China Securities Co., Ltd.: The Federal Reserve is expected to continue cutting interest rates, injecting new momentum into the rise of gold prices.

China Securities Co., Ltd. released a research report stating that since 2025, the price of gold has been on the rise, with international spot gold increasing from around $2650 per ounce to a high of $4381 per ounce, repeatedly hitting historical highs. The main factors driving this increase include de-dollarization, the independence of the Federal Reserve, central bank gold purchases, U.S. tariffs, geopolitical conflicts, as well as inflation, employment, and Fed rate cut expectations related to the traditional real interest rate pricing framework. Private sector investment demand in Europe and the United States (such as ETF demand) continues to show a strong correlation with U.S. real interest rates. With U.S. inflation falling and labor market resilience weakening, expectations for Fed rate cuts in the second half of the year have increased, leading to a decrease in nominal and real interest rates, providing new momentum for gold price increases. In recent years, the pricing framework of gold in terms of the U.S. dollar and real interest rates has been "ineffective." In traditional asset pricing models, gold is seen as a benchmark asset for pricing liquidity. Historical patterns have shown that the trends of gold prices and the two indicators of the U.S. dollar and real interest rates, which measure liquidity in the same way, often contradict each other. However, since 2023, the correlation between gold and traditional indicators has gradually broken down, especially in 2024, when gold performance deviated from both real interest rate pricing and U.S. dollar pricing, indicating the urgent need for improvement and refinement of the gold pricing framework. The explanatory power of marginal demand for gold pricing has strengthened. Returning to traditional supply and demand logic, as gold supply remains relatively stable with annual production levels around 3600 tons, the true pricing variable for gold lies in demand, especially marginal demand. Gold demand primarily includes three components: private sector consumption demand, private sector investment demand, and official gold purchases. In the past, gold's marginal demand was mainly driven by ETF demand in Europe and the United States (private sector investment demand in Europe and the United States, mainly from overseas institutional investors), and its demand or investment framework largely depended on U.S. real interest rates. Since 2023, there has been a profound shift in the structure of gold demand, with increased elasticity in global central bank gold purchases and private sector investment demand in the Asian region (especially China), weakening the pricing weight of gold for overseas institutional investors. The weakening of U.S. credit, the increased demand for gold credit endorsement, and the substitution of U.S. bonds Central bank gold purchases have become a long-term trend, and demand will continue to remain high. In recent years, the overissuance of U.S. currency, as well as the continuous increase in the proportion of total U.S. debt to GDP, have reinforced the recognition of non-U.S. economies diversifying into other currencies and assets in the global arena, further accelerating de-dollarization. Gold, as a decentralized, borderless currency that does not rely on the credit of any specific country, has withstood the test of time for thousands of years. This trust is based on a common recognition of its value throughout history, making gold an important tool for countries' central banks to diversify their assets and hedge against geopolitical risks. According to a report from the European Central Bank, due to record-breaking purchases and the surge in gold prices, gold has surpassed the Euro to become the second largest reserve asset globally for central banks, with gold accounting for 20% of global official reserves in 2024, surpassing the Euro's 16%, second only to the U.S. dollar's 46%. In addition to central bank gold purchases, private sector investment demand from emerging market countries will continue to increase. Following similar logic to central bank gold purchases, private sector investment in emerging market countries will shift part of their allocation from U.S. assets such as U.S. bonds to other types of investments after gaining trade surpluses with Western countries. Gold is one of the important categories of investment, and as financial order reconstruction and global financial market volatility continue due to tariff games and the ongoing decline in the credibility of the U.S. government, the proportion of investments in assets such as gold, known as "alternative currencies," will continue to rise. The Fed's rate-cut cycle in the second half of 2025 is expected to continue Private sector investment demand in Europe and the United States (such as ETF demand) still shows a strong correlation with U.S. real interest rates. With U.S. inflation falling and labor market resilience weakening, expectations for Fed rate cuts in the second half of the year have increased, leading to a decrease in nominal and real interest rates, injecting new momentum into gold price increases.