Western: Bullish on gold prices in the medium term, selectively favoring resilient leaders from top to bottom.

Western released a report stating that a significant drop in gold prices will directly lead to a decrease in the realizable net value of gold-related inventory, potentially resulting in substantial inventory impairment losses. The market is gradually correcting hawkish expectations, and gold prices have begun to recover; gold is expected to benefit from the exposure of inflation risks in the United States. The bank predicts that the jewelry industry may experience a "quarterly recovery" in Q3 2026. It is recommended to focus on targets with a high proportion of direct sales and low inventory hedging, while also considering the timing of inventory write-offs, with expectations for profit improvement in the next 1-2 quarters. Western's main viewpoints are as follows: In H1 2026, gold prices are expected to fluctuate widely, with increased inventory impairment losses. In the first half of 2026, the global gold market is expected to experience broad fluctuations, with international gold prices dropping nearly 8% over this period; the London spot gold price surged to nearly $5,600 per ounce at the beginning of the year, setting a historical high before rapidly retreating, with a maximum drawdown of nearly 30% from the peak, representing the largest adjustment since 2013. The second quarter is traditionally a weak consumption season for the industry, and together with the fluctuations in high gold prices, the demand for gold jewelry is expected to decline. Meanwhile, the significant decrease in gold prices will directly lead to a decline in the realizable net value of gold-related inventory, potentially resulting in substantial inventory impairment losses. The market is gradually correcting hawkish expectations, and gold prices have begun to recover. In July 2026, the U.S. non-farm payrolls decreased by 23,000, below market expectations; the year-over-year core CPI increased by 2.5%, showing a month-on-month weakening. The market is gradually correcting hawkish expectations, and gold prices have started to recover. In the short term, adjustments in gold prices are driven by hawkish comments from Waller, leading to rising U.S. Treasury yields; however, from a medium-term perspective, the continuous strengthening of inflation expectations since January has been driven by rising oil prices, exacerbating current production risks in the U.S., including ongoing CSPCapex sustainability and defaults on private placements by small and medium-sized enterprises. From this perspective, gold is expected to benefit from the exposure of inflation risks in the United States. The jewelry industry's sales are showing signs of recovery, with a focus on the elasticity of recovery in Q3. As gold prices recover, sales are expected to improve quarter-on-quarter. Given that January and February are peak sales months, followed by a restocking phase in March and April, both direct sales and franchise channels are at relatively high gold prices for restocking. Therefore, the bank predicts that the jewelry industry may experience a "quarterly recovery" in Q3 2026. Targets with a high proportion of direct sales and low inventory hedging ratios, which experienced significant inventory impairment in Q2, may have stronger recovery elasticity in Q3. Risk warnings: risks of gold price fluctuations; risks of weak consumer demand; risks of intensified industry competition, etc.