China Securities Co., Ltd.: How to Evaluate the Rhythm and Space of Gold

China Securities Co., Ltd. released a research report stating that since 2026, gold has undergone three significant market shifts. The essence of these shifts is not a reconstruction of mid-to-long-term pricing logic, but rather intense competition in the short-term liquidity environment. This year's stable clues are anchored by the long-term structural forces of global central bank gold purchases and reserve diversification. The main uncertainties stem from the liquidity paths shaped by geopolitical conflicts and the impacts of monetary policies. Since July, gold has completed its first round of correction based on fiscal constraints and tightening expectations. The price of gold has begun the second round of upward trends, which requires confirmation of substantial monetary easing by the Federal Reserve. Beyond short-term inflation and employment data, in the current technological contest, the Federal Reserve finds it difficult to tighten monetary policy, and this asymmetry in policy may determine that the current upward cycle of gold has not yet concluded. The main points presented by China Securities Co., Ltd. are as follows: 1. Gold has experienced three notable market shifts this year, with funds and volatility mutually reinforcing each other. The first phase, from January to February, saw gold continuing its previous upward trend and accelerating higher. On the funding level, global gold ETFs increased their holdings by 120 tons in January, reaching a historic high, with Asia and North America increasing their holdings by 62 tons and 43 tons, respectively. During the same period, gold options trading and market volatility rose significantly, with substantial intraday fluctuations in price occurring multiple times at the end of January. The second phase, from March to June, saw gold enter a period of continuous adjustment from high levels. Correspondingly, fund flows weakened. In the second quarter, global gold ETFs experienced a net outflow of 45 tons, with a notable outflow seen in North America; some investment funds from China and trend-following funds from Europe and the United States also reduced their gold positions. By the end of June, both the price of gold and market positions had noticeably cooled compared to the highs at the beginning of the year. The third phase, from July to the present, has seen gold prices consolidate around $4,000-$4,200 per ounce, initiating the first round of correction. Ahead of a significant rebound in gold prices in August, fund flows had already begun to improve in July: global gold ETFs recorded a net inflow of about $3 billion and added 23 tons in July, ending two consecutive months of net outflows, with Europe becoming the main inflow region, Asian funds continuing to increase their holdings, and North America shifting from net outflows to small net inflows. 2. The three rounds of market shifts do not signify a repeated reconstruction of long-term logic; they fundamentally represent intense competition in short-cycle liquidity. Short-cycle fluctuations in gold are primarily influenced by liquidity conditions and private sector positions (ETF fund flows), determining the slope and amplitude of market conditions; mid-to-long-term trends rely more on U.S. fiscal credibility, the evolution of the global monetary system, and central bank reserve diversification, which establish the configuration center and underlying support for gold prices. This year's relatively stable clues are provided by the U.S. fiscal deficit and high-interest burdens, as well as the medium-to-long-term support from central bank gold purchases; the truly uncertain variables originate from the liquidity pathways related to monetary conditions. Expectations regarding liquidity are primarily influenced by geopolitical conflicts and the impacts of monetary policies. The former alters policy expectations through oil prices and inflation, while the latter directly changes market understanding of the Federal Reserve's reaction function, together driving gold from its early-year rise into two rounds of adjustment. In the first phase, geopolitical conflicts heightened oil prices and intensified inflationary pressures, leading to the first wave of corrections in gold prices (March-April). In the second phase, the appointment of Powell further altered the market's understanding of the Federal Reserve's reaction function, resulting in the second wave of gold price declines (June). 3. The signals from July indicate a loosening of tightening expectations and a resonance in credit narratives. The core signal from the market in July is not that the Federal Reserve entered a cycle of easing, but rather that high interest rates can no longer alone suppress gold. The pricing direction for gold in July can be summarized in two aspects: First, employment, inflation, and consumption cooled, leading to a correction of persistent interest rate hike expectations, thereby reducing short-cycle liquidity pressure; Second, the entrenchment of geopolitical issues, rising fiscal deficits, and increased term premiums on U.S. Treasury bonds have strengthened the demand for medium- and long-term credit hedges. The former reduces the suppressive factors on gold, while the latter enhances its supportive elements, collectively driving the shift in the gold market toward liquidity and credit logic resonating. Since July, the U.S. job market has consistently cooled, and inflation performance has remained relatively moderate, causing the previously sustained unilateral pricing under tight conditions to loosen. In terms of employment, the tightness of the U.S. labor market has significantly decreased, with new hiring demand nearly stagnating. Wage and labor supply indicators similarly point to a loosening employment market. On inflation, the price pressures in July showed marginal alleviation, and risks of secondary inflation have not further diffused. Consumption data has further reinforced signals of marginal economic cooling. Following the publication of employment, inflation, and consumption data, the market began to reassess the unilateral tightening logic that was in play after Powell's appointment. As of August 17, the market's implied probability of a September interest rate hike has dropped to around 33%, significantly lower than one month ago when it stood at 51.2%. Moreover, geopolitical conflicts have transitioned from being one-time events to ongoing constraints in energy, fiscal dimensions, and policy frameworks, with fiscal credibility re-emerging in pricing and enhancing demand for credit hedges. The persistence of geopolitical conflicts is gradually shifting from a singular short-term interest suppression to sustained support through long-term policy credibility. On July 8, Trump announced that the U.S.-Iran memorandum "has ended," leading to continued disruptions in the Strait of Hormuz, with military and economic tensions between the U.S. and Iran seen as ongoing disputes, shifting geopolitical conflicts from one-time shocks to continuous constraints on energy, fiscal, and policy matters. The long-term nature of geopolitical conflicts primarily supports gold through three paths. First, sustained high energy prices will increase the fiscal pressure on governments to maintain stable living costs for residents; Second, rising expenditures in defense, energy security, and supply chain restructuring further expand fiscal deficits and the financing needs for national debt; Third, when long-term interest rates consistently rise and affect fiscal stability and financial conditions, the market will adjust its expectations for policy interventions, liquidity support, and future monetary easing accordingly. In July, the term premium on U.S. Treasuries rose again, signaling a resurgence of monetary credit risks. The New York Fed's ACM model also shows that the term premium on Treasuries rose significantly in July, with the 10-year Treasury term premium rising from about 0.51% on June 30 to about 0.84% on July 31, an increase of approximately 33 basis points within a month; by mid-August, it remained in a high range of 0.80%-0.90%, almost reaching 0.90% on August 17. This implies that even as employment and inflation cool, and market expectations for sustained tightening loosen, yields on long-term Treasuries will still need to account for higher duration risk compensation. Subsequently, the U.S. Treasury announced that it would raise the scale of its one-time liquidity support for 10- to 30-year Treasury bonds from $2 billion to at least $4 billion, indicating that the policy department's sensitivity to long-term market liquidity and term risks is increasing. This action by the U.S. Treasury does not equate to quantitative easing and cannot be simply interpreted as debt monetization but instead indicates that when long-term rates continue to rise, the constraints on fiscal and monetary policy are amplifying. For gold, these changes are significant: if the rise in long-term interest rates mainly stems from improving real returns in economic growth, it typically suppresses gold; however, if the rise is driven by fiscal deficits, bond supply, and policy credit risks, gold and long-term yields may rise simultaneously. 4. Fiscal credibility determines the allocation direction, while monetary policy determines the next stage's upward slope. As U.S. fiscal issues transition from long-term expectations to short-term market constraints, gold may have completed its first round of valuation correction from "over-tight pricing" to a relatively balanced position of "fiscal and monetary direction." Since July, gold has completed its first round of repair from about $4,000 to $4,600 per ounce. The essence of this is not that easing policies have materialized, but that the market has shifted its pricing from a singular focus on "high interest rates, a strong dollar, and sustained tightening" to considering the potential of economic cooling, fiscal credit risk, and the marginal turn in monetary policy. After the completion of the first round of valuation correction, fiscal credibility and central bank gold purchases can still elevate the central configuration for gold and limit downward space; however, they are less likely to continually determine the short-term upward slope. For gold to further transition its valuation correction into a second round of sustained upward trends, confirmation of substantial monetary easing is still needed. Going forward, three groups of signals may be critical to observe: First, whether the labor market will continue cooling, pushing policy focus from inflation back to employment; Second, whether inflation can remain controllable, and whether the Federal Reserve is willing to tolerate a degree of energy inflation; Third, whether North American gold ETFs can shift from tentative inflows to sustained net inflows. These three factors collectively determine whether easing expectations can shift from directional judgments to policy realities and capital confirmations. Looking beyond short-term inflation and employment data, the Federal Reserve's policy orientation serves the fundamental interests of the U.S. economy and financial system. In the current technological contest, the long-term main theme of the Federal Reserve making monetary easing difficult will determine that the current upward trend in gold has not yet ended. In previous reports, China Securities Co., Ltd. has systematically elaborated that the fundamental purpose of the Federal Reserve's policy is to serve the U.S.'s fundamental interests. The so-called independence of the Federal Reserve and its monetary framework will be adjusted over time, with the 1970s being the best example. For the United States, maintaining technological leadership is paramount to guarantee monetary and financial stability, followed by concerns about the social stability risks inherent in K-shaped divides, and finally, concerns about inflation levels. Once one understands the American model, the current predicaments of the U.S., and the fundamental positions of the Federal Reserve, it is possible to grasp a long-term theme: in the current technological contest, the asymmetry in the Federal Reserve's monetary policy making easing difficult forms the policy foundation for why the gold bull market has not yet concluded. Technological competition is increasing the U.S.'s dependence on long-term capital and loose financial conditions. While monetary policy can tighten temporarily, it is unlikely to long-term allow real interest rates and financing costs to rise indefinitely. Risk Warnings: The persistence of consumer recovery remains uncertain. Whether it continues to oscillate at low levels or manages to return to normal growth rates will require close monitoring. If consumer demand remains weak, the economic rebound could be constrained. Uncertainties still exist regarding whether the real estate sector can continue to improve. The current downcycle in real estate has lasted a considerable length of time, and while there are signs of temporary warming, many indicators continue to show negative growth, which necessitates observation on whether the warming trend can be maintained. Statistical data limitations may lead to incompleteness in the dataset, including risks of model failure and errors in data statistics. The impact of tightened monetary policies in Europe and the United States may exceed expectations, dragging down global economic growth and asset price performance. Uncertainties persist in geopolitical conflicts, disrupting global economic growth prospects and market risk appetite.