Gold dips and bullish opportunities are emerging

On January 8, precious metals saw a big correction, with COMEX gold down 3.33% and COMEX silver down 6.46%. We believe that gold sell-off after the long dip opportunities are emerging.

The sharp rise in real interest rates on US bonds has put pressure on gold

On Friday, precious metals prices crashed, mainly due to the sharp rise in U.S. bond rates caused by gold prices a sharp correction. On the morning of January 7th the Democrats formally claimed control of both houses of the Georgia Senate, taking two seats.

That is expected to be a smoothing of the future of Mr Biden's policies, including the $1,400 extra tax rebate checks he mentioned on Friday and a trillion-dollar spending package. All these measures require a simple majority vote in the Senate. As a result, the rapid strengthening of economic expectations has led to a sharp rise in the 10-year Treasury rate, resulting in a correction in gold prices.

The probability of US bond rates starting to rise is unlikely

Expanding fiscal stimulus will continue to increase the size of the US fiscal deficit for at least the next year. Historically, there has been a strong negative correlation between the leverage ratio of the U.S. government and Treasury interest rates.

In addition, the continued rise of interest rates on US debt is also not conducive to economic recovery and bad debt disposal in the US after the current epidemic. A rapid rise in interest rates may trigger the Federal Reserve's response measures. Once the Fed starts its yield-curve control policy, it can effectively push down long-end bond rates, as the Japanese experience has shown.

Referred to the experience of rising interest rates of Treasury bonds driven by China's economic expectation from April to July 2020, the interest rate of Chinese 10-year Treasury bonds rose by 57bp from the low point, while the interest rate of US Treasury bonds has risen by 61bp from the low point in this round.

The further recovery of the interest rate of Chinese government bonds is driven by a number of non-economic factors such as policy inflection point and tight liquidity supply, so the further rise of interest rate of US government bonds is relatively limited.

Saudi Arabia's larger-than-expected production cuts have prompted oil prices to rise, and the subsequent rebound in inflation will be more smooth. In addition, last week's 8.3 per cent gain in Brent crude in a week brushed off supply concerns after Saudi Arabia's energy minister said he would voluntarily cut output by 1m b/d over the next two months, underlining the kingdom's desire to avoid a price war with Russia. 

Subsequent oil prices or "wait" demand recovery driven by the east wind. That is to say, in the first half of the year, the probability of further upward oil prices is large, while the US bond interest rates continue to rise is less likely.

The long-term bullish logic for precious metals has not been broken

We continue to believe that gold is poised for another all-time high: (a) real interest rates on Treasuries have further to fall, (b) the flood of major central banks continues, and (c) gold remains a highly valued asset allocation on rising inflation.

In this stage, crude oil, agricultural products and industrial products all have obvious allocation value. At the same time, gold underperforms the above commodity sectors. In the period of rapid rise of inflation, gold performance is the most bright eye, commodities show gold > crude oil BBB>od BBB2 m> ranking. At present, the inflation logic in the first half of the year is more inclined to moderate inflation, and gold still has some upside potential.

To sum up, when the current round of U.S. bond interest rate recovery ended, the value of gold allocation will be highlighted. In addition to the impact of real interest rates on US Treasuries, gold's recent safe-haven properties also have some support for gold prices. Recently, the global epidemic prevention and control situation is gradually grim. 

On the one hand, experts in South Africa revealed that the vaccine may not be effective against the mutated virus. On the other hand, the epidemic in Europe and the United States is still not getting better. For the past two weeks, the average number of new cases per day in the United States and Europe has hovered around 200,000, with no sign of a turnaround. 

Biden, on the other hand, promised a bailout package and economic stimulus. He also promised that his first priority after taking office would be to solve the epidemic problem. Once the new cases continue to rise, he would not rule out the means of the United States to launch a comprehensive city closure. As a result, we believe gold will regain allocation value after the correction. The key is the strength and timing of the rebound in Treasury rates.