes relatively cheaper for investors holding non-US currencies, directly enhancing the attractiveness of gold to non-US dollar holders.On the other hand, central banks around the world continue to increase their holdings of gold, which raises the long-term central price level of gold. Over the past five years, the demand for gold from central banks has surged, especially since the third quarter of 2022, when the scale of central bank gold purchases has significantly increased, reflecting the increased demand for gold reserves from central banks. The strong purchasing power of central banks provides a strong upward driving force for the rise in gold prices.

Overall, the increase in the US deficit rate, regional political disturbances, and the nearshoring of the US supply chain have not changed the logic of global central banks' gold purchases. The pace of interest rate cuts may accelerate as the US employment situation weakens, and the gold market is expected to continue.

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