Xu Zhiyan: Gold is interpreting the first wave of market trends. After the interest rate cut cycle begins, it may usher in the second wave of market trends

According to the Wisdom Finance APP, on August 12th, Xu Zhiyan from Huaxia Fund shared his views on the gold market in a program. Xu Zhiyan stated that after a certain adjustment in this round of gold, gold has returned to its own track. This round of relatively large market fluctuations has caused financial turmoil affecting the performance of gold. Gold is in a very good allocation cycle for 3 to 5 years, one of the core reasons being that the Federal Reserve is expected to be in a rate-cutting cycle for the next three years, a judgment that is currently being reinforced. After gradually reaching a new platform, gold may consolidate for a period of time, allowing investors to gradually digest and the market supply and demand to reach a new balance. Gold is a dynamic pricing mechanism that depends on the core logic of whether the currency is loose, whether it is over-issued, and whether the value of the currency can withstand inflation in the medium to long term.

From the perspective of developed countries in Europe and America, they tend to over-issue currency. After significant easing and substantial profit-taking rate hikes, there may be a restart of easing. Therefore, judging cyclical things is very crucial, meaning increasing allocation in the up cycle of gold. Xu Zhiyan hinted that currently gold is interpreting the logic of the first wave of the market. He used the example of "In 2019, the rate-cutting cycle began, and gold hit a new high after three months of volatility," implying that "with the opening of the rate-cutting cycle, gold may usher in a second wave of the market."

Specifically, Xu Zhiyan pointed out that after the adjustment, gold has returned to its own track.

Gold investment has recently attracted more attention from everyone in the market, stemming from the global market. Last week, the so-called yen carry trade caused significant market volatility, during which gold actually declined.

The most fundamental reason can be traced back to March 2020, when liquidity issues arose due to the crisis, the first reaction was to solve the immediate problem (in March 2020, global epidemic caused market volatility).

In other words, the margin for these trades may be called in, or even face the risk of liquidation. When liquidity becomes difficult, the first thing to do is actually to save oneself, meaning many people sold off highly liquid assets that could be immediately cashed out, even at a cost, to repay the margin.

Similar situations occurred in 2018 and 2016, especially in 2008 when there was a large amount of selling in the gold market in the short term (2008 financial crisis). This selling made the liquidity crisis one of the main triggering factors.

During this event, (everyone) was not thinking about hedging risks with gold, but rather about how to survive with other assets, which was actually the case. Therefore, in this round of gold, it can be seen that after a certain adjustment, gold has returned to its own track. This round of relatively large market fluctuations has caused financial turmoil affecting the performance of gold.

Gold is actually a highly liquid, high-credit, and globally recognized asset that can hedge risks and, more importantly, can be instantly cashed out, providing security for other assets. Therefore, I often liken gold assets to ballast stones, the last line of defense against risks.

Gold has many functions in its allocation. In this round of the large yen carry trade process, gold actually provided liquidity for other assets, which is a fundamental reason for its certain adjustment Xu Zhiyan judged that the gold is in a very good allocation cycle for 3-5 years.

In the long run, there is no problem with gold. The support point for gold is the interest rate cuts in the United States.

At the beginning of the year, this framework was set, believing that gold is in a very good allocation cycle for 3 to 5 years. One of the core reasons is that the Federal Reserve will be in an interest rate cut cycle for the next three years, which is currently a reinforced judgment.

In other words, the fact that the Federal Reserve started cutting interest rates in September, the market expectations, including judgments, also believe that an interest rate cut cycle will be initiated. Whether it is 25 basis points or 50 basis points, this is not the most important for gold itself. The key is the initiation of an interest rate cut cycle.

The second point is central banks increasing their gold holdings. Recent data indicates that central banks are still continuously increasing their gold holdings. Global central banks bought 180 tons in the second quarter and nearly 300 tons in the first quarter. In total, it is close to 480 tons. If it is close to 1000 tons for the whole year, it is actually a very large amount historically.

Of course, gold is used to hedge risks, resist currency over-issuance, resist global economic downturns, debt monetization, and so on. These factors are not a problem in the long run.

According to the gold analysis framework, from a medium-term perspective, it is closely related to actual interest rates and the general direction of the Federal Reserve's interest rate meetings.

Xu Zhiyan believes that after the gold price steps up to a new level, it will consolidate for a period of time.

Trading attributes are also of great concern to everyone. Currently, trading may be more short-term. The net long positions in futures are indeed relatively high, and people are a bit concerned. Isn't this overbought? Having too many long positions often carries some risks.

Technically, after rising a lot, everyone feels the risk point (approaching), such as breaking through close to 2500, everyone feels that the market may fluctuate a bit.

It is also seen that gold has some fluctuations, but how to correctly understand the relationship between gold fluctuations and investments?

Gold is a financial asset, and it is the fourth largest category of trading globally with very active trading.

This focus is also very high, and trading in futures positions is very active, so there will inevitably be some fluctuations. These fluctuations will increase with the market itself, such as last week's yen carry trade, some speeches by the Federal Reserve, fluctuations in other market assets, etc.

Gold should absolutely not be treated as a fixed-income asset, which is incorrect.

The medium to long-term returns are indeed good, often mentioned as 7% to 8% (AU9999 long-term annualized 8%), but it is actually a volatile asset. Its volatility is equivalent to about 2/3 of stocks or around 60%, much larger than bond volatility.

So how to understand it?

First, in terms of the medium to long-term returns of gold and its volatility, it is actually a very cost-effective asset.

Its negative correlation with other asset classes is natural, making it a high-quality target for asset allocation, which is its scarcity.

Moreover, some assets such as overseas assets, Nasdaq, and US bonds, either require you to buy something at a high premium or the market quotas are very tight now, as everyone knows, so in reality, you can't get the quantity.

Gold can be allocated in quantity, is a very good risk-hedging asset, and its medium to long-term properties are also very good. In fact, volatility is an inherent attribute of gold, and it is also a key inherent factor causing negative correlations with other asset classes. Therefore, it is important to correctly understand the fluctuations in gold Secondly, how to understand the current price of gold, many people think that the price is quite high. The price has reached around 2,400, so is gold good or not?

In fact, the pricing of gold is quite complex and multi-faceted. It is a global macroscopic epitome. Gold does not have a fixed pricing formula like the stock market, where there is value investing, DDM models for stocks, and cash flows for bonds to determine whether it is expensive or cheap.

The final determination of the price of gold is actually based on supply and demand. If something is scarce, it is valuable. Gold is actually known to be very difficult to mine, and it is also difficult to determine its reserves.

The market demand for gold is still there, but the price has shown some upward movement, so it is important to understand gold correctly. After gradually reaching a new platform, it may consolidate for a period of time, allowing investors to gradually digest it, and the market's supply and demand will gradually reach a new balance