Huayuan Securities: New and old paradigms resonate, continue to be optimistic about the gold sector's allocation opportunities amid expectations of interest rate cuts

According to the Wisdom Financial APP, Huayuan Securities released a research report stating that gold has four attributes: financial, monetary, hedging, and commodity. The real interest rate of the US dollar is the preferred indicator in the long term. In the medium term, the trend of US economic data is weakening, raising expectations of interest rate cuts, and gold prices hitting historic highs. In the long term, a new paradigm framework is emerging, with strong central bank gold purchases, growth in US money supply, and changes in geopolitical situations expected to continuously push up the long-term center of gold. Under the resonance of the new and old paradigms, the performance of gold-related companies is expected to gradually realize growth, and the team continues to be optimistic about the gold sector allocation opportunities. Gold Pricing Framework: Gold has four attributes: financial, monetary, hedging, and commodity. (1) The financial attribute corresponds to the real interest rate framework, where the opportunity cost of holding gold can be measured by the real interest rate. The price of gold is negatively correlated with the 10-year US bond rate/TIPS rate, making it a preferred indicator in the long term. (2) The monetary attribute corresponds to the alternative to the US dollar, with gold prices negatively correlated with the US dollar index, although the overall relationship is weaker than with real interest rates. (3) The hedging attribute corresponds to investors choosing safe-haven assets during risk events to preserve and increase value, requiring attention to the size and duration of risk events (whether they have a substantial impact on economic policies). (4) The commodity attribute corresponds to global gold supply and demand, with its commodity explanation relatively weaker, but in recent years, central bank gold purchases have become an important marginal increment, increasing from 254.9 tons in 2020 to 1037.4 tons in 2023. Medium-term Perspective: US economic data trends are weakening, raising expectations of interest rate cuts, and gold prices hitting historic highs. (1) US inflation data steadily falling: Since 2022, US inflation has steadily declined from high levels, with first-quarter 2024 inflation showing a fluctuating pace, but has unexpectedly fallen for two consecutive months since May, with the year-on-year CPI actual value as of June at 3.0%. (2) Economic indicators and employment data steadily declining: Since 2022, the ISM Manufacturing PMI year-on-year data has been declining from high levels, with July 2024 data at 46.8%; during the same period, the addition of non-farm employment has fluctuated downward, from 862,000 people in February 2022 to 114,000 people in July 2024. (3) The FOMC meeting is gradually brewing an atmosphere of interest rate cuts, with the June 2024 dot plot expecting one rate cut within the year, and the highest market pricing in August indicating the possibility of three rate cuts within the year (FedWatch tool shows a 47.7% probability of a total of 100 basis points for three rate cuts within the year priced by the market on August 6). Long-term Perspective: A new paradigm framework is emerging, with strong central bank gold purchases, growth in US money supply, and changes in geopolitical situations expected to continuously push up the long-term center of gold. (1) In recent years, there have been two trends in the structure of gold investors: "eastward advance and westward retreat" and the continuous increase in central bank gold reserves. The SPDR Gold ETF is an important channel for Western investors to buy gold, with holdings declining in recent years, while global central bank net purchases continue to grow, becoming an important force in gold demand. At the same time, the People's Bank of China has been buying gold for 18 consecutive months since November 2022, increasing its gold reserves by 10.16 million ounces during this period, contributing significantly to incremental demand From a long-term perspective, the continuous growth of the M2 money supply in the United States, the downward shift in real interest rates of the US dollar, and the continuous increase in leverage ratios of various sectors in the United States (in recent years, there has been a structural change with the household sector deleveraging and the government sector leveraging up), these factors together have driven the central price of gold priced in US dollars to move upwards. 2024 vs 2019: What are the similarities and differences in the gold price expectations in the context of interest rate cuts? According to Huayuan Securities' review of two important gold cycles, it can be summarized that from 2018 to 2022, gold went through a complete cycle of interest rate cuts and hikes. Amid the continuous escalation of the epidemic, gold experienced a unique bull and bear cycle, with the real interest rate framework having a good explanatory effect throughout the entire period. From 2022 to 2024, with inflation fluctuations and the oscillation of recession/interest rate cut expectations, gold saw fluctuations, reaching historical highs under the resonance of the old and new paradigms. The real interest rate framework had a good explanatory effect for most of the time, with the weight of the new paradigm becoming increasingly evident during a certain period. Continued optimism for gold sector beneficiaries under the resonance of old and new paradigms. Under the resonance of old and new paradigms, the central long-term price of gold is expected to continue to rise, and the performance of related companies is expected to gradually realize growth. Recommended focus: Shandong Gold, Yintai Gold, Chifeng Gold, Zhongjin Gold, Hunan Gold. Risk Warning: Risks of significant fluctuations in gold prices, risks of geopolitical factors leading to new project production falling short of expectations, risks of fluctuations in gold demand, uncertainties regarding the Fed's interest rate cuts, risks of US inflation persisting beyond expectations