--- title: "In conversation with Xu Zhiyan from Huazheng Fund: Gold is still in a new cycle, and its medium to long-term investment value is underestimated by many" type: "News" locale: "en" url: "https://longbridge.com/en/news/224030369.md" description: "In the next 1 to 2 years, the real interest rates in the money market (government bond yields - inflation rate) will gradually decline, possibly accelerating in the second half of next year, or turning negative in the following years. During such periods, gold tends to perform relatively well" datetime: "2025-01-06T06:42:59.000Z" locales: - [zh-CN](https://longbridge.com/zh-CN/news/224030369.md) - [en](https://longbridge.com/en/news/224030369.md) - [zh-HK](https://longbridge.com/zh-HK/news/224030369.md) --- # In conversation with Xu Zhiyan from Huazheng Fund: Gold is still in a new cycle, and its medium to long-term investment value is underestimated by many Xu Zhiyan, the assistant general manager of Huazhong Fund and the manager of Huazhong Gold Easy ETF, is possibly one of the most knowledgeable individuals about gold in the asset management industry. On one hand, he was involved in the establishment of the first batch of gold ETFs in the industry, manages the largest gold fund in Asia, and frequently participates in discussions with relevant departments and industry associations, providing advice and suggestions for policies and the industry. On the other hand, he is also one of the few investors in the industry who has experience in macro, equity strategies, and commodities. His judgments on the cycles of major asset classes often differ from market consensus but tend to align more closely with the trajectory of future developments. He is an investor skilled in research and also an expressive talent among practical individuals. As the year comes to a close, regarding the future direction of gold, the market, and major asset classes, Zhou Hong, the executive deputy editor of Wall Street Insights, had an in-depth dialogue with Xu Zhiyan. Xu Zhiyan was a guest at the Alpha Annual Summit held by Wall Street Insights from December 20 to 21, sharing his latest outlook for the new year with investors. Xu Zhiyan's core viewpoints are as follows: 1. Researching gold is essentially studying the global macroeconomic long cycle, particularly the monetary cycle, economic cycle, and global political cycle. From a monetary perspective, the Federal Reserve is expected to enter a rate-cutting cycle in the future, which is a major trend. For investors, understanding these cycles is crucial for grasping the impact on gold prices. 2. Currently, gold prices are at historically high levels, which we understand has raised concerns for some people. The reasons for concern include two aspects: first, gold jewelry consumption has seen a significant decline for the first time in the past decade; second, when gold prices approached $1,920 per ounce at the end of last year, there was a significant adjustment. Now, gold has risen to over $2,600 per ounce, and investors are worried about another significant fluctuation in gold prices. 3. Central banks have purchased a large amount of gold in 2022 and 2023, sparking discussions about the sustainability of this buying behavior. We believe this trend has a certain degree of sustainability. 4. At the end of last year, we proposed the view that "gold is entering a new cycle." By the end of this year, we found it challenging to find a new term to describe this cycle. Therefore, we believe that next year, gold assets will be "the continuation of a new cycle" and will have "a new normal in pricing." 5. Our judgment is that in the next 1 to 2 years, the real interest rates in the money market (government bond yields - inflation rates) will gradually decline, possibly accelerating in the second half of next year or turning negative in the following years. During such periods, gold tends to perform prominently. 6. In the second half of 2025, influenced by geopolitical factors, global inflation may rise again, which will have a certain impact on the pace of interest rate cuts by overseas central banks and will also disrupt the trend of gold. In the short term, gold may experience some fluctuations, but in the long term, the investment value of gold will remain optimistic. 7. The monetary system has undergone a transition from the gold standard to a paper currency system, and now, when facing economic issues, it is usually resolved through excessive issuance of currency. This trend will not revert to the gold standard era. However, it is foreseeable that the money supply will continue to increase. 8. Alan Greenspan once said that the pricing of gold is not in the hands of the public because it is too scarce. Central banks, insurance companies, large institutional investors, and ultra-high-net-worth individuals are the main buyers of gold Although gold is not paper currency, it is actually stronger than paper currency. It is a globally recognized asset, and even central banks, which are the guarantors of the credit of the paper currency issuance system, hold a large amount of gold. There are approximately over 40,000 tons of gold globally, with about 20-30% held by central banks, which fully proves that gold is truly hard currency. 9. Overall, many people underestimate the investment value of gold. In fact, we should calculate the yield of gold based on the publicly auctioned price. The medium to long-term investment value of gold is actually quite good, around 8%. 10. The inclusion of gold has a positive contribution to the overall performance of the investment portfolio. According to research by the World Gold Council, increasing gold to about 10% in global asset allocation can improve the efficient frontier of the portfolio. 11. In the context of global low growth and low interest rates, this may bring some volatility. In the face of economic issues, the solutions of developed countries often involve emergency measures first. Excessive issuance of currency is essentially an emergency response to the economy, but the excess currency will remain in the market, making it very difficult to completely withdraw. 12. For A-shares, our allocation is very clear, especially in response to the investment needs of young people; this is a basic allocation. **The following is a summary of the entire dialogue** - **Gold is the counter to currency** **Zhou Hong:** Gold has been continuously rising over the past few years and is still near historical highs. What factors do you think have driven the rise in gold prices? **Xu Zhiyan:** Gold, as a unique asset, differs from stocks, bonds, and real estate, and its pricing has its inherent rules and logic. Over the past few years, gold prices have risen significantly, approximately doubling compared to five years ago. Since last year, gold has performed particularly well among various commodities, with an increase of nearly 30%. At the same time, the increases in gold prices over the past year, three years, and five years have all been considerable. I believe the following factors have driven this round of significant increases in gold prices. First, from the perspective of gold pricing logic, it is essentially a counter to currency. For thousands of years, gold has existed as currency and has a history of the gold standard for hundreds of years. Therefore, if there is excessive issuance of currency, gold prices are likely to rise, especially in the expectation of currency over-issuance. Second, the market has undergone significant changes over the past five years. In March 2020, the Federal Reserve over-issued currency more than double the amount during the 2008 global financial crisis in just two weeks, leading to the most severe inflation in the U.S. in 40 years. Subsequently, the Federal Reserve took aggressive interest rate hikes and then entered a rate-cutting cycle. During these 3-5 years, global geopolitical events have occurred frequently, and the phenomenon of currency over-issuance has severely weakened the purchasing power of global currencies, especially causing a significant depreciation in the value of dollar-denominated assets. Finally, the price movements of gold reflect the market's attitude towards risk. - **Gold is still in a new cycle** **Zhou Hong:** Do you think there is still room for gold to perform further next year? **Xu Zhiyan:** We are currently writing the gold strategy report for 2025. The current gold price is at a historically high level, and we understand that this has raised some concerns The reasons for concern include two aspects: on one hand, influenced by the rise in gold prices, the consumption of gold jewelry has seen a significant decline for the first time in the past decade; on the other hand, when gold prices approached $1,920 per ounce for the first time at the end of last year, there was a significant adjustment. Now, gold has risen to over $2,600 per ounce, and investors are worried that gold prices may experience significant fluctuations again. However, our concerns about the future trend of gold are not many; in the long term, the investment value of gold is still expected to be optimistic. The reasons are as follows: First, our research on gold is essentially a study of the global macroeconomic long cycles, particularly the monetary cycle, economic cycle, and global political cycle. From a monetary perspective, we believe that the Federal Reserve will enter a rate-cutting cycle in the future, which is a major trend. Therefore, it is crucial for investors to understand the impact of these macro cycles on gold prices. Second, central banks have purchased a large amount of gold in 2022 and 2023, sparking discussions about the sustainability of this gold-buying behavior. We believe this trend has a certain degree of sustainability. For example, in the first quarter of this year, central banks purchased 480 tons of gold, and in the second quarter, they purchased 190 tons. Recently, there have been concerns about whether central banks will stop buying gold. However, other countries' central banks continue to purchase gold. Then, at the end of November, the People's Bank of China also significantly increased its gold holdings. Third, the high debt levels of global economies. If there is too much debt and fiscal revenue cannot cover it, it may lead to debt monetization. This will also draw attention to gold. Fourth, the challenges of global geopolitical issues. At the end of last year, we proposed the view that "gold is entering a new cycle," and by the end of this year, we found it difficult to find a new term to describe this cycle. Therefore, we believe that next year, gold assets will be the " **continuation of the new cycle**." However, it will also exhibit some new characteristics. One characteristic is the changes in interest rates of overseas central banks, as well as the possibility of individual countries significantly raising tariffs, which may cause some disruption to the global decline in inflation. Our judgment is that in the second half of next year, that is, in the second half of 2025, inflation may rise again, which will have a certain impact on the Federal Reserve's rate-cutting policy. Although rate cuts will still occur, they may be delayed or reduced by one or two cuts, so the reduction in the number of rate cuts may lead to some market fluctuations. Fifth, aside from monetary factors, we believe that **the short-term trend of gold may still experience some twists and turns, but in the long term, the investment value of gold is still expected to be optimistic.** Changes in personnel in overseas political circles will not alter the macroeconomic cycle of the United States; this round of the U.S. economic cycle is generally downward. In the long term, the growth rate of the U.S. economy is roughly around 2%. Therefore, a 10-year Treasury yield close to 5% is clearly unsustainable. As inflation rises again overseas, this will lead to a narrowing of the gap between inflation rates and Treasury yields, potentially even turning negative; this difference is known as the real interest rate. The real interest rate is a core key indicator for the pricing of gold in the medium to long term, including 20 years Our judgment this year is that in the next 1 to 2 years, real interest rates may gradually decline, possibly accelerating in the second half of next year, or even turning negative in the following years. This is due to weak economic growth, while inflation rises again after fluctuations, leading to a stagflation phase. During such periods, gold tends to perform prominently. Additionally, we anticipate that the tail effect will be very evident in the second half of next year; gold may raise some concerns in the early stages of inflation, but when inflation truly rises, gold's anti-inflation characteristics will re-emerge. Therefore, from this perspective, our theme this year may be to add a "new pricing normal" on the basis of the existing new cycle. Thus, for the gold market in the next 1 to 2 years or even in the medium to long term, we actually hold a positive and optimistic attitude. - **Monetary policy is the most important factor supporting gold** **Zhou Hong:** Earlier, you mentioned several important factors affecting prices, such as monetary policy, inflation, growth, geopolitics, tariffs, etc. Let's refine it a bit; if you were to rank these factors for next year, which would come first? **Xu Zhiyan:** First of all, **I believe monetary policy is the most important factor because it has a direct impact on gold prices**. About two-thirds of gold's volatility is related to monetary policy, and we consider it an antidote to currency. Gold has a strong allocation function. Gold is a very scarce precious metal, and its pricing differs from traditional pricing, with marginal demand being the main influence on its price. The demand for gold mainly comes from people's distrust of the monetary system, especially the dollar system. This distrust partly stems from the need for the U.S. to increase the money supply to solve problems; without excessive money issuance, it is difficult for the U.S. to address its economic issues. From many economic data points, the macroeconomic cycle in the U.S. is downward, such as PMI (Purchasing Managers' Index) and unemployment rates. With the advancement of the country's immigration policies, this issue may further exacerbate. **Secondly, I believe inflation is important**. Inflation is a very intuitive factor affecting gold prices. Gold's anti-inflation characteristics overlap with monetary factors, but essentially, gold serves as a significant asset for inflation protection. **Thirdly, the scarcity of gold** is an important factor that may not have received enough attention. Gold is an extremely scarce resource. I have visited many gold mines; for example, gold mines in South Africa have been dug down to 4,000 meters, while some gold mines in Shandong, China, are about 1,000 meters deep. At such depths, extracting a ton of rock may yield only one gram of gold. Imagine that the smelting process for gold requires crushing and grinding these rocks, purifying them through physical and chemical techniques; this is a complex process. The current price of one gram of gold is about six hundred and something RMB, and considering environmental protection and marginal costs, it is very difficult to compress costs further. Therefore, the scarcity of gold is an important component of its value. **Finally, the core pricing of gold**; we currently see real interest rates are relatively high, but they may decline in the future We foresee some fluctuations in monetary policy in 2024, which may cause short-term shocks to the gold market. In particular, at the beginning of next year, the market may generally feel concerned that the Federal Reserve may delay interest rate cuts, and some even believe that there may be interest rate hikes. In response to this situation, we have released a 2,200-word report emphasizing that investors should cherish the opportunity presented by the pullback in gold prices. Recently, gold prices have shown a good rebound, approaching previous highs. - **Risk Factors for Gold** **Zhou Hong:** Alright, you previously provided an important framework for analyzing assets like gold. According to your perspective, what are the risk factors for gold prices? **Xu Zhiyan:** Gold is not an asset that only goes up and never down; historically, it has undergone several major adjustments. For example, the recent major adjustment stemmed from a positive outlook on the global macroeconomy and expectations of interest rate hikes. Overall, I believe there are two risk factors for gold: **First, some central banks that previously abandoned the dollar may return to the dollar,** which I think is a possibility. From a long-term cyclical perspective, the global macroeconomy, not just the United States, is actually in a relatively weak cyclical range, which is related to historical cycles. The contribution of emerging markets to global GDP has diminished. Developed countries are facing severe problems, including Europe, Japan, and Asian countries, which are all dealing with aging populations. Additionally, global resources, such as oil and human resources, have peaked and are beginning to decline. New technologies are advancing, but it is still unclear how significantly new technologies in the field of artificial intelligence will impact previous technologies like mobile internet. These factors have led to a relatively weak state of global economic growth. For the gold market, the phase of revitalizing the global economy may be quite challenging. Of course, this also requires observing the global economic situation next year, whether it will be a soft landing or a hard landing. There is significant divergence among opinions, but our current view leans towards a soft landing, although the U.S. economy cannot be ruled out from facing the risk of a hard landing. Therefore, our judgment is that, for the United States, the risk of a hard landing indeed exists in the current environment. If the U.S. cannot timely cut interest rates and adjust economic policies, this may lead to some economic problems in the second half of the year. However, from a larger cyclical perspective, this issue may not be too significant. Second, after personnel changes in overseas political arenas, whether the dollar index will continue to perform strongly is currently a matter of great divergence, and we are skeptical about this. Considering that U.S. debt is currently at a historical high, having increased about five times since 2008, it means that the U.S. has issued a large amount of debt. The current interest rate level is high, with debt interest expenditures accounting for about 40% of fiscal revenue, which limits the possibility of the U.S. continuing to expand its debt scale. The dollar has been very strong over the past 40 (30) years, but in recent years, the proportion of dollars held by developing countries has rapidly declined, while the proportion of gold, renminbi, and other currencies held has increased. The fundamental reason lies in concerns about the excessive issuance of dollars. **Another risk factor is global geopolitical conflicts.** In the past few years, geopolitical issues have prompted global central banks to accelerate their purchases of gold. I believe this will not change overnight From these two risk points, I do not believe that gold faces significant risks; there may be some fluctuations, for example, when expectations for interest rate cuts are adjusted, gold prices may fluctuate. In the short term, some reform measures overseas are gaining recognition, and the US dollar may also perform strongly. However, I believe it is still very difficult for the US dollar to maintain a strong trend. - **Analysis of Gold Supply and Demand** **Zhou Hong:** You mentioned earlier the central bank's gold purchases, which is a hot topic that everyone is currently paying attention to. It seems that in the past, many central banks around the world held reserves in US dollars, but now they seem to be gradually increasing their gold reserves. Is this a long-term demand force for gold? **Xu Zhiyan:** The demand for gold can be roughly divided into several categories, one of which is central bank demand. In the past 22 years, central bank demand has been relatively stable, at about 300 to 500 tons per year, without significant fluctuations. However, in 2022, the amount of gold purchased by central banks increased significantly, and there are several reasons behind this. One reason is geopolitical conflicts, such as the Russia-Ukraine conflict, which has intensified global concerns about the US dollar system. This concern is fundamental because if there are issues with the payment system, assets priced in US dollars may encounter difficulties in settlement and payment. Therefore, central banks in non-US countries, mainly developing countries, about dozens of countries, began to significantly increase their gold holdings starting in 2022. The increase in 2022 was close to 1,100 tons, more than double the average level of the past 10 years. In 2023, another 1,038 tons were added. This has caused a huge change in the gold market. Because the annual production of gold is relatively stable, about 3,600 to 3,800 tons are mined from the ground each year, plus 800 to 1,000 tons of second-hand gold, totaling about 4,400 to 4,800 tons. In this tight balance state, suddenly having a large buyer increase demand by 500 tons, accounting for more than ten percent of the total, has a significant impact on the market. There are doubts in the market about the sustainability of central bank gold purchases. The significant increase in 2022 was seen by many as an incidental factor, but in 2023, there was actually another significant increase. This year, it is highly likely that the central bank's gold purchases will still be between 900 and 1,000 tons, as the purchase amount in the first and second quarters, plus the third quarter, has approached 800 tons, including the recent resumption of gold purchases by the People's Bank of China. Therefore, the sustainability of central bank gold purchases cannot be ignored. This is similar to a household's financial management, where a family considers liquidity, safety, and profitability. The central bank's gold purchasing behavior is also based on considerations of asset safety and value preservation. In fact, in addition to liquidity and asset safety considerations, maintaining global competitiveness in the medium to long term is also an important factor for central banks to increase their gold holdings. Therefore, the significant increase in gold holdings by central banks in non-US countries is not an incidental phenomenon. If the several factors mentioned earlier suddenly disappear, we may no longer increase gold holdings. However, these factors have medium to long-term characteristics, so expecting central banks to purchase 1,000 tons of gold each year may not be realistic. As gold prices rise and the proportion held by central banks increases, the purchase volume may gradually decrease, but we believe that the central bank's purchase volume will not decrease significantly and will not disappear overnight. The total purchase volume may not be as much as 1,000 tons, but since there has never been a lack of demand for gold, the increase in marginal demand will drive prices higher For example, recently there have been many discussions online about gold chains that are hard to sell but gold bars that are in high demand, indicating a significant increase in the demand for gold investment, which is a very interesting phenomenon. In addition, the demand for gold is also reflected in technology applications, as well as the arrival of the AI era and the chip era. For instance, high-end smartphones contain nearly one gram of gold. Gold plays an important role in chip manufacturing due to its infinite malleability and stability. It is one of the most stable metals and does not easily react with other substances, making it essential in high-end chips. Despite the high price of gold, it is irreplaceable in chip manufacturing. High-end smartphones contain nearly one gram of gold. This is also why the second-hand electronic device recycling industry is so important, as these devices can be crushed to extract rare metals, including gold. Some companies are doing very well in this field, recycling billions of devices each year and able to extract a considerable amount of gold. This is referred to as the use of gold in the technology sector, or the demand for gold in the technology sector, which accounts for a relatively high proportion, about 5%, and this proportion is still increasing. The demand for gold by central banks, I believe, is a specific demand that involves geopolitical conflicts, historical issues, the dollar system, and the choices central banks make when diversifying their dollar assets. For example, when central banks choose to diversify their assets, they may opt for gold, the renminbi, and other assets. In the case of our country's central bank, in the past, there may have been more dollars, but the amount of gold accumulated each year has been significant. When we promoted gold ETFs, China's gold holdings were always 1,024 tons, and now it has exceeded 2,000 tons. Even so, compared to dollar assets, our gold's proportion on the central bank's balance sheet is still very low globally. The official data I have seen should be around 7-8%, which is indeed low, because we have about $30 trillion in U.S. Treasury bonds. Of course, some countries have relatively fewer U.S. bonds and more gold, so their proportions can be 30%, 40%, or even 50%. - **Similarities and Differences in Investment Forms** **Zhou Hong:** Gold is an asset that the public generally pays attention to, and there is a saying, "endless gold bars to buy, unsellable gold chains." The investment forms we may encounter in daily life include gold ETFs, gold trading accounts in banks, physical gold bars, and gold jewelry. What are the differences between these investment methods? **Xu Zhiyan:** Yes, we can open gold trading accounts in banks, which allow the purchase of physical gold but not virtual gold. For individual investors, in addition to leveraged investment methods, there are also leveraged products offered by exchanges, such as the TD (Deferred Delivery) products from the Shanghai Gold Exchange, which are aimed at professional investors. For ordinary investors, the main types of assets they encounter daily are: gold jewelry, physical gold, and gold ETFs. Gold jewelry is actually classified as a consumer item, but in the demand for gold, it is categorized under consumption. Many investors mistakenly believe that purchasing gold necklaces or jewelry is an investment, but in reality, it is more of a consumption behavior. The price of gold jewelry is usually higher than the base gold price because it includes craftsmanship costs, which likely account for just over 30%. This means that as an investment, when purchasing gold jewelry, about one-third of the cost is actually for consumption Therefore, purchasing gold jewelry should not be viewed as a purely investment activity. Buying gold bars is a true investment tool. The price of gold bars may only be 20 to 30 yuan higher than the base gold price, which is due to costs such as store operations, logistics, and value-added tax. So, if you buy gold bars at a price of 620 yuan, after adding various fees, the final price may be between 650 and 660 yuan. Such gold bars are the real investment in gold. Indeed, bringing gold bars home carries certain risks, so safety needs to be considered, and it may be necessary to rent a safe deposit box for storage, which incurs certain costs. Gold ETFs are one of the most mainstream choices for individual investors globally, representing a form of holding gold through a securities account or fund account. This is the same asset as physical gold, just in a different form. You can choose to take physical gold home or store it in a bank account, while gold ETFs store gold in a fund or securities account. The assets behind gold ETFs are supported by physical gold, with almost 99.9% being physical gold, leaving only a very small proportion in cash. Therefore, we can understand gold ETFs as being 100% backed by physical gold. Where is the gold in gold ETFs stored? It is stored at the Shanghai Gold Exchange. The model of gold ETFs allows for universal redemption across different vaults nationwide. The advantage of this model is that it combines the characteristics of gold consumption and investment, but here we mainly discuss physical gold investment, namely the purchase of gold bars and gold ETFs, which are the two main investment methods. Gold ETFs avoid the costs associated with processing, polishing, and warehousing physical gold. Therefore, compared to purchasing physical gold bars, the holding cost of gold ETFs is lower, approximately 0.5% management fee plus 0.1% custody fee, totaling 0.6%. If we assume the gold price is 600 yuan/gram, the cost would be about 4 yuan/gram. In contrast, the cost of physical gold bars may reach 30-40 yuan/gram, making the cost of gold ETFs about 1/8 of that of physical gold bars. Additionally, gold ETFs can generate extra income through leasing gold. Over the past 11 years, annual and semi-annual reports show that gold ETFs earned 170 million yuan in leasing income, which is fully distributed to fund investors. Therefore, the total cost of gold ETFs is lower, and investors do not need to bear the security storage issues of physical gold. Gold ETFs increase additional value through secure trading methods, partially hedging management fees. Although current interest rates are low, gold leasing income still exists. Purchasing gold ETFs is a cost-effective investment method. - **True Hard Currency** **Zhou Hong:** We previously mentioned the monetary attributes of gold, which are very strong. As the renminbi gradually moves towards globalization, the monetary system may be undergoing a reshaping. In this reshaping process, looking a bit further into the future, will the positioning of gold change? **Xu Zhiyan:** The dissolution of the Bretton Woods system occurred in the 1970s, and prior to that, the UK implemented a gold standard system that lasted for about 200 years. This system was first proposed by Newton when he served as the director of the Royal Mint; he not only discovered gravity but was also responsible for coin minting His contributions made the British pound one of the hardest currencies in the world at that time. Britain was once known as the Empire on which the sun never sets and was a global leader in technology during the industrial era. By the 19th century, especially after World War II, the global economic center shifted to the United States. The U.S. proposed the gold standard system, transferring the status of global currency hegemon to the U.S. dollar, establishing a fixed exchange rate of 35 dollars per ounce of gold, a system that lasted for decades. However, by the 1970s, the Bretton Woods system collapsed, backed by a significant context: the U.S. had a large amount of gold reserves but had issued a vast number of offshore dollars globally. According to the gold standard, each ounce of gold corresponded to 35 dollars, but in reality, the number of offshore dollars far exceeded this limit. Many people used offshore dollars to exchange for gold, leading to a reduction in U.S. gold reserves from 20,000 tons to 12,000 tons. The Bretton Woods system subsequently collapsed, and the world entered the era of fiat currency. The nature of currency became very interesting, and Friedman’s "A Monetary History of the United States" details this historical process, a book I have studied carefully. The development of currency globally will not return to the gold standard because the gold standard has its limitations. Currently, gold is difficult to mine in large quantities, making it impossible to release enough currency to stimulate the economy, a problem that was already evident in the U.S. during the Great Depression in 1929. Friedman won the Nobel Prize for comprehensively analyzing the issue of central banks not being able to overissue currency in 1929, believing that central banks should have the power to overissue currency. This led to the later Greenspan era and the Baumol era, where central banks primarily resolved issues during financial crises through overissuing currency. The monetary system has undergone a transition from the gold standard to the fiat currency system, and now, when facing economic problems, the usual solution is to overissue currency, a trend that will not return to the gold standard era. However, it can be anticipated that the money supply will continue to increase. In the context of global low growth and low interest rates, this may bring some volatility. When facing economic problems, the solution is often to take emergency measures first, just like a person needing a booster shot when their health declines. For example, the U.S. adopted this method instantly during the 2008 financial crisis, the 2000 bubble period, and the outbreak of the pandemic in 2020. Afterward, other treatment methods are used to resolve the issues. Currency is essentially an emergency response to the economy, but the overissued currency remains in the market, making it very difficult to completely withdraw. Therefore, we can see that, especially in developed countries, the monetary system is continuously overissuing in the long term. Taking the U.S. dollar as an example, its purchasing power is actually less than 3%. Additionally, from the perspective of the larger monetary system, gold clearly cannot return to the gold standard era, but the value of gold has an intuitive connection and medium to long-term impact on the monetary system. Greenspan once said that the pricing of gold is not in the hands of the public because it is too scarce. Central banks, insurance companies, large institutional investors, and ultra-high-net-worth individuals are the main buyers of gold. Although gold is not fiat currency, it is actually stronger than fiat currency; it is a globally recognized asset, and even central banks, which are the credit guarantors of the fiat currency issuance system, hold a large amount of gold. There are approximately over 40,000 tons of gold globally, with about 20-30% held by central banks, which fully proves that gold is truly hard currency - **The Investment Value of Gold is Underestimated** **Zhou Hong:** In a classic investment book, it was mentioned that over the past century, the annual return of various assets has been around 6% for stocks since 1900, while the annual return of gold was almost 0%. Excluding inflation, there was virtually no return. However, in the last decade, the return on gold has been calculated to be very close to historical stock returns. What is your view on this? **Xu Zhiyan:** Yes, this book is quite famous and is used as a textbook in many universities, even for graduate and doctoral students, and it is widely circulated in the industry. However, the conclusion about gold is incorrect, and I always clarify some points during my speeches if possible. From 1900 to 1973, the price of gold was basically a straight line, with the gold standard pegging it at $35 per ounce, resulting in a return of 0% over those decades. If we assume that gold price fluctuations only began in the last 50 years, combined with the 70 years of 0% return, using the entire 120-year annualized average would greatly underestimate the value of gold. This method of calculation is incorrect. Asset allocation and asset theory should start from when there were publicly traded prices. For example, if a price is locked in, like 1 ounce for $35, how would the price change? So that calculation method is wrong. The real calculation should compare publicly recognized prices. In fact, the World Gold Council has produced data showing that since 1976, when gold futures began to be publicly traded, the annualized return has been about 8%. We also did a version of the data, showing that the return over the past year was about 30%. The three-year annualized return is about 15%, and the five-year annualized return is around 12% to 13%, while the twenty-year and forty-year annualized returns are about 8%. The twenty-year data is very representative because it closely relates to investors. Over a twenty-year span, the return on gold is very close to that of the S&P 500 index. However, if we compound the dividends of the S&P 500 index, then its return exceeds that of gold. Therefore, overall, many people underestimate the investment value of gold. Although this book is a good book, it may not have considered such details in the information provided. In fact, we should calculate the return on gold based on publicly traded prices. The authors of the book may not necessarily care about these details, but as asset managers, we need to clarify this to our clients. Thus, the medium to long-term investment value of gold is actually quite good, around 8%. **Zhou Hong:** Is this 8% a nominal return? **Xu Zhiyan:** Yes, when we talk about annualized returns, whether for stocks, bonds, or gold, they are calculated at nominal prices. However, when we subtract inflation, these price indices perform similarly to the S&P 500 index, with gold lagging behind the S&P 500 index by about one to two points, mainly due to differences in dividends. The annualized return of the S&P 500 index is about 9% to 10%. In the past 10 to 20 years, the performance of the industry chain has been even better. Therefore, the investment value of gold is not poor In addition to its investment value, gold has another important characteristic: as a risk management and inflation hedging tool, its inclusion in stock and bond portfolios can significantly reduce portfolio volatility. Many investors feel that stability has performed well over the past 1, 3, and 5 years, but in reality, they overlook the investment value of gold. Gold not only has good investment value but also effectively reduces the volatility of investment portfolios, which is a very important characteristic. The inclusion of gold has a positive contribution to the overall performance of the investment portfolio. According to research by the World Gold Council, increasing gold allocation by about 10% in global asset allocation can improve the efficient frontier of the portfolio. Gold has a very low correlation with stocks and bonds, even negative, so the inclusion in the portfolio is not just to add negatively correlated assets, but because the addition of gold can stabilize the return curve and help achieve investment goals. Many investors often encounter the problem of chasing highs and cutting losses during the investment process, mainly because their risk tolerance and expected returns do not match. In addition, they also lack the corresponding tools and methods. I have been engaged in asset allocation for many years and have explained the importance of asset allocation on multiple platforms, including free courses, emphasizing that even beginners can understand the importance of asset allocation. I proposed the concept of "ETF 大道至简" (ETF Simplified), allowing investors to clearly understand the substantial value brought by allocation. Taking Chinese insurance companies as an example, they are the main force in allocation. These large institutions have about 28 to 29 trillion yuan in funds and publish their stock and bond holdings every six months. If we include gold in this, it can actually serve several purposes: first, to enhance returns; second, to reduce volatility; and finally, to minimize drawdowns. This is also a very important part of global pension funds and insurance companies in asset allocation. As an investment product, we cannot underestimate the investment value of gold. Investing in gold is not just about pursuing pure returns, as gold investment is a long-term process. Unlike stocks, which may fluctuate by three to five points in a single day and then possibly drop back the next day, gold has much lower volatility, which many people may not be able to tolerate. Including gold in the investment portfolio actually optimizes the portfolio. - **Investment Advice for Ordinary People** **Zhou Hong:** On one hand, gold can correct our expectations for returns; on the other hand, the inclusion of gold can reduce the volatility of the investment portfolio. Next, let's ask a practical question: assuming we give asset allocation advice to different age groups, for the elderly and for middle-aged people who are currently working, what would your suggestions be? **Xu Zhiyan:** Everyone knows that the ETF industry has seen tremendous growth in recent years. This year, the scale of ETFs has surpassed that of actively managed funds, reaching 7 trillion. From the time I joined Huaan Fund 20 years ago and started working on the 180 index fund until now, we have developed various ETF products including gold, Germany, France, Nasdaq, Japan, and more. **The benefits of asset allocation for investors are obvious.** The Huaan Fund, where I work, is the only publicly listed fund management company that publishes a major asset allocation index. As of now, this index has risen by eight to nine percentage points In our major asset index, the proportion of stocks and bonds is relatively high, achieved through a large allocation model. In terms of major asset allocation, we maintain a moderately high allocation to gold, around 7%. At the same time, we have allocated global bonds, particularly 2.6% to the National Development Bank bond ETF. Although the Nasdaq index recently reached a new high of 20,000 points, we believe its valuation is high. However, considering cash flow, policy support, and other factors, we still allocated 5-6% to the Nasdaq index. Since August, we have significantly increased our holdings in A-shares and reduced our allocations in Germany and France, with the allocation to France and Japan dropping to 0. These adjustments represent our views and do not reflect the position of the institution we belong to. We have also increased our allocation to Hong Kong stocks, with a very clear direction for increasing A-shares. I believe everyone should pay close attention to the current A-share market. We believe that the driving factors behind this round of market movement since 924 are multifaceted. Firstly, policy is just one aspect; we usually only see the policy level without deeply understanding the underlying significance behind the policies. Especially in the real estate market, we have done a lot of work, including stabilizing the decline and the recent measures to stabilize the property and stock markets. Secondly, the local debt issue is expected to be resolved. This provides conditions for the next steps in local development. These factors are all important backgrounds we need to consider when evaluating and allocating A-shares. Finally, livelihood issues are also very important. I believe that this round of development in China still needs to follow a high-quality development path, which is different from previous development models. In terms of A-share allocation, we have increased our investment in the ChiNext 50 index. This index was developed in cooperation with the Shenzhen Stock Exchange 11 years ago, reducing the weight of the then-largest market cap sector, agriculture, forestry, animal husbandry, and fishery, making it purer. In addition, we have also increased our investment in the Sci-Tech Innovation Board. After August, although the Sci-Tech Innovation Board has been more volatile recently, we made slight adjustments. We have also increased our investment in Hong Kong stocks. In terms of Hong Kong stocks, we have two targets: one is the central enterprise dividend from the Hong Kong Stock Connect, commonly referred to as "three sixes": 6 times PE, 0.6 times PB, and over 6% dividend yield. We have also increased our allocation to another core asset in Hong Kong stocks, the Hang Seng Internet Index. Although it is volatile, we captured both ends in our allocation, requiring both certain profitability and stability, which is the direction of our major asset allocation. As for the Japanese market, although it has performed well, we believe it may raise interest rates, which is inconsistent with global interest rate trends, and it has seen significant gains in the past. Therefore, we have reduced our allocation to the Japanese market in the short term; the French market has also seen a reduction in our allocation due to internal issues this year, including the impact on high-end consumption. This is a basic allocation characterized by low volatility and drawdown, around 3-4%, which is considered the historical maximum drawdown in the market each year. Our central bond allocation is about 60%, clearly focused on low volatility. For high-end wealth groups and institutional investors, especially older investors, they pay more attention to the asset preservation function, with appreciation being a secondary goal. Since they no longer have jobs and their income sources have decreased, they cannot afford significant drawdowns in their assets For these types of investors, it is recommended to increase bond allocation. Although this will lower expected returns, it can reduce volatility and is more suitable for their risk preferences. For young people, they have strong expectations for future income and hope that their assets can appreciate to realize more dreams. In terms of asset allocation, they can appropriately increase the proportion of A-shares and adopt a more aggressive allocation strategy. Additionally, for young people with a fixed monthly income, if they are willing to invest some funds in the stock market, they can adopt a second solution, which is to invest fully in A-shares through ETFs. This industry allocation index has yielded about 15-16% this year. Although fully investing in A-shares will bring significant volatility, compared to the benchmark, this equity-oriented allocation has outperformed ordinary equity funds by about 8-9 percentage points this year, 5-6 percentage points last year, and has also significantly outperformed in the year before that. This type of allocation is more suitable for young people who pursue appreciation and can withstand certain volatility. **Zhou Hong:** In the ChiNext and sci-tech ETFs, do some stocks have a relatively large weight? How to address the challenge of this overweight proportion? **Xu Zhiyan:** Since the ChiNext and sci-tech boards opened in 2018 and 2019, the stock volume has not been that large, but the proportion of ETFs has already been quite high. Some ETFs have entered the top ten holdings of ChiNext stocks, with a proportion reaching 5%. As a part of the A-share market, the ChiNext board has three notable characteristics: first, its valuation is relatively low and vibrant; second, it has significant elasticity and volatility, much like teenagers, with strong growth potential; finally, investors need to determine their investment strategy based on their risk tolerance. Since "9·24," the net value of the ChiNext board, especially the sci-tech chip sector, has doubled, which has put investors in a difficult position of deciding whether to buy or not. This may not be a problem for medium to long-term investments, but investors may want to avoid short-term risks, which we can achieve through asset allocation. Therefore, we can adjust the investment portfolio through a rebalancing strategy. Although we recommended investments this month, the weight has decreased compared to last month. At the same time, we have increased our allocation in the ChiNext and digital economy sectors. Our digital economy ETFs and other new productivity-related areas, including new energy, have also increased. However, we cannot be too aggressive, so we have also increased our allocation in dividend assets, such as central enterprise dividends and state-owned enterprise dividends, which are all very good investment varieties. - **Medium to long-term opportunities** **Zhou Hong:** Okay, then we will ask the last question, which is related to you personally. How do you allocate in your own portfolio? Can you share it with everyone? **Xu Zhiyan:** I adhere to the principle of integrating knowledge and action in ETF investments. I have published two investment portfolios, and I believe these are just references for individual investors. The first portfolio focuses on investing in the ChiNext 50. I believe the ChiNext index is like young adults, with strong profitability and relatively low valuation, so it is given a higher weight in the portfolio. The second portfolio has a balanced allocation in Hong Kong stocks, including central enterprise dividends as well as the Hang Seng Internet and Hang Seng Technology indices. At the same time, it also selects some domestic asset classes, such as gold and assets related to the AI era This combination may be relatively aggressive and may not be suitable for all investors. Because I personally hold a very positive attitude towards the market, I believe this combination may have certain reference value for many young people. I believe the A-share market is undergoing substantial changes, and these changes are not just at the policy level. From the issues I encountered when I served as a fund manager seventeen or eighteen years ago, the A-share market has undergone fundamental changes. At that time, we faced three main problems: first, valuations were too high; second, dividends were too low, only 1%; and finally, the market was primarily financing-oriented. Now, these three issues have fundamentally improved. First, our valuations are now comparable to those of developed global markets and are no longer excessively high. Second, our dividend yield has approached 3%, which is on par with global levels, and in some aspects, even lower than other markets. Finally, through measures such as buybacks, increased holdings, and refinancing, there has been a significant encouragement for listed companies to distribute dividends. Now, the total amount of dividends plus buybacks has actually equaled or even exceeded the scale of refinancing. Therefore, the microstructure of the A-share market has also undergone significant changes. **I believe that as interest rates decline, the potential of the A-share market may be further tapped, and in the medium to long term, it may welcome relatively good opportunities. This is my relatively positive view. For reference only.** **Zhou Hong:** Today we had an in-depth discussion on gold investment, which will also involve some strategies and portfolio investments. Especially today, a very critical point is that we clarified a very important concept: the selection of several products in gold investment itself and the investment value of gold itself may be underestimated. It brings balance, investment value, and volatility smoothing to the portfolio, contributing positively to the portfolio. 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