Recently, spot gold has experienced consecutive declines. On the evening of the 19th Beijing time, spot gold fell below $4,500 per ounce, dropping over 2% for the day. As of the 20th, spot gold was quoted at $4,498.98 per ounce. Year-to-date, it has gained only 4.19%, but since its peak at the beginning of the year (January 29, $5,598.75 per ounce), it has fallen approximately 20%. The significant volatility of gold prices near historical highs has raised doubts in the market about gold's role as a safe-haven asset.
Gold is not a hedge against risks associated with assets like stocks. DBS Bank (China) Senior Investment Strategist Deng Zhijian explained that an asset does not become a safe haven simply because it does not rise continuously, nor does it become a risk asset just because it experiences a sharp decline. Gold does not hedge against risks in the stock or bond markets but rather serves as a hedge against U.S. dollar risks.
Deng Zhijian noted that currently, major central banks outside of U.S. allies are almost universally reducing their holdings of U.S. Treasuries and increasing their gold reserves. In the short term, due to geopolitical tensions in the Middle East, some oil-dependent countries are selling gold, but this trend is expected to reverse to buying once the situation stabilizes.
According to Deng Zhijian's observations, over the past 20 years, the majority of months have seen negative real interest rates in the U.S. due to inflation, but the Federal Reserve has never raised interest rates immediately upon entering negative territory. Negative real interest rates have become the norm, and the Fed requires more comprehensive data before tightening monetary policy. While the logic that interest rate hikes suppress gold prices holds true, the timing for such hikes is still far off.
From 1998 to the present, during the four cycles from when the Fed stopped cutting rates to the end of the next rate hike, gold experienced only one minor decline, with the other three cycles recording significant gains. Therefore, a pause in rate cuts or rate hikes does not necessarily mean gold will only decline.
Deng Zhijian pointed out that the only factor that could classify gold as a risk asset is its high volatility, characterized by frequent sharp rises and declines. Unless one firmly believes the U.S. dollar must appreciate, gold remains the best tool for hedging against dollar risks. However, gold is not a hedge against risks associated with assets like stocks, bonds, or commodities.
In the medium to long term, gold is still driven by three factors: frequent geopolitical risks, the long-term weakness of the U.S. dollar, and the trend of reducing U.S. Treasury holdings.
Xu Wenyu, Director of the Macro Research Group at Huatai Futures Research Institute, stated that any asset may face adjustments after a sharp short-term rally, regardless of whether it is classified as a risk or safe-haven asset. "Understanding gold requires focusing on its fundamental characteristics as an asset. Gold is a 'stability' asset, and its stability is relative to the instability of economic growth, especially under the modern debt-based economic model. Therefore, when the economy begins to address its instability issues, such as resolving debt and deleveraging, gold's safe-haven role temporarily weakens, putting pressure on its price, while the appeal of risk assets like stocks relatively increases," Xu Wenyu explained.
Wang Hongying, President of the China (Hong Kong) Financial Derivatives Investment Research Institute, noted that from a short- to medium-term perspective, the recent decline in gold is still a technical or cyclical adjustment, and the fundamental investment value of gold has not changed. In fact, central banks in many countries, including China's central bank, continue to increase their gold holdings. Additionally, the 10-year U.S. Treasury yield continues to reach new highs, and the long-term investment value of gold driven by future inflation remains. From this perspective, gold is not a risk asset.
Is it still advisable to buy gold? "If the intention is solely for hedging purposes, ordinary investors may consider moderately increasing their holdings of gold-related assets, particularly physical gold, paper gold directly tracking gold prices, and ETFs. However, it is recommended that such investors avoid leveraging their gold-related assets, as this contradicts their original intention and exceeds their risk tolerance," Deng Zhijian advised.
Xu Wenyu pointed out that in the long run, a debt-based economy becomes increasingly unstable after repeated adjustments. Therefore, for ordinary investors, allocating a certain proportion of gold (especially physical gold) in their asset portfolios is always a viable strategy. As for jewelry, which carries more consumer attributes, investors can choose based on personal needs.
Wang Hongying believes that due to the persistence of short- to medium-term structural factors affecting gold prices, such as significantly reduced expectations for Fed rate cuts and the increased likelihood of neutral monetary policies driven by inflation levels, gold is still in an adjustment phase from a technical perspective. Therefore, investors with different risk profiles should approach gold purchases cautiously, and it is advisable to adopt a wait-and-see stance for the time being.
"In terms of investment product selection, ETFs are the preferred choice, as they require smaller investment amounts or units, making them suitable for ordinary investors, and their fees are relatively low. Gold bars also hold investment value, but they incur significant discounts during resale, which can impact investment returns. Jewelry combines both consumption and investment attributes, with a stronger emphasis on consumption and higher premiums, making it unsuitable as an investment tool. Investors should choose gold products that align with their preferences for investment attributes, consumption attributes, or a combination of both," Wang Hongying added.
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