Expectations of Fed rate cuts rise, gold price continues to rise

Rising, rising, rising! The price of gold has once again reached a high level.

In the last week of this year, the spot price of gold has risen slightly, approaching a historical high, and is expected to achieve a three-year increase in the annual average level.

As of 15:11 on December 27th, Beijing time, the spot price of gold was reported at $2065.38 per ounce.

The main factor supporting the rise in international gold prices is that data shows that inflationary pressures in the United States have eased, thereby strengthening market expectations for multiple interest rate cuts by the Federal Reserve in 2024.

Last Friday, the latest data from the US Department of Commerce showed that the year-on-year growth rate of the core PCE price index, the preferred inflation target of the Federal Reserve, excluding food and energy, fell to 3.2% in November, down from the previous value of 3.5% and lower than the market expectation of 3.3%. It is the lowest level since April 2021.

Although several Federal Reserve officials have recently made hawkish remarks trying to downplay expectations of interest rate cuts, the market currently expects the possibility of an interest rate cut by the Federal Reserve in March to still exceed 80%.

Wells Fargo predicts that the trading price of gold in 2024 will remain between $2100 and $2200 per ounce.

Global central bank gold buying spree continues

According to the World Gold Council, central banks and other institutions around the world increased their gold holdings by 337.1 tons in the third quarter of 2023, a quarterly increase of 93%. The People's Bank of China continues to buy gold. As of the end of November 2023, China's gold reserves reached 2226 tons, an increase of 12 tons (+0.53%) compared to the previous month, and gold has been continuously accumulated for 13 consecutive months.

Wan Zhe, a professor at Beijing Normal University and former chief economist of China Gold Group, said that central banks are the "barometer" of the market. The continuous gold buying by central banks also indicates that the risk aversion and tense situation in the current market have not been completely relieved under the influence of geopolitical situations.

The latest central bank gold reserve survey by the World Gold Council shows that considering factors such as inflation and geopolitical events, 70% of the surveyed central banks expect to increase their gold reserves in the next twelve months, and the trend of central bank gold buying may continue for many years.

A seemingly stable "high volatility" asset

However, gold, which seems to have attractive returns recently, is not considered a high-quality investment in history.

Since the end of the gold standard in 1974 until 2022, the average annual return of gold is only 5.0%. In contrast, the average annual return of the global stock market is 10.5%, which is twice that of gold.

The average annual return of the US stock market is even higher, reaching 11.9%. Even the annualized total return rate of the US 10-year Treasury bond is higher than that of gold, reaching 6.7%.

In addition, its volatility is much higher than it appears: since 1974, the standard deviation of gold is as high as 19.0%, far higher than the standard deviation of the global stock market, which is 15.0%.