Investment Highlights In our report "The 'Unusual' Gold Bull Market - Research on Global Monetary Changes II," we pointed out that after 2022, the framework of gold pricing based on the real interest rate of the US dollar is no longer valid. Under the unprecedented global changes, the differentiation of the global economy and the changes in trust between countries have led to a trend of both residents and officials allocating gold, becoming an important driving force for the rise in gold prices. In this special report, we attempt to construct a quantitative model for gold pricing. Based on the extended model, we have made predictions for future gold prices under different scenarios. In an optimistic scenario, gold prices may break through $3,800 per ounce; in a neutral scenario, gold prices may reach around $3,200 per ounce; in a pessimistic scenario, gold prices may fall back to the range of $2,600 to $2,700 per ounce. However, the quantitative gold pricing model can only serve as a reference. After all, as pointed out in our previous report, this round of the gold bull market is primarily driven not by economic factors, but by non-economic factors. This round of the gold bull market is a long-term bull market brought about by the decline in trust between countries and the reconstruction of the international order, as well as the significant changes in the global monetary system. Gold Pricing Model 1.0: Dominated by Real Interest Rates How to reasonably price gold? Similar to other commodities, supply and demand are the cornerstones of the gold pricing framework. Due to the relatively stable and slow-changing gold production, supply-side factors have little impact on gold prices; it is mainly the changes on the demand side that dominate the trend of gold prices. As a special major asset, gold possesses financial, hedging, commodity, and monetary attributes, and the demand for gold will also be driven by these four attributes. In terms of financial attributes, holding gold is equivalent to holding a zero-coupon, perpetual anti-inflation bond. On one hand, the real interest rate represents the opportunity cost of holding gold; when interest rates rise, the opportunity cost of holding gold increases, which will exert some pressure on gold prices. On the other hand, gold has anti-inflation properties, and when inflation expectations rise, it will also push up gold prices. In terms of hedging attributes, gold is usually considered a safer asset in the face of crises or increased uncertainty. Therefore, when risks rise, gold prices may increase driven by hedging demand. In terms of monetary attributes, due to its scarcity and value stability, gold has been widely used as a means of payment and a standard of value for a long time. Although gold has currently exited the realm of monetary circulation, it remains an important reserve asset in the international reserves of central banks, having a certain substitutability for other currencies. Therefore, when the level of distrust in the international monetary system among central banks rises, it may increase the demand for gold reserves. Finally, gold, as a commodity, is also often used in industrial production and daily consumption (such as gold jewelry), with industrial demand being relatively stable and having a smaller impact on gold prices Before 2022, gold prices were primarily priced based on the real interest rates of the US dollar. We characterized the financial attributes using the real interest rates of the US dollar and inflation expectations, and the risk-hedging attributes using the economic uncertainty index, constructing a three-factor model for gold pricing. From the regression results, during the period from 2007 to 2022, the three factors had a significant impact on gold prices, explaining 83% of the movements in gold prices. Among them, the real interest rate alone could explain 78% of the fluctuations in gold prices, making it the most critical factor influencing gold price trends. In contrast, the demand for gold purchases by global central banks had no significant impact on gold prices from 2007 to 2022. Gold Pricing Model 2.0: Global Central Bank Gold Purchases are Key After 2022, the three-factor gold pricing model gradually became ineffective. Since 2022, real interest rates of the US dollar have risen to historical highs, yet gold prices have not only failed to decline but have instead risen, even reaching new historical highs multiple times. The explanatory power of the three-factor gold pricing model has dropped from 83% before 2022 to 19%, and it can no longer account for the continuous rise in gold prices since 2022. In our report "The 'Unusual' Gold Bull Market - Research on Global Monetary Changes II," we pointed out that the "decoupling" of gold prices from real US dollar interest rates is due to the global century-long changes, leading to economic divergence and a decline in trust among countries, resulting in a trend of increasing demand for gold allocation by residents and officials, which has become a new driving force for rising gold prices. Especially after the freezing of Russia's foreign exchange reserves by Western countries in 2022, the significant increase in demand for gold purchases by global central banks may have become an important support for gold prices. So, how can we track the gold purchase demand of global central banks? The World Gold Council provides estimated data on gold purchases by global central banks, but the data frequency is only quarterly, making it difficult to track changes in gold purchases by global central banks in a timely manner. Additionally, the IMF publishes monthly data on gold reserves of various countries' central banks, but this data cannot capture the gold purchases that have not been disclosed by the central banks. To more accurately and timely track the real situation of gold purchases by global central banks, we use UK gold export data (excluding the portion exported to Switzerland for gold processing) as a proxy variable for global central bank gold purchases This is because the London over-the-counter trading center in the UK primarily trades 400-ounce gold bars, which are favored by global central banks or institutional investors due to their larger transaction amounts and lower unit costs, and are less frequently exported to retail consumers. Therefore, they can serve as a proxy indicator for global central bank gold purchases. Additionally, it should be noted that global central bank gold purchasing behavior may not be continuous, with possible interruptions of several months in between. However, if the market forms expectations for sustained gold purchases by global central banks in the future, even if the scale of gold purchases by global central banks declines in certain months, gold prices may still be supported under the influence of these expectations. Thus, we conduct a two-year moving average of global central bank gold purchase data to construct the market's adaptive expectations for global central bank gold purchases. We compare the global central bank gold purchase proxy variable constructed based on UK gold export data with the data provided by the World Gold Council and find that both the values and trends are quite close, reflecting a certain reliability of this indicator. To verify the shift in the gold pricing paradigm after 2022, we introduced a dummy variable that takes the value of 1 after 2022 and 0 at other times, and added interaction terms between this dummy variable and other variables. We included the dummy variable and interaction terms in an extended model and found that the interaction term between global central bank gold purchases and the dummy variable has a significant positive impact on gold prices, while the interaction terms of real interest rates and inflation expectations with the dummy variable do not have a significant impact on gold prices. This reflects a clear change in the current gold pricing paradigm after 2022, with the influence of global central bank gold purchases on gold prices significantly increasing after 2022. In addition to global central bank gold purchasing behavior, the impact of policy uncertainty on gold prices has also increased to some extent after 2022. In the extended model, the interaction term between policy uncertainty and the dummy variable also has a significant positive impact on gold prices, which may reflect the reconstruction of economic, financial, and trade orders under the global century-long changes, with economic policy uncertainty at historically high levels, making the safe-haven attributes of gold play an even more important role The new expansion model significantly enhances the explanatory power of gold price trends. Compared to traditional models, the expanded model that incorporates global central bank gold purchasing behavior and interaction terms with virtual variables increases the explanatory power of gold prices from 45% to 88%. On the other hand, the residual standard deviation of the expanded model decreased from USD 313/ounce in the traditional model to USD 145/ounce, a reduction of nearly 54%. According to the fitting results of the expanded model, the current gold price is not significantly overvalued. Although real interest rates in the U.S. continue to rise, the ongoing gold purchases by global central banks and the increased demand for safe-haven assets due to rising policy uncertainty may lead to a trend-driven upward shift in gold price levels. Gold Outlook: A Long-term Bull Market Amid Monetary Changes In the long run, we believe that gold has entered a new long-term bull market. The decline in trust between countries has led to a deep restructuring of the global economy and monetary system, a process that will be long-term. On one hand, the increasing demand for gold purchases by global central banks may be a long-term trend. The freezing of Russia's foreign exchange reserves in 2022 has heightened concerns among central banks about U.S. financial sanctions. Additionally, the continuous rise in U.S. debt and the high deficit rate show a tendency to become long-term, and the loss of fiscal discipline will exacerbate investors' concerns about the sustainability of U.S. debt. Currently, the 5-year CDS spread in the U.S. is also at a high range compared to recent years Potential sanction risks and high U.S. debt will weaken the trust foundation in the U.S. dollar. In this context, the increase in global central bank gold purchasing demand brought about by the restructuring of the global monetary system will be a long-term trend. The World Gold Council's 2024 Central Bank Gold Reserve Survey shows that 69% of central banks believe that gold reserves will continue to rise over the next five years, a proportion that has been on a continuous upward trend since 2022. On the other hand, the current official gold reserve levels of major gold purchasing countries are still low, leaving significant room for future increases. Although in the past three years, central banks in China, Poland, India, Singapore, and Qatar have ranked among the top in global gold purchases, the proportion of gold in their foreign exchange reserves remains low, with China at only 5.5% and India at 11.4%. In contrast, the proportion of gold in the Eurozone's foreign exchange reserves is as high as 62.4%. Therefore, compared to Europe's gold reserve levels, emerging market countries still have considerable growth potential for gold reserves in the future. Based on the extended model, we have made predictions for future gold prices under different scenarios. In the optimistic scenario, we believe that uncertainties regarding Trump's tariffs, immigration, and fiscal policies will remain high, putting the U.S. economy under stagflation pressure, which will accelerate gold purchases by central banks. In this case, we expect global central bank annual gold purchases to rise to 1,300 tons/year, inflation expectations to increase by 1%, policy uncertainty to rise by 0.5 standard deviations, and real interest rates to decline by 30 basis points, leading to a potential breakthrough of the gold price center above $3,800/ounce. In the neutral scenario, if global central bank gold purchases rebound to previous highs of 1,200 tons/year, with inflation expectations only rising by 0.5% and other conditions remaining unchanged, the gold price center may stabilize around $3,200/ounce In a pessimistic scenario, if the uncertainty surrounding Trump's policies decreases and the resilience of the U.S. economy remains strong, concerns about the risk of stagflation in the U.S. economy may fade, and there is no significant acceleration in global central bank gold purchases, then the gold price may potentially fall back to the range of USD 2,600-2,700 per ounce. However, the probability of this currently appears relatively low. However, the quantitative gold pricing model can only serve as a reference, as pointed out in our previous article, the current bull market in gold is primarily driven by non-economic factors rather than economic ones. The main driving forces behind this bull market in gold are the declining trust between countries and the restructuring of the international order, leading to a long-term bull market in gold due to the significant changes in the global monetary system. Article authors: Liang Zhonghua, Wang Yuqing, source: Haitong Macro Research, original title: "How Much Space Does Gold Have: A Reference Quantitative Model - Research on Global Monetary Changes Three (Haitong Macro Wang Yuqing, Liang Zhonghua)" Risk Warning and Disclaimer The market has risks, and investment should be cautious. This article does not constitute personal investment advice and does not take into account the specific investment goals, financial conditions, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Investing based on this is at one's own risk