The gold market is shining

Gold is the safest way to preserve value and invest. In recent years, the price of gold has been rising all the way, and the international gold market is just as glamorous.

In the National Day holiday just past, gold hit a record high of 1,796.1 US dollars per ounce for the year, an increase of more than 12% compared with 1,590 US dollars two months ago. Recently retreated to 1756 US dollars, the market began to worry about whether this round of gold has ended? What is more worried about whether the economic external driving force has been ineffective after the QE3 and the European OMT, and whether the bull market in the commodity market will end? Bank of China (Bank of China) and Hang Seng Bank Gold Market analysts have issued reports one after another, analyzing the reasons for the rapid development of gold prices, and optimistic about the market outlook.

Monetary policy to stimulate the gold price The Hang Seng Bank’s “Golden Market Overview” released in October stated that the price of gold could approach the level of US$1,800 per troy ounce, as global major central banks have successively introduced loose monetary policies.

European Central Bank President Mario Draghi announced in September the details of the purchase of the Euro Zone National Bonds Plan. This plan is called "Direct Currency Trading" (OMT) and aims to alleviate the problem of excessive debt in some Euro Zone countries. The European Central Bank can purchase unlimited 1- to 3-year bonds in the secondary market and will abandon its position as a priority creditor. However, the precondition for the central bank to purchase debt is that countries in financially disadvantaged countries need to first seek help from the aid providers in the region and accept the strict conditions set by the aid agency.

In the same month, the U.S. Federal Reserve Bureau introduced the third round of quantitative easing monetary policy (QE3) and purchased 40 billion U.S. dollars of agency mortgage-backed bonds (MBS) each month. Hang Seng Bank gold market analysts believe that this plan is different from the previous two rounds of quantitative easing monetary policy, that is, no time limit is set, and QE3 will continue until the labor market environment improves. In addition, the Fed has also announced that it will extend the time limit for maintaining extremely low interest rates from the end of 2014 to mid-2015, and stated that by the end of the year, it will continue to extend the average maturity of the bonds held, that is, its “distorted operation” plan to buy 450 per month. Billion U.S. long-term Treasury bonds and sell short-term treasury bills.

Following the European Central Bank and the Federal Reserve, the Bank of Japan also expanded the scale of loose monetary policy. The Bank of Japan decided to buy an additional 10 trillion yen of national debt and increase its asset purchase plan to 80 trillion yen.

As global major central banks launched a series of measures to support the stability of the financial market and revitalize the economy, the market's demand for the use of gold for hedging increased. As a result, the demand for hedging in the US dollar fell, and the price of gold, which has always lags behind the US dollar, rose. On the other hand, investors are worried that the loose monetary policies of central banks will eventually push up inflation, so buying more gold to reduce the losses caused by inflation eroding money purchasing power.

Upside space points to 1844

Just as investors looked forward to the gold price to climb to the historical high of 1921.15 US dollars per ounce in September 2011, the gold price showed a rather quiet situation after the National Day, and it was adjusted back to 1756 US dollars. Will the strong gold end? Xu Ming, a gold analyst at Bank of China, believes in the analysis of the newspaper's gold market: The need to distinguish between the driving force of gold prices.

Xu Ming said that from the point of view of global economic growth, the October Global Economic Outlook Report released by the International Monetary Organization this week lowered the global economic growth expectation. In 2012, the global economy only grew by 3.3%, which was lower than the 3.5% estimated in July. This will be the lowest growth rate since 2009. The IMF predicts that the global economy will grow moderately next year by 3.6%, which is also lower than the 3.9% forecast for July. The market used this as a hedge, but in the report of the IMF, the forecast for the deepest crisis in the euro zone economy turned from -0.4% to 0.2% in 2013. China’s economic pre-judgment is still rising from 7.8 percent in 2012 to 8.2 percent in 2013. This cannot be judged as gloomy prospects from the point of view of crisis affecting commodity markets or growth. Blanchard, chief economist of the IMF, believes that China, India or Brazil’s economy will not have a “hard landing”. The qualitative change of trends tends to be more important than the price itself, but when the market wakes up again, commodity prices will surely surprise most people.

Another factor is related to the warning proposed by the IMF. This is the main risk of the global economy in the future. After the United States just announced its strong non-agricultural and unemployment rate dropped to 7.8%, the IMF's warning is in the lead. It said that the U.S. economy will continue to grow moderately by about 2% this year and next, but it must avoid tax increases at the end of the year. Such a "fiscal cliff", otherwise the economy will fall back into recession. As the precipice point on January 1, 2013 approaches, the risk of U.S. monetary and fiscal policies is likely to exceed the European debt risk and become the real focus of the market. At the present time, worrying about Spain sometimes considering Greece, when the eyes of investors are blurred, seeing the deeper volatility will allow investors to re-examine the dollar exchange rate above the 80 level. Benchmarking the US dollar index to return to the launch of QE3 at a higher probability of 79.30, which is undoubtedly a better driving factor for the price of gold.

Xu Ming believes that sorting out the driving factors behind the commodity market and the strength of the dollar behind the gold will help us to judge and decide on operating behavior. What can be preliminarily predicted is that over time, negative factors will affect the U.S. dollar more.

The Hang Seng Gold Market Overview Report also believes that looking ahead, the Fed’s commitment to maintain ultra-low interest rates until mid-2015 may continue to drag down the dollar and drive up the price of gold. The Fed and other major central banks continue to implement loose monetary measures, but also highlight the role of gold preservation. The past few years coincided with the global financial crisis and the eurozone debt crisis. The Fed, the European Central Bank, and the Bank of Japan all launched large-scale monetary policy measures to stimulate the economy. From the beginning of 2007 to the end of 2011, the cumulative increase in gold prices reached 146%.

Although data from the World Gold Council shows that with the slowdown in global economic growth, the demand for gold ornaments in many countries has dropped, leading to a 7% drop in global gold demand in the second quarter. However, the purchase of gold by central banks in emerging markets such as Russia and the Philippines has helped offset this effect. In the second quarter, the amount of gold purchased by central banks more than doubled from the same period of last year. The strong official demand will help increase the price of gold.

Xu Ming believes that from a technical perspective, the support of the upward trend of the midline is still at 1688 US dollars, and above this short-term operation is still between the daily rails between the upper and lower tracks between 1758-1788 US dollars. Weekly signal is more pointing to this wave of gold if the 1750 to complete the weekly technical oversold technical adjustments, the upward space is pointing at 1844 US dollars. He suggested that the operator seeks to establish a position within the support range of US$1,758 and the weekly Bollinger Band’s 1,720 US$s, and points the short-term profit and medium-term profit target to US$1,790 and US$1,844.