Recent US inflation data hit a 40-year high, pushing inflation expectations up sharply and exceeding the Fed's previous inflation target, while the Fed began a tightening cycle, US bond interest rates continued to rise, and real yields followed. But gold prices deviated from real yields, what is driving gold prices upward? Is the pricing model of real rate of return invalid? How much room is left for gold prices to rise in the future? What do you think of the opportunities in the gold sector? We give an analysis here.
Review our gold pricing framework: the real yield determines the gold price trend, the risk aversion mood changes the gold price fluctuation rhythm, and the commodity attribute tests the gold price bottom.
Compared with general financial assets, the pricing of gold is more complex, and investment demand is the main variable that determines the long-term trend. As a special commodity, gold has three attributes: commodity, risk aversion and finance. we believe that the cost in commodity attributes tests the bottom of the long-term gold price. according to our back test, especially the "90th percentile cash + maintenance cost" has a good supporting role for gold price; risk aversion affects the short-term fluctuation rhythm of gold price, so it is difficult to change the long-term trend of gold price. From the perspective of supply and demand structure, the change in gold production is relatively stable, increasing from 2830 tons in 2010 to 3478 tons in 2020, with an average annual compound growth rate of only 2.08%. And like other commodities, the change in gold production is more the result of price influence, that is, the change on the demand side is the main factor driving the fluctuation of gold price. From the composition of the demand side, jewelry and industrial gold account for about 50%, and the demand fluctuation in this part is relatively stable. The main factors causing the sharp fluctuation in the relationship between supply and demand come from investment demand, including physical investment and central bank purchase of gold, that is, the long-term trend of gold prices determined by financial attributes.
The real yield on US debt can well explain the long-term trend of gold price. Because holding gold can not generate interest income, we can not use the discount model to reflect the change of investment demand. We need to use another way of thinking, that is, to find a kind of financial asset that is close to the safety of gold. The real rate of return of this financial asset is used to measure the opportunity cost of holding physical gold, and then reflect the change of gold investment demand. Through backtracking, it is found that there is a good trend correlation between the real yield of distal US debt and the gold price in history, and the change of the real yield well explains the changing trend of the gold price, and the linear goodness-of-fit of the two reaches 85%.
Investment advice: the current gold boom continues, the plate in the high growth target has the allocation value. The upward cycle has been more than three years since gold prices bottomed in the third quarter of 2018, and valuations of gold companies as a whole have experienced a wave of rise. On the whole, we believe that in the current market environment, the gold price is expected to remain high, and the target allocation value with outstanding growth advantages will also be excavated. The core targets are Chifeng Gold, Yintai Gold, Shandong Gold, Zijin Mining, Shengda Resources (Silver) and so on.
Risk reminder events: macroeconomic fluctuation exceeding expected risk; policy change exceeding expected risk; epidemic repeated risk; enterprise production and operation less than expected risk and so on.
