Gold has plummeted, and someone is buying heavily.

Yesterday, data on the central bank's gold purchases in May was released. Overall, gold prices in May continued to weaken. The data shows that the central bank maintained its heavy gold-buying trend since March, with the monthly increase in gold holdings reaching a new stage high again.

Gold prices have been relatively weak overall in recent months. Initially, this was due to liquidity stress caused by the Middle East conflict, leading many international buyers to sell gold as a liquid asset to cover positions in other risky assets. However, the recent decline in gold is due to stronger expectations of interest rate hikes. Last Friday's non-farm payroll data exceeded market expectations, indicating the US economy is stronger than anticipated.

The market now expects the Federal Reserve to raise interest rates once in December this year, completely eliminating previous expectations of rate cuts. As a non-interest-bearing asset, gold's short-to-medium-term counterpart is interest-bearing assets. If the Fed starts raising rates, gold will face pressure in the short to medium term. This is the analysis of gold from a liquidity perspective.

However, gold can still serve as an effective hedge in risk scenarios such as a potential tech stock crash or the economy falling into stagflation. We can think of gold as a type of insurance. We shouldn't pay too high a price for this insurance, but it has its value. From the central bank's behavior of buying more as gold falls in recent months, we can see that such insurance needs to be accumulated in an investment portfolio, but we shouldn't overpay for it.

(Not for investment purposes) 

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