China-Singapore Jingwei, December 13 Question: Is the pricing model invalid due to the soaring gold price?
Author: Zhao Wei, Chief Economist of IFC.
Zhao Wei. Since October, the price of gold has risen sharply, once hitting a record high, and the deviation from the "theoretical center" has also reached a historical extreme. Why is the gold pricing model ineffective?How will the gold price be interpreted in the future?
Why is it deviating from the "pricing factor"?
Since October 6, ** has risen rapidly. After this round of largesse, the deviation from the "theoretical center" of its pricing model has also reached a historical extreme. From the perspective of central bank gold purchases, the five-factor models of central bank gold purchases are as follows:Inflation factors, risk factors, opportunity costs, and trading behavior in the model. According to our calculations, the explanatory power of the five factors on the gold price is % and 25% respectively. According to the model, the current gold price is well above the theoretical pivot value of $1,762 ounces in the model. In the past, global ETF holdings and the 10-year U.S. Treasury real interest rate are also more effective indicators for tracking gold prices, and the current gold price has also deviated significantly from the two.
Figure 1 Gold prices deviate significantly from the pricing center of the five-factor model.
Fig. 2 Central bank gold purchases have strong explanatory power in the five-factor model.
From the perspective of the dismantling of various factors in the model, the recent risk aversion and the decline in real interest rates are the most powerful drivers of gold prices. On the one hand, since November, under the influence of improved supply and demand, weaker economic data, and easing speculative disturbances, U.S. Treasury interest rates have fallen sharplyOn the other hand, the rising risk aversion brought about by the Palestinian-Israeli conflict also supported gold prices. However, the in-model factor can only explain 30% of the increase in gold prices in the fourth quarter.
Behind the sharp fluctuations in gold prices, is it the impact of "new variables" or the failure of "old factors"?In fact, the framework of real interest rates is not completely broken, and gold prices still have a high negative correlation with real interest rates. On the one hand, from a historical retrospective perspective, the negative correlation between the month-on-month increase and decline of ** and the month-on-month change in the real interest rate of the 10-year US Treasury bond has been relatively stable for a long time, with only a slight change since August 2022, but it is still significantly negatively correlated. On the other hand, according to the statistics of the fluctuation range of gold prices in various periods of daily trading, it can be seen that gold price changes mostly occur at 20:00-23:00 Beijing time, which is the period when the US economic and financial data are published.
But on the one hand, in the traditional framework, for the convenience of tracking, tips are usually used as a representation of the "real interest rate";However, the trading does not strictly follow the pricing of tips. By calculating the implied "rate cut expectations" of the S&P 10-year Treasury bond and the COMEX (New York Mercantile Exchange) ** federal interest rate, we can see that the current S&P 500 and ** respectively imply 79 times and 7The expectation of 5 interest rate cuts may be more "dovish" than that of U.S. Treasury bonds and federal interest rates**, which overdraws the "interest rate cut expectations" to a certain extent.
Moreover, the lagged release of "central bank purchases" and "household investment" may be one of the forces that have raised the gold price pivot, which may be due to "long-term concerns" about sovereign currencies. Bitcoin's surge is used to symbolize the weakening of confidence in "sovereign currency": In March 2020, global central banks released water, triggering concerns about over-issuance of money, and Bitcoin **responded**;In the second half of 2022, the U.S. debt ceiling crisis continued to heat up, triggering "distrust" of the dollar system, and bitcoin** was reactivated. The two phases of the pivotal rise occurred in this context: before March 2020, from March 2020 to August 2022, and since August 2022, the real interest rate fell by 100 basis points, and the gold price was **0%；Real interest rates rose by 100 basis points, and gold prices were **3%, the asymmetry is significantly stronger.
Figure 3 The 100 basis point change in U.S. Treasuries led higher in the asymmetry of gold prices.
After the new high, how will the price of gold go?
In the short term, the "interest rate cut expectations" implied by the current gold price may have been overdrawn, and there is a possibility of short-term adjustment. Judging from recent days, the international gold price has appeared**. In the early stage, the continued decline in U.S. bond interest rates was an important support for gold prices, and the implied interest rate cut expectations for gold prices may be higher. However, with low inventories and still low effective interest rates, the resilience of U.S. real estate may become a short-term support for the economyThe stickiness of U.S. wages may drag down the speed of inflation, and the current market expectation of interest rate cuts starting in the first quarter of 2024 may be "overdrawn". In addition, under the pressure of fiscal spending, there is still a possibility of a supply shock on U.S. bondsCombined with the constraints of term spreads, short-term U.S. bonds still have the risk of upside, and gold prices may be relatively under pressure.
On the other hand, residents' investment behaviors triggered by risk aversion and declining trust in sovereign currencies are prone to reciprocate after event shocks, which may also put pressure on gold prices in the short term. Historically, the demand represented by the central bank and private investment is more consistent with the trend of gold pricesAmong them, central bank gold purchases are a "slow variable", while private investment is relatively volatile. Recently, events such as the Palestinian-Israeli conflict and Moody's downgrading of the outlook for U.S. bonds may make private investment "overbought" in stagesOn the institutional side, non-commercial long positions also reached the historical quantile of 91%. Residents' investment behavior may go back and forth in the short term, suppressing gold prices.
Figure 4 **Non-commercial long positions reach the historical 91% percentile.
In the medium and long term, U.S. bond interest rates are easy to fall and difficult to rise, recession fears, and central bank gold purchases continue to support gold pricesThe short-term return of gold prices to the center may be a "accumulation" for another upward movement. First, looking back historically, from the last time the Fed raised interest rates to the first rate cut, the decline in U.S. Treasury interest rates may be the general trend. Second, in the economic downturn, there are also many better market performances. Third, at present, China, Japan, India, Russia and other countries with large economies, the proportion of foreign reserves is still low, and they may continue to buy under concerns such as geopolitical risks. China-Singapore Jingwei app).
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