Guotai Junan Securities pointed out that the real interest rate of US Treasury bonds is the main pricing factor for short-term fluctuations in gold. Recently, the divergence between the price of gold and US bond rates may be related to the uncertainty of the US election. Due to the lower premium of Shanghai gold compared to London gold, it has become the preferred choice for investors due to its higher certainty. The market expects the Fed to reduce interest rates by a smaller margin, the stability of the Renminbi is strengthening, foreign capital is flowing into A-shares, the premium of Shanghai gold is returning to normal, providing investors with buying opportunities
Recently, US economic data has been stronger than expected, the Fed may narrow its interest rate cut, leading to depreciation of non-US currencies and triggering a new wave of gold buying. So, which gold should you buy?
On Monday, October 28th, Guotai Junan Macro Research released a report stating that from the perspective of the gold market, the real interest rate of US Treasury bonds is the main pricing factor for short-term fluctuations in gold prices. Recently, there has been a deviation between gold prices and US bond rates, which may be related to the economic policy uncertainty brought about by the US elections. Due to the low premium of Shanghai gold compared to London gold, it is the preferred choice for investors.
Recently, the market expects the Fed to reduce the magnitude of interest rate cuts, and domestically, a strong easing monetary cycle has begun. In addition, the impact of the reversal of the yen carry trade is gradually dissipating, making the US-China interest rate differential once again the dominant factor in exchange rates. Guotai Junan believes that the US-China bond yield spread is rising, and the US-China exchange rate is expected to fluctuate between 7.1-7.2. The resilience of the Renminbi is increasing, demonstrating strong stability.
Furthermore, foreign exchange settlement and sales data show that the net settlement amounts for forward and spot transactions in September have both significantly rebounded, indicating an increased willingness in the market to hold Renminbi. The frenzy of foreign capital investing in the A-share market has further intensified, Shanghai gold's premium has returned to positive territory, and the implied exchange rate is around 7.15, providing investors with a more favorable buying opportunity.
Moreover, with the continued push of loose policies, there is no need to worry too much about the pressure of stabilizing the exchange rate on incremental policies in the short term. Market demand for gold is expected to continue to rise.
This article is based on research from Guotai Junan Macro Research, authored by Han Zhaohui S0880121120065 and Zhang Jianyu, original title: "Behind the Recent Exchange Rate and Gold Price Fluctuations - International Financial Perspective Series II"