The Federal Reserve will hold a monetary policy meeting next week, and the market generally expects the first interest rate cut of the year to be announced at that time.
According to news from the Chasing Wind Trading Desk, Citigroup analyst Derome Robinson and his team recently released a research report stating that during the &#34;re-inflation&#34; period when the Federal Reserve's policy stance becomes more dovish, the positive correlation between gold and risk assets such as stocks will significantly strengthen, with both prices often rising in tandem. However, the current market pricing of this correlation is clearly insufficient.
Based on the Federal Reserve policy stance indicator established by Citigroup, the current market pricing of the terminal rate is below the level implied by inflation and growth indicators, indicating that the Federal Reserve's policy stance is in a &#34;clearly dovish&#34; position.
In this macroeconomic context, the historical linkage pattern between gold and risk assets is returning. Citigroup's analysis shows that the six-month implied correlation between gold and risk assets such as the S&amp;P 500 index reflected in the options market is far lower than the levels actually observed in similar dovish environments, with the report stating that it &#34;looks very cheap.&#34;
Citigroup believes that this pricing discrepancy suggests that the market is underestimating the likelihood of both rising in tandem, and therefore the bank is optimistic about a strategy that pairs the upside risks of stocks with the upside risks of gold.
<h2>Market Pricing Indicates a Clear Dovish Stance from the Federal Reserve</h2>
In the report, Citigroup constructed a Federal Reserve policy stance indicator, which assesses the Fed's policy inclination by analyzing the residuals between market terminal rate pricing and market-based inflation and growth indicators.
The report points out that this indicator is currently at a low level, indicating that the Federal Reserve's pricing is &#34;overly accommodative&#34; relative to the fundamentals.
The report further explains that this dovish stance is based on considerations of future risks to the U.S. economy, particularly signs of weakness in the labor market and potential personnel changes within the FOMC. Data shows that the U.S. unemployment rate is continuing to rise, and the duration of unemployment is also increasing, all of which provide reasons for the Federal Reserve to maintain an accommodative policy.
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<h2>Not Just a Traditional Safe-Haven Asset, Gold's Potential Remains Undervalued</h2>
In this policy-driven &#34;fiscal dominance&#34; environment, the correlations between assets undergo systematic changes. Citigroup points out that the correlation between gold and risk assets (such as the S&amp;P 500 index and the Nikkei index) as well as risk currencies (such as the Australian dollar and the British pound) often becomes more positive than the market-implied pricing.
It is worth noting that the market has not fully digested this change in correlation. By comparing the six-month implied correlation of gold prices with risk assets (derived from options market pricing) to the historically realized correlation during the same period, Citigroup found a significant deviation between the two.
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Citigroup emphasizes that gold is often mistakenly viewed as a safe-haven asset, while in reality, the relationship between gold and bond yields is structurally unstable, which undermines its justification as a purely safe-haven tool.
Therefore, Citigroup tends to view gold as a tool to hedge against &#34;higher term premiums or policy missteps.&#34;
In the current context of the Federal Reserve adopting an accommodative stance to address potential economic risks, this attribute of gold makes it perform exceptionally well. This explains why, in an environment of rising risk appetite, gold can still strengthen alongside assets like stocks.
Based on this logic, the report believes that the combination of &#34;gold rising + stocks rising&#34; is reasonable

Citigroup believes that gold is often mistakenly viewed as a safe-haven asset, but its relationship with bond yields is structurally unstable. The bank is more inclined to see gold as a hedge against "higher term premiums or policy missteps." In an environment where the Federal Reserve's policy stance is extremely dovish, this attribute of gold is particularly pronounced and may benefit alongside risk assets

- The Federal Reserve is expected to announce its first interest rate cut of the year at next week's monetary policy meeting, indicating a dovish stance.  
- Citigroup analysts highlight that the correlation between gold and risk assets like stocks is underpriced in the current market, suggesting that both could rise together.  
- The report argues that gold should be viewed as a hedge against potential economic risks rather than a traditional safe-haven asset, supporting a strategy that pairs upward risks in both gold and stocks.

When the Federal Reserve is "extremely dovish," the possibility of gold and U.S. stocks rising together is underestimated