For some time, the price of gold has continued to strengthen. At the end of June, the price of the New York Mercantile Exchange gold futures hit a new high since May 2013, with the highest quotation reaching $1,433.3 per ounce, which is still being adjusted at a high level recently. Because the financial attribute of gold is much higher than the commodity attribute, the trend of gold price has a strong correlation with the world political and economic situation.
The current round of gold price rise began in the second half of 2018. In the same period, the world economy began to slow down after a strong synchronous recovery lasting for more than a year, and trade and investment activities were significantly weakened. In the World Economic Outlook Report released in January and April this year, the International Monetary Fund lowered the global economic growth rate twice this year. The latest World Trade Outlook Index released by the World Trade Organization on May 20th also fell to the lowest level in recent years.
The sustained rise in the price of gold can be understood from two aspects.
First of all, the strength of the dollar no longer makes the price of gold get significant support. In the face of increasing economic downside risks, the voices of various economies calling for monetary easing have revived. The European Central Bank claims that it is considering more stimulus measures, which may further reduce interest rates from the current low point. Australia, Russia, India and other countries have begun to relax monetary policy. The growth momentum of the US economy has weakened recently, and the latest inflation, manufacturing PMI and other indicators are less than expected. At the congressional hearing on the 10th of this month, the chairman of the Federal Reserve said that he would take necessary actions to maintain the sustained growth of the US economy, consolidating the previous expectation of a US dollar interest rate cut. Last month, the trend of the strong dollar in the previous two years reversed, and the dollar index fell by 1.65% in June, which significantly supported the prices of precious metals including gold.
Secondly, the increased awareness of risk aversion in various countries has made gold popular again. Factors such as the "US priority" policy and the "Brexit" tug-of-war in Britain have led to increased market uncertainty; Conflicts in many hot spots continue, and the international environment is complex and changeable. In this context, a large number of safe-haven funds have flooded into the gold market, and central banks are also increasing the allocation of gold. According to the report of the World Gold Council, in 2018, the global central bank added 651 tons of official gold reserves, up 74% year-on-year, which was the highest net purchase of the global central bank since the decoupling of the US dollar from gold in 1971. In the first quarter of this year, the global central bank’s gold reserves continued to grow, with 145.5 tons of new purchases, the highest level in six years.
At present, the international political and economic risks have not dissipated, and safe-haven demand and loose monetary policy will continue to support the high price of gold. However, it is difficult to reproduce the situation of continuous soaring in the past. On the one hand, countries all over the world have generally recognized the need to jointly cope with and resolve risks. The Osaka Declaration adopted at the just-concluded G20 Summit shows that all parties are committed to achieving a free, fair, non-discriminatory, transparent, predictable and stable trade and investment environment and injecting confidence into the world economy. On the other hand, the choice of safe-haven financial instruments and asset portfolios is increasing, especially with the maturity of technology and the improvement of market recognition, digital assets are sought after, and gold is no longer the only choice.
(Zhang Xiaoyu, Research Fellow, Institute of International Market Research, Ministry of Commerce)