According to the latest report from GUOTAI JUNAN International, gold prices have surged above $4,300 over the past 12 months, while the dollar has weakened continuously during the same period, leading to intensified discussions around "depreciation trades." However, despite the frenzy surrounding these trades, the US Treasury market, which should be most sensitive to inflation risks, has remained unusually calm, with its core long-term inflation expectations still firmly anchored around the Federal Reserve's 2% target.
From the perspective of asset price dynamics, the rising gold prices essentially reflect the market's "vote of no confidence" regarding the future credit of the dollar. In contrast, the performance of US Treasuries can be viewed as a "vote of confidence" in policy credibility. The core market dynamics currently revolve around betting on which economic signal will ultimately guide the Federal Reserve's decision—whether to opt for interest rate cuts to combat a potential recession or to be forced into tightening policy to suppress inflation. This divergence not only highlights the different pricing logic between gold and US Treasuries but will also determine the ultimate direction of major asset classes in the short term.
Key insights from GUOTAI JUNAN International include that over the past 12 months, gold prices have risen above $4,300, coinciding with a persistent weakening of the dollar and heightened discussions on "depreciation trades." The rationale behind gold's rise is influenced not only by concerns over the potential monetization of significant US debt but also by increased risk-averse sentiments arising from global trade frictions and geopolitical tensions. Following the Federal Reserve's re-initiating interest rate cuts, the appeal of gold as a non-yielding asset has risen, supported by a re-evaluation of the dollar’s credit.
From the dollar's perspective, the dollar index has fallen nearly 10% from its peak at the beginning of the year, fluctuating largely within a low range over the past three months. The future dynamics of the long and short market positions will be a pivotal driver of the market's focus on "depreciation trades." We believe that while the dollar may face resistance in its continued rebound due to multiple factors, the current market pricing of depreciation has become quite full. A comparative analysis of the dollar index during Donald Trump's two presidential terms suggests a higher probability for the dollar to continue oscillating upward.
Meanwhile, despite the fervor of "depreciation trades," the US Treasury market has remained unexpectedly calm, with its core long-term inflation expectation indicators stable around the Federal Reserve's 2% goal. Looking ahead, the simultaneous escalation of domestic and external tensions in the US, along with the rising expectations for Fed interest rate cuts, will provide investors with sufficient reasons to shift towards safe-haven assets. The implied federal funds rate may reach new lows within the year.
In conclusion, understanding the interplay of gold, the dollar, and US Treasuries amidst these multiple factors is essential for investors. They need to clearly distinguish between long-term risks and short-term realities. The current market's core dynamics hinge on betting on which economic signals will eventually dictate the Federal Reserve's decisions—be it interest rate cuts in response to a potential recession or enforced policy tightening to combat inflation. This divergence not only marks the points of difference in the pricing logic of gold and US Treasuries but will also determine the short-term trajectories of major asset classes.
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