China Galaxy Securities: It is expected that there will be no significant trend reversal in the gold and silver markets in February, but it is still necessary to pay attention to marginal changes in the aftermath of risk events.

China Galaxy Securities released a research report stating that in January, the market experienced a shift in macro narratives from event-driven risk avoidance to concerns about global order reshaping. The widening trust gap globally, damaged US dollar credit, structural contradictions in silver supply and demand, and competition for key resources have become the core logic driving the rise in gold and silver prices currently. Looking ahead to February, based on the trading core logic of the market mentioned above, the firm leans towards there not being a trend reversal in gold and silver. However, attention still needs to be paid to the marginal changes brought about by various risk events and potential discrepancies in US macro expectations. At the end of January, Trump announced his final candidate for the Fed chairmanship, Kevin Wash, but the impact of this on recent Fed interest rate decisions may be relatively short-lived. Kevin's attitude and market trust levels have expectations gaps in information transmission. Additionally, due to silver's volatility being much stronger than gold, and its direction primarily led by gold, if gold undergoes a correction, the risk for silver may be higher, requiring flexibility in operations and position management. Key views of China Galaxy Securities: I. Gold fundamentals A. Supply and demand balance According to the latest statistics from the World Gold Council, total supply in the first three quarters of 2025 was 3,717 tons, an increase of 1.2% year-on-year. In the third quarter, global gold total supply increased by 3% year-on-year to 1,313 tons, reaching a quarterly record high. Gold mine production in the third quarter increased by 2% year-on-year to 977 tons; recycled gold supply increased by 6% year-on-year to 344 tons, remaining at a high level and stable. Gold demand totaled 3,717 tons in the first three quarters of 2025, amounting to $384 billion, an increase of 1% year-on-year. In the third quarter, global gold total demand (including off-exchange investment) increased by 3% year-on-year to 1,313 tons, a record high quarterly demand total according to historical data from the World Gold Council. Investment demand continued to dominate gold demand in the third quarter. Global gold ETF total holdings increased significantly (by 222 tons), and combined gold bar and coin demand exceeded 300 tons for the fourth consecutive quarter (316 tons this quarter), driving the overall increase in gold demand. Central bank gold purchases remained high in the third quarter at 220 tons, a 28% increase from the previous quarter (although cumulative central bank purchases in the first three quarters of the year were 634 tons, indicating a slower pace compared to the 724 tons purchased in the same period last year). Jewelry consumption experienced a double-digit decline year-on-year in the third quarter (the sixth consecutive quarter of decline), dropping to 371 tons, mainly due to high gold prices putting pressure on jewelry consumption. Technological gold demand slightly decreased compared to the third quarter of 2024, despite the growth provided by artificial intelligence applications, facing resistance from US tariff policies and the rise in gold prices. Looking ahead, the World Gold Council believes that on the supply side, as gold producers' profits increase and are expected to remain high, this will further stimulate increased production capacity, pushing gold mine production to new highs this year. Total recycled gold is expected to increase, but the increase in recycled gold is likely to be lower than expected levels due to the liquidation of old jewelry affecting gold prices. On the demand side, global gold ETFs still have rising potential, retail gold investment performance remains steady, and a slight decline is expected in the second half of the year. However, due to high gold prices and weak economic growth in most regions, gold jewelry demand is expected to have difficulty significantly rebounding. Technological gold demand may face pressure due to high prices, slowing economic growth, and tariff issues, but strong consumption in artificial intelligence is expected to offset these negative factors. B. Central bank gold demand In the interest rate hike cycle initiated by the Federal Reserve in 2022, central bank gold purchases not only weakened the pressure on gold from rate hikes by European and American central banks, offset the impact of reduced gold ETF investments, but also continuously pushed the central trading price of gold upward: in the context of European and American central bank rate hikes, global gold ETF outflows continued, diverging from gold price trends, from the second quarter of 2022 (after the rate hikes) to the second quarter of 2024 (before the rate cuts), global gold ETFs experienced a net outflow of 745.6 tons, but during the same period, global central banks purchased about 2,500 tons of gold, and the London gold price rose by over 20%. As of the third quarter of 2025 (latest data), the trend of central bank gold purchases has continued, and although the quantity year-on-year in the first to third quarters has decreased slightly, central banks from emerging countries such as China, Turkey, Poland, and India have been continuously increasing their gold reserves. In addition, since January, the Polish central bank announced plans to purchase an additional 150 tons of gold, the Hungarian central bank stated that it may consider increasing the proportion of gold in the central bank's reserves, but the Tanzanian central bank announced plans to sell some gold reserves to raise funds for infrastructure development. Overall, the trend of central bank gold purchases is expected to continue. C. Gold ETF demand As of the end of December, global gold ETF cumulative holdings reached 4,025 tons, surpassing the historical peak of 3,769 tons in 2020. Looking at the whole year, gold ETF holdings increased by a net 801 tons, marking the end of a trend of net outflows since 2021, with the net increase in holdings this year being second only to the 893 tons in 2020. Overall, in 2025, there has been a significant resonance between central bank gold demand and ETF investment demand, and the firm expects this trend to continue into 2026. II. Silver fundamentals Since the third quarter of 2025, silver has shown a relatively independent trend compared to gold. The firm believes that the foundation of the market's startup lies in the longer-term contradictions behind silver. Specifically, in the first half of this round of the precious metals bull market, the gold-to-silver ratio center has risen, indicating that silver's valuation relative to gold is in a lower range; in addition, after years of digesting inventory shortages in silver, the supply and demand gap has become more severe, with major trading exchanges in London, China, and other regions experiencing historically low inventories. Subsequently, factors such as emotional and capital aspects, combined with the Trump administration's inclusion of silver as a critical mineral resource and increased marginal demand from AI-related narratives, have intensified market enthusiasm for silver. A. Silver's "undervaluation" relative to gold In reviewing the precious metals bull market of the past 20 years, it can be seen that silver's price increase is often higher than that of gold, even reaching 1.5 to 2 times that of gold. Since the end of 2023, gold has continuously reached historical highs, while silver has been trading below $50, leading to the gold-to-silver ratio center shifting from the long-term range of 50-80 to 80-90. From a relative valuation perspective, silver is somewhat undervalued, hence possessing the possibility of phased increases. B. Long-term supply and demand gap narrative for silver fundamentals From a fundamental perspective, silver has experienced a supply and demand gap since 2021, which has continued until this year. As silver is mainly a byproduct, its supply side is relatively stable and difficult to significantly increase or decrease in the short term, emphasizing the importance of demand changes in influencing silver prices. In terms of demand, traditional industrial sectors for silver, such as jewelry, investment, and electronics, usually have stable absolute levels of consumption, with limited impacts. However, from 2020 to 2022, disruptions caused by the pandemic led to a significant decrease in demand in India, the world's largest consumer of silver jewelry and silverware, followed by a rebound, creating a supply and demand gap for silver. Although India has gradually returned to normal demand levels since 2023, the rapid growth of the photovoltaic industry, led by China, has brought new marginal increments to silver photovoltaic silver, thereby sustaining the supply and demand gap for silver. In recent years, this demand gap has been mainly filled by outflows from exchange inventories, preventing silver prices from rapidly rising when supply shortages first appeared. However, by 2024-25, major exchange inventories worldwide had fallen to historical lows, and the long-term accumulation of supply and demand conflicts gradually matured. In October 2025, India's seasonal demand surged, market silver ETF demand also increased rapidly, igniting long-term contradictions, causing silver to quickly break through its historical high of $50 and leading to a rare short squeeze in the London market for silver. Here are some deeper indicators that help explain the "heat" in the silver market: global silver ETFs have seen significant net inflows, reaching over 26,000 tons as of January, indicating that the market still holds a relatively optimistic view of silver price trends; silver lease rates soared to around 35% during extreme market conditions, recently settling around 3% (still significantly higher than the historical normal level of around 0%), indicating that fundamental tightness in the physical silver market has not fundamentally reversed. Furthermore, global silver inventories are generally low (except for the United States due to a suction effect at the beginning of 2025). It is noteworthy that although LBMA market inventories have risen to over 27,000 tons, an estimated 19,000-20,000 tons of silver are linked to ETFs and cannot freely circulate, leaving only about 7,000 tons of silver available for free circulation. Moreover, domestic inventories have reached new lows due to overseas market suction. As of the end of January, the inventories of the Shanghai Futures Exchange and Shanghai Gold Exchange were only about 1,000 tons, leading to a significant backwardation in spot and futures silver since January, with wide fluctuations in the internal/external price spread of silver and multiple openings of import windows. However, it is crucial to note that silver ETF demand and price performance often exhibit a certain form of reflexivity; as silver prices rise, they drive an increase in silver ETF demand, further squeezing available silver inventories and leading to higher silver prices. But if silver reaches a turning point (such as adjusting along with gold), ETF demand may decrease due to price pressure on silver, leading to an abundance of available circulating silver stocks and causing prices to further decline. C. Changes in demand for silver in the industrial sector Despite the recent attention on photovoltaic silver, according to the latest photovoltaic roadmap from CPIA, the use of silver in mainstream TopCon cells has decreased from 106mg per cell to 86mg per cell, with an expected continued trend towards reduced silver usage. Overall, the continuous decline in silver consumption per unit remains a major trend, alongside a slowdown in industry growth. According to SMM, photovoltaic silver powder production was 5,421 tons in 2025, an 8% decrease year-on-year. The reduction in silver consumption per unit in photovoltaic cells and the substitution of silver by other materials may pose a potential bearish factor for silver prices. With the rapid rise in silver prices at the end of this year, photovoltaic cell companies have accelerated the replacement of silver by basic metals such as copper. However, the timing of widespread adoption of such materials remains uncertain and is not expected to occur before mid-2026, requiring continuous monitoring. This also represents a defect in the narrative of industrial silver-related bull factors. Additionally, according to a new report released by the World Silver Council titled "Silver: Next Generation Metal," the development of new energy vehicles and the construction of data centers are expected to bring marginal increases in demand for silver. Silver demand in the automotive industry is expected to grow at an annual rate of 3.4% between 2025 and 2031, reaching approximately 94 million ounces in 2031 (an increase of about 435 tons from 2026). Furthermore, global data centers have seen significant growth, from 0.93 gigawatts in 2000 to nearly 50 gigawatts in 2025, a 53-fold increase. Core components such as servers, switches, and cooling systems in data centers all require silver. In 2025, North America, Western Europe, East Asia, and Southeast Asia accounted for 88% of the global computing capacity, with the Oxford Economic Research Institute predicting a 57% increase in US data center construction over the next 10 years. Although there is currently no authoritative data on silver consumption in the data center sector, given the industry's growth prospects, it is expected that marginal demand for silver will increase.