Mysterious Gold Prices: Surge Then Plunge

The recent gold prices are quite abnormal.

The recent gold prices have been really bizarre. They first surged dramatically, then suddenly plummeted!

A while ago, the gold prices in some stores rose to 600 yuan/gram, much higher than the international gold prices, and then they suddenly plummeted recently!

What kind of mystery is hidden behind this?

In previous content, I introduced to you that our domestic gold prices were higher than international gold prices a few days ago due to exchange rates and other reasons.

So why did the gold prices suddenly plummet?

Here, you must understand the secret between gold prices and the US dollar.

Remember this sentence: When the US dollar is strong, gold is weak; when the US dollar is weak, gold is strong.

Why does the gold price fall when the US dollar index strengthens? It can be understood from two perspectives:

From the perspective of pricing: Gold is priced in US dollars, so a strong US dollar means that each dollar can buy more gold, hence the gold price slides.From the perspective of capital transmission: if the US dollar appreciates, those who hold gold may sell gold for US dollars to gain expected returns, and if the US dollar depreciates, those who hold US dollars may buy gold to hedge against the depreciation pressure, which would lead to a rise in gold prices.

Advertisement

Is there a difference between domestic gold prices and international gold prices in our country? Yes, there is.

However, if you compare the gold prices on the New York Stock Exchange, or the spot gold prices in London and Shanghai, you will find that they generally remain consistent. Over the past decade, the price difference between RMB gold and international gold has been hard to exceed 3%, but recently, it exceeded 5%!

Why did domestic gold prices far exceed international gold prices a few days ago?

To think about it in another way: why is gold more expensive when bought with RMB, but cheaper when bought with US dollars?

There are probably only two possibilities for this situation: either the international gold price has dropped and will make up for the increase in the future; or the purchasing power of RMB has been weakened, which means there is a depreciation expectation. Which situation do you think it is?

Obviously, the answer has already been given to you: domestic gold prices have made up for the decline.

This is because the US dollar and US Treasury bonds have been too strong recently.

The current yield on 10-year US Treasury bonds has approached around 5%. In this situation of risk-free high interest returns, capital will flock to the US dollar, and at this time, the value of gold becomes lower.

But will US dollar assets always be so strong? Of course not.It's important to recognize that the U.S. government is on the brink of a shutdown. The fundamental reason is that the U.S. debt has now reached astronomical levels. When Trump took office in 2017, the total U.S. debt was around $20 trillion, and by the end of his four-year term, it had soared to $27 trillion. That's a staggering $7 trillion added in just four years. But has Biden fared any better? In the three years since he took over from Trump, the debt has ballooned from $27 trillion to $33 trillion, an increase of $6 trillion. It's remarkable how these two octogenarians have racked up debt at an elite level.

On the surface, it may seem that U.S. interest rate hikes will indeed reap benefits globally. However, if interest rates remain this high, the U.S. government will collapse under the burden of interest payments alone. The U.S. currently needs to pay an interest of $970 billion annually, which is double what it was in 2017. Moreover, as more of the previous low-interest debt is replaced with high-interest debt due to this round of interest rate hikes (interest rates were low when the debt was initially borrowed, but now the U.S. is in a high-interest financial environment), it means that the U.S. may have to pay an interest of up to $1.5 trillion annually in the coming years. What does this mean? The U.S. has an annual fiscal revenue of just over $4 trillion, so this would mean that 30-40% of its annual income would have to go towards interest payments, and that's just the interest, without even considering the principal of the debt! So, in reality, the Americans themselves are quite vulnerable. As a result, the current Federal Reserve Chairman, Jerome Powell, has come up with a new tactic—the "talk-the-talk interest rate hike" method, using this approach to keep everyone in check every day.

What is a "talk-the-talk" interest rate hike? It means that in reality, they dare not raise interest rates, but they make tough statements, saying that the Federal Reserve will maintain high interest rates. To put it nicely, this is called "expectation management," but to be more straightforward, it's actually just intimidation.

From this perspective, perhaps in the medium to long term, gold may still have the potential to reverse the dollar's dominance and become a new safe haven for assets.