The gold market is full of sorrows, and heavy events are about to come

Due to stronger expectations for the Fed to raise interest rates, the U.S. dollar index remained at a high level above the 103 mark, and U.S. bond yields continued to rise. The yield on the U.S. 30-year Treasury bond hit its highest level since March 2019, at 3.026%. The U.S. index and U.S. bond yields put enormous pressure on the price of gold. Spot gold once broke below the $1,860 mark, and other non-U.S. currencies also fell under pressure.

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With the imminent Fed rate hike, the market's investment sentiment towards gold has also diminished. Gold ETFs saw outflows (12 tons in total) every day last week, ending 14 consecutive weeks of capital inflows. The week on the 16th also cut the net long position further, to 81,000 contracts. This is the lowest level since early February.

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Markets now expect the Fed to raise its key interest rate by 50 basis points when it wraps up its two-day meeting, which would be the largest rate hike since 2000. The current probability of the Fed raising interest rates by 50 basis points in May is 99.6%. But it was more comfortable paying more attention to Fed Chairman Jerome Powell's news conference to get a better idea of ​​how high he thinks interest rates need to be to keep inflation in check.

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On the same day, the U.S. Treasury Department will release its quarterly funding announcement, which will detail the size of future bond auctions. investment, which would force the Treasury to borrow more money from the public.

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On Friday, the U.S. Labor Department will release its monthly nonfarm payrolls report -- an important market indicator of U.S. economic growth and wage pressures. These events have the potential to usher in huge volatility in the gold market.

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As the Federal Reserve officially entered the interest rate hike cycle, the real interest rate of the 10-year U.S. Treasury bond, which has been hovering in the negative range for nearly two years, continued to rise under the support of tightening expectations. It is now close to a positive state, but liquidity tightens and opportunity costs The "negative" impact of the uplift on gold has not been realized under the disturbance of geo-risk.

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Since the beginning of the year, under the alternating support of hedging demand and reflation transactions caused by the geopolitical conflict between Russia and Ukraine, the price of gold has fluctuated upwards. Market worries.

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As a special commodity, gold has the dual attributes of a risk asset and a safe-haven asset. As the Federal Reserve starts the interest rate hike cycle, the impact of interest rates on the price of risky assets has begun to appear, and the demand for safe-haven also supports the price.

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Previously, the faster-than-expected rate hike by the Federal Reserve and the unexpected Russian-Ukrainian conflict brought the double impact of interest rates and hedging on the gold price. Based on the trend of speculative value and risk premium, we can divide the gold price trend into three parts. stage analysis.

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In the first stage, tightening expectations have increased and inflation expectations have eased. The rise in real interest rates has significantly suppressed the speculative value of gold, while financial market fluctuations and geopolitical risks have also supported gold’s hedging demand. Gold prices are raising interest rates and avoiding risks. The long-short game oscillated sideways.

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In the second stage, the safe-haven demand and inflationary pressure caused by the situation in Russia and Ukraine formed double support for the price of gold. In the third stage, there are still great uncertainties in the follow-up sanctions measures for geopolitical conflicts, the demand for hedging is showing a long tail exit, and the risk premium continues to rise.

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However, as inflation expectations have been fully reflected, interest rate hike expectations have once again become the core driver of real interest rates, suppressing the speculative value of gold. In the near future, with the gradual inclusion of interest rate hike expectations, U.S. bond interest rates have stabilized, and the 10-year U.S. bond real interest rate has not yet returned to positive under the suppression of inflation expectations. At the same time, the end of the geo-risk-led hedging demand is coming to an end, and the increase in SPDR gold ETF positions has been suspended. The fall in the risk premium and the stabilization of speculative value have caused the price of gold to drop significantly in the near future.

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After several rounds of QE, in 2017, the Federal Reserve officially announced the reduction of the balance sheet until the end of 2019. Although it is regarded as one of the few periods for reference to shrink the balance sheet, this round of balance sheet reduction is likely to be quite different from the previous round.

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First of all, from the perspective of the reasons for the tightening of monetary policy, this round of interest rate hike and balance sheet reduction is mainly driven by inflation, and although the current round of employment market has also improved, since mid-2021, US inflation has continued to be high and gradually climbed. It hit a new high since the Great Stagflation period and has yet to show signs of peaking and falling back.

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Secondly, from the perspective of global monetary policy trends, before the last round of balance sheet reduction, the world's major economies did not notice any significant tightening, except for some emerging markets to raise interest rates. In the second half of 2021, with the rising expectations of the Fed's monetary tightening, emerging economies such as Russia and Brazil have adopted preventive interest rate hikes to prevent exchange rate depreciation and capital outflow risks. The world has ushered in a new wave of interest rate hikes.

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Finally, due to the previous continuous interest rate hikes, the US dollar index remained high and the inflation level hovered at a low level. At that time, in a sense, the balance sheet was actually used as an alternative to raising interest rates. Against the background of the impact of the epidemic and the Fed's ultra-loose monetary policy, safe-haven demand and speculative value have brought investment allocation demand for gold.

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Previously, the gold market has experienced two stages of "safe-haven reinvestment" and "speculative reinvestment". As the Federal Reserve accelerates the normalization process of monetary policy, the market's investment preference for gold is gradually weakening. The strong statement of the Federal Reserve will suppress the price of gold, making the price of gold still have room for downside in the medium term.