The gold market is undergoing a severe stress test.
Investor Gu Ming (pseudonym) reflects on the recent downturn, stating that what initially seemed like easy money has turned into clear losses. Having followed the crowd into gold earlier this year, he has now sold part of his holdings, vowing to "take profits in time next round." In contrast, a southern China-based investor, Xiao Chen, reported not selling but instead adding tens of thousands of yuan to his position in recent days.
These divergent strategies highlight the dramatic reversal in the gold market over just over four months. Wind data shows that by late January, gold-themed ETFs had seen year-to-date returns exceeding 35%, with gold mining stock ETFs even surging over 55% at one stage. However, as of June 10th, the average year-to-date return for gold-themed ETFs has turned negative to -9.35%.
The pressing question is whether this pullback is a short-term technical correction or a signal that the gold bull market has conclusively ended.
Liu Tingyu, Fund Manager of the Yongying Gold Mining Stock ETF, characterizes the recent sharp decline in gold stocks as a typical pulse-like disturbance rather than a structural reversal based on fundamental logic. He argues that while market panic has spread, the core pillars supporting gold's medium to long-term value remain robust. Following the rapid sell-off, the investment appeal of the sector has actually become more pronounced.
Year-to-Date Gains Wiped Out
On June 10th, gold prices weakened again, briefly breaching the key psychological level of $2,170 per ounce, showing clear downward pressure. After four consecutive days of declines, COMEX gold futures have completely surrendered their nearly 30% year-to-date gains, with returns briefly turning negative to around 4%.
The sharp correction in gold prices has resonated in related equity markets. The SSH Gold Stock Index, which covers gold-listed companies in both A-shares and Hong Kong shares, hit a new year-to-date low of 2652.84 points on June 10th, having fallen over 34% in the past three months, with a year-to-date return of -17.09%.
Among constituent stocks, declines were widespread but varied. Chifeng Gold (06693.HK) fell 7.76% in a single day, while Zhaojin Mining (000506.SZ) and Huayu Mining (601020.SH) were among six stocks that dropped over 4%. Overall, more than 60% of the index's 45 constituents have fallen over 10% year-to-date, with Chow Tai Fook (06168.HK) seeing its decline widen to over 41%.
The decline swiftly impacted the ETF market. Currently, there are two main types of gold ETFs: equity funds tracking the SSH Gold Stock Index and commodity products tracking SGE Gold 9999 or Shanghai Gold. On June 10th, the 20 gold-themed ETFs averaged a decline of over 2.9%, with seven products, including Southern Gold ETF, Tianhong Gold ETF, and Qianhai Kaiyuan Gold ETF, falling more than 3%.
Since hitting their peak earlier this year, gold market declines have been particularly severe. After reaching a year-to-date high in late January, gold, last year's top-performing asset, has entered a sustained downward trend.
Wind data shows that as of June 10th, all the aforementioned gold-themed ETFs have fallen an average of over 30% from their late-January highs, significantly eroding returns. The average year-to-date return has plummeted from 35.75% on January 29th to -9.35%.
The reversal is starkest for gold mining stock ETFs. Data shows that at their peak on January 29th, all six gold mining stock ETFs had year-to-date returns exceeding 50%, led by Huaan Gold Stock ETF with a 55.87% gain. However, following the market correction, these products have experienced maximum drawdowns exceeding 45%, with all year-to-date returns turning negative, now ranging between -17.83% and -16.7%. This suggests investors who entered at the peak are likely facing widespread paper losses.
Amid the sustained weakness, capital is rapidly exiting gold-themed ETFs. Statistics show that over 70% of these ETFs have seen net outflows in the past month, with cumulative outflows reaching approximately 148.59 billion yuan. The largest fund, Huaan Gold ETF, saw the most significant exodus, with nearly 79 billion yuan in net outflows during the period, reducing its size from the trillion-yuan level to 981.92 billion yuan.
A quantitative research analyst explained the difference between gold stock and gold commodity performance, noting that gold mining stock ETFs invest in mining company shares. Compared to the gold price itself, these stocks offer dual leverage from both gold prices and corporate earnings growth, resulting in higher potential volatility.
As prices have fallen, overall trading volume for gold ETFs has shrunk significantly, with activity well below previous highs. The average daily trading volume for gold ETFs peaked at 242 billion yuan in February before declining monthly, dropping to under 75 billion yuan in June so far, a nearly 70% contraction from the peak.
Market participants note that gold ETF investors are primarily institutions and experienced individuals, allowing for relatively flexible capital movement. Furthermore, the high-growth prospects and profitability of the AI sector are diverting incremental funds from the gold market, with some trend-following capital reducing bullish bets on gold in favor of the tech sector.
Navigating Heightened Volatility
The prolonged "gold fever," from last year's狂热 rally to this year's sharp swings, appears to be cooling rapidly.
Industry insiders view the recent sharp decline in gold and gold stocks as the result of a confluence of short-term negative factors, including macro monetary policy shifts, renewed geopolitical tensions, and liquidity shocks. However, gold's volatility has decreased over the past month, potentially attracting renewed attention from medium to long-term capital.
Liu Tingyu analyzes that despite the significant short-term correction, opportunity is born from volatility. The fundamental drivers for the long-term upward trajectory of gold and gold stocks have not changed due to short-term disturbances. Additionally, the sustainability of the current macro headwinds is questionable. He suggests that if subsequent economic data weakens, the market's tightening expectations could be proven wrong, potentially leading to a recovery in gold's financial attributes.
A representative from a mid-to-large fund company added that when the US stock market's AI theme strengthens and risk appetite rises, gold's relative attractiveness in asset allocation diminishes marginally. This diversion effect is amplified, especially when ETF positions are already at high levels, potentially exacerbating the pullback.
As gold enters a high-volatility consolidation phase, market opinions and investor strategies are diverging. Some investors report having "reduced the vast majority" of their positions, while others maintain regular investments, believing "gold is not a short-term trend-chasing asset."
Analysts from UBS Global Wealth Management's Chief Investment Office (CIO) suggest gold prices may remain volatile in the near term, challenged by elevated real yields, a stronger US dollar, and weaker ETF demand in the second quarter. They note that higher yields continue to enhance the appeal of high-quality fixed income and money market instruments, which investors could consider as allocation options while awaiting more favorable macro conditions.
A fund company marketing executive in Shanghai explained that central bank purchases and investment demand are two crucial sources of capital supporting price increases. Gold itself is an asset class choice. For investors, it's about identifying the stage-optimal value among different assets. When one asset class rallies excessively, investors reallocate their portfolios.
In his view, the stage-optimal value lies in relative logic. When gold's value advantage returns, investment capital will naturally follow. However, in the short term, negative factors may not be fully exhausted, making it difficult for gold's volatile pattern to pause. For long-term strategic investors, a phased buying approach might help smooth out costs.
Regarding the gold mining stock sector, Liu Tingyu believes corporate earnings maintain strong growth momentum, while valuations have undergone a severe compression. This creates a significant expectation gap between strong fundamentals (high earnings growth) and depressed valuations. For long-term investors, such irrational market declines often further highlight investment value.
He points out that the current PE ratio for the gold sector has been nearly halved, dropping from around 40x in 2023 to between 15x and 19x. While earnings per share (EPS) have been significantly revised upwards, the price-to-earnings (PE) ratio has been sharply revised downwards, indicating the market price has already excessively priced in pessimistic expectations regarding macro headwinds like interest rate hikes.
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