Hong Hao: One-third of this round of the gold bull market has passed, and it has not yet reached its absolute climax

Gold has been rising for a long time, will it continue to rise?

On July 9th, Hong Hao, Chief Economist of CICC, made bold predictions about the economy and market at a summit, especially regarding the precious metals market.

Key points summarized by the Investment Homework Representative are as follows:

1. We are currently in a period of confusion, waiting for policies, fiscal measures, and monetary measures to reignite the cycle at the bottom of the cycle.

The market trend reflects the confusion of this stage. However, the most obvious investment opportunity lies in this stage, due to the continuous rise in precious metals brought about by the declining interest rates.

1. This bull market in gold has only gone through one-third of the cycle and has not yet reached its peak. Gold will rise to unbelievable heights in this cycle.

2. If the real estate issue is not resolved, China's long-term bond yields will continue to hit new lows.

3. This wave of (US stock) semiconductor market, including stocks such as NVIDIA and Qualcomm, is far from over.

Hong Hao, Chief Economist of CICC and Director of China Chief Economist Forum, has made accurate predictions about the development of the Chinese economy and market trends. He has been named "Best Overseas Strategist" by New Fortune magazine and "China's Most Accurate Strategist" by Bloomberg News. He has served as the head of the research department at CICC International, and has worked at institutions such as Citi Group and Morgan Stanley.

Hong Hao believes that as a reserve asset, the proportion of gold in the entire monetary system will inevitably increase, and with limited annual gold production, the significant gap between supply and demand for gold in the Chinese domestic market is a positive factor for gold.

Furthermore, the precious metals cycle lags behind the economic development cycle by 7-10 years. Therefore, although gold has risen significantly, the market is just getting started.

Moreover, the fitting degree between this bull market in gold and the previous major bull market in gold is very high, with similar historical backgrounds, economic cycles, and monetary supplies, indicating that the price trends displayed should also be consistent.

Therefore, Hong Hao boldly predicts that the bull market in gold has only gone through one-third of the cycle, has not reached its peak, and can imagine reaching high points.

Below is the essence of the content summarized by the Investment Homework Representative (WeChat ID: touzizuoyeben), shared with everyone:

This bull market in gold has only gone through one-third of the cycle, the market has just begun

The recovery of this economic cycle is different from before. The US stock market has been rising for a long time. From 2009 to now, the S&P has risen from 666 points to the current 5500 points, nearly tenfold. China has also made significant progress. However, what we see is the slowdown in China's labor productivity development, including changes in population and industrial upgrades, nearing completion.

Our biggest challenge now lies in the aging of the labor force and further improvement in labor productivity, reaching a bottleneck. The United States is likely to see a rebound in labor productivity under the new wave of artificial intelligence and semiconductor revolution, which is good news for precious metals. **

The blue-green line in the picture represents the comprehensive price curve of bulk precious metals, gold, silver, and other precious metals that we deal with.

When we lag the cycle of precious metal prices by 1 to 2 short cycles, which is 7 to 10 years behind, we can see that their high peaks and troughs are basically consistent with the fluctuations in labor productivity cycles, that is, economic cycles. This is definitely not a coincidence, as economic development requires credit expansion.

The first trough appeared in 1980, after the collapse of the Bretton Woods system, when the Fed regained control of inflation and the economy began to move forward.

Therefore, as the economic volume expands, the demand for credit and money supply increases. For thousands of years in history, gold has always been one of the important reserve assets of central banks. If the monetary base of central banks starts to expand due to the need for credit expansion for economic development, then naturally the proportion of gold as a reserve asset in the entire monetary system will increase.

However, there is a problem, the production of gold is limited, and the annual output is limited, the amount of precious metals that can be mined is limited. For example, China, China was once the only global system that used silver as a circulating currency, without gold. China's exports of silk, tea, etc., in the Qing Dynasty won a large amount of silver imports for China, making China the largest GDP country in the world at that time. Although China did not have many special exports, relying on these exports to introduce silver, China's economic volume became the largest in the world, highlighting the importance of gold and silver.

Therefore, now we see that if the cycle of precious metals lags behind labor productivity, that is, the economic development cycle is roughly 7 to 10 years, then the gold market is just beginning. Although it has doubled, it is just the beginning.

Let's take a look again, we can use different currencies to buy gold. Just now we talked about the 1970s, after the collapse of the Bretton Woods system, the purchasing power of the US dollar relative to gold decreased by 40%, and the Chinese yuan decreased by 99%. Therefore, in today's market, we see a premium on gold every day, there is a huge price difference between gold priced in RMB in the domestic market and gold priced in USD in the international market.

In a perfect world, we can buy gold cheaply in the international market in USD, then sell it domestically in RMB, making a price difference. Because we know that gold is small in volume but high in value, it is very easy to pass through customs. And the law of one price in economics tells us that this phenomenon should be unsustainable.

So if we look at the exchange rate between the US dollar and gold, it is the bright blue line on the graph.

![](https://wpimg-wscn.awtmt.com/c67bd2f5-2c82-4d8d-b8d5-2eaace28c640.png? The speed at which the RMB depreciates relative to gold is much faster than the speed at which the USD depreciates relative to gold. This trend is continuously strengthening, as shown in the graph where the bright blue line is a straight line moving vertically downwards, and the yellow line represents our central bank reserves, including foreign exchange reserves and gold. Approximately 5% or more of China's central bank foreign exchange reserves consist of gold.

We can see that foreign exchange reserves are continuously increasing, with China's central bank buying gold continuously for eight months, stockpiling gold. However, the price of gold priced in RMB is continuously declining.

Therefore, if we were to make a very simple trade now, it would be to desperately buy gold with RMB domestically. Recently, I heard that the purchase of gold may be restricted, not sure if it's true. This highlights the huge gap between supply and demand for gold in the Chinese domestic market, where demand is very high but supply is far behind.

Let's take a look at the two major trends in gold prices. The blue line represents the massive bull market in gold seen previously, while the yellow line represents the current gold bull market. We can see that the fitting degree of this round of the gold bull market to the previous one is very high.

In the two gold bull trends, historical background, economic cycles, and currency supply are basically consistent. Therefore, market prices reflect human expectations and various macroeconomic variables.

Thus, we can see that this round of the gold bull market has basically gone one-third of the way and has not yet reached its peak. Gold will rise to heights that everyone will not believe in this round. On July 8th, someone asked me if it would reach $3,300 per ounce, I think that imagination is a bit too small, we should think boldly.

Without solving the real estate issue, China's long-term interest rates will continue to hit new lows

As I mentioned earlier, China's labor productivity has encountered a bottleneck in growth, slowing down continuously, and has not found new breakthroughs yet. The United States has already found them, possibly in AI, semiconductors, weight loss drugs. Therefore, the labor productivity in the United States is continuously improving. At the same time, the United States is a country with a population of 400 million, with illegal and legal immigration of about 4 million people every year, meaning that the labor force in the United States is growing at a rate of 1% per year, which is quite astonishing.

Let's take a look at China again, the relationship between urbanization rate and birth rate. China has experienced a rapid urbanization process in the past 30 years, resulting in houses built now that may not be sold out in the next ten years. With the rise in urbanization rate, improvement in education levels, and income levels, the birth rate is continuously declining. This is not only a problem faced by China but a trend all countries globally are facing Therefore, if the development of labor productivity encounters bottlenecks, the birth rate encounters bottlenecks, and the economic structure undergoes changes, the allocation of real estate in the balance sheets of households will be replaced. If we don't buy houses anymore, what should we buy?

This year, we have seen deposits increase to 350 trillion in the Chinese banking system. The long-term government bond yields in China continue to hit new lows, leading the People's Bank of China to come out and say not to buy bonds, as there is a bubble. However, we know that if the real estate issue is not resolved, China's long-term bond rates will continue to hit new (lows).

This year, macro data has started to recover from the low point

Let's take a look at the operation of the economic cycle, a 40-year cycle, which leads us to our views on the bullish trend of precious metals, commodities, and gold in the coming years.

Looking at the short cycle is also important. After experiencing three years of the pandemic in 2024, China has been in a restart mode for over a year, but economic development is not as robust as before. Since June, sales of liquor, luxury goods, etc., have shown varying degrees of decline, with Maotai prices plummeting. However, the demand for gold and silver is increasing.

Let's take a look at China's economic short cycle, a 35-year cycle, with ten three-year and five-year cycles overlapping to form a 35-year cycle.

This year happens to be the end of the previous cycle and the beginning of the next cycle, a transitional year. If we take 2023 as the first year, with China lifting pandemic restrictions and restarting in 2023, this year, through the fitting of macro data, we can see that whether from a timing perspective or from the fluctuations in macro data, this year is a year of starting to recover from the low point.

Therefore, in the first quarter of 2024, China's economic data significantly exceeded expectations. In April and May, we had a very good stock market rebound, but now it has fallen into a lull again because the real estate issue has not been resolved. Everyone is still waiting for important meetings, waiting for policy changes, hoping that the meetings will provide us with more investment and future guidance.

Despite the economy recovering and struggling to find a bottom, the rebound strength is limited, and the sustainability is not good. The stock market is defending the 3000-point mark every day.

The semiconductor rally in the United States is far from over

Let's take a look at the United States, where the yellow and blue lines in the chart represent the semiconductor cycle.

By using data such as semiconductor shipment orders and shipping costs, we can fit the semiconductor cycle in the United States, which is basically a cycle of 3 to 4 years. After the artificial intelligence revolution in the United States last year, a straight line going up indicates a very strong recovery momentum in the U.S. economic cycle. This may also be one of the reasons why global capital continues to flow into the United States.

Therefore, in the U.S. semiconductor cycle, we can see that in the past, when it was going up, it generally stayed at its peak for a period of time. So it is very obvious that this wave of semiconductor market, including stocks such as NVIDIA and Qualcomm, is far from over.

We are currently at the bottom of the cycle, waiting for policies to ignite the cycle

Finally, sharing a more complex chart - the economic cycle in China.

In the past, China's economic cycle was mainly driven by real estate investment, as real estate accounted for one-third of China's economy. It may be much smaller now, but at its peak, it still accounts for one-third. Real estate investment generates demand for credit expansion, people buying houses generate demand for credit expansion, as well as demand for cars, furniture, and other consumer goods. Therefore, understanding China's economic cycle has to start from the real estate inventory cycle and investment cycle.

This round of China's economic cycle is in the stage of bottoming out and rebounding. We can fit a curve of the operation of China's economic cycle using cross-departmental economic data, represented by the bright blue line on the chart. Basically, every 3 to 4 years, China's economic cycle goes from a low point to a high point and then back to a low point. We are currently at the low point, which is the far right of this chart.

When we compare the curve of China's economic cycle with data from other macro departments, we see that including rebar, stock prices, bond yield, earnings per share of listed companies, etc., during the operation of the economic cycle, China's macro data consistently and cross-departmentally move in the same direction according to a set pattern and time rhythm. Currently, all macro data are at cyclical lows.

There is a saying in China that "after extreme hardship comes good fortune, and a sick tree may grow new shoots." We are currently in a period of confusion, because at the bottom of the cycle, we are waiting for policies, fiscal measures, and monetary measures to reignite the cycle.

The market trend reflects our sense of confusion at this stage. But the most obvious investment opportunity lies in this stage, where the continuous decline in interest rates brings about the continuous rise in precious metals.

Hope that the Chinese economy will show some performance in the second half of the year, as economic growth will continuously increase the demand for monetary credit and precious metals. This demand is not only for hedging and investment purposes, but also due to economic growth increasing the demand for precious metals.

Source: Investment Homework Pro by author Wang Li

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