Gold Soars Again, Institutions Warn of Risks in Gold-Linked Assets

Recently, after the U.S. Department of Labor released the U.S. Producer Price Index (PPI) for July, the result, which was lower than market expectations, further strengthened the expectation for a Federal Reserve rate cut in September. Against this backdrop, gold prices have once again entered a "surge" mode, remaining steadily above the $2,500 per ounce threshold for several consecutive trading days, setting a new historical high.

As gold prices continue to reach new highs, financial products such as wealth management, funds, and futures linked to gold have seen a significant increase in their ability to attract capital, becoming increasingly popular among investors. Financial institutions are also actively accelerating the layout of related products, with the launch of gold-themed wealth management products accelerating and the total inflow of funds into gold-themed ETFs for the year already exceeding 18 billion yuan.

Industry insiders believe that gold prices still have support in the long term, and there is still room for allocation. However, the high gold prices have increased the risk of short-term price fluctuations, and the net value of products linked to gold will also be affected by these fluctuations. From a prudent investment perspective, investors must be more cautious, pay attention to diversified investment portfolios, and spread the risk of market fluctuations.

Gold prices remain high

Since mid-August, international gold prices have risen for several consecutive trading days, breaking through the $2,500 threshold and remaining high. As of August 22, the international spot gold opened at $2,512.12 per ounce, reaching a high of $2,514.67 per ounce during the period, setting a new historical high.

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Data from Dongwu Securities' research report shows that from August 12 to August 16, overseas spot gold continued to set historical highs, with a cumulative increase of 21% for the year.

The overall price of domestic physical gold has also been fluctuating upwards. Data from the Shanghai Gold Exchange shows that the opening price of Au99.99 rose from 550 yuan per gram on August 6 to 574 yuan per gram on August 22.

In terms of investor demand, as gold prices continue to climb, domestic investors' willingness to allocate to physical gold has significantly weakened. Many physical gold investors believe that gold prices have risen repeatedly this year and are now at a high level, which is no longer a good time to buy physical gold.

The World Gold Council's recently released "July China Gold Market" report shows that 89 tons of gold were withdrawn from the Shanghai Gold Exchange (SGE) in July, a year-on-year decrease of 26 tons, the weakest July since 2020; jewelry consumption and physical investment continue to be weak, putting pressure on gold wholesale demand.

Compared to physical gold, "gold+" financial asset allocation is becoming more and more popular among individual investors. Mr. Shao from Guangzhou said: "In the long run, there is still room for gold prices to rise, but the current price is already too high. Compared to physical gold, products such as wealth management, funds, and futures linked to gold assets are more suitable for the current stage of portfolio allocation."In the view of An Guangyong, an expert at the Credit Management Committee of the China Federation of Mergers and Acquisitions, against the backdrop of increasing downward pressure on the global economy, gold and its related assets have shown a more prominent risk-avoiding characteristic compared to the first half of the year. The market has shown greater interest in assets such as gold ETFs, gold-linked financial products, and structured deposits, especially those that can provide fixed returns and are linked to gold, as they are widely concerned due to their safety and profitability.

A wealth management business manager at a joint-stock commercial bank revealed to the reporter that "fixed income +" products recently configured with gold assets have been very popular among customers due to their low net value fluctuations and relatively high returns, leading to a noticeable increase in customers' willingness to configure. Especially in an environment where deposit interest rates are declining and the stock and bond markets are experiencing wide fluctuations, many stable financial products have suffered "paper losses," making the overall performance of products configured with gold assets more prominent.

Wind data shows that the unit net value of 28 theme financial products containing the word "gold" has exceeded 1 yuan, and the cumulative unit net value growth rate of some products has even exceeded 1%.

Chen Long, a director of the China Chief Economists Forum, said that due to the increased uncertainty in the global economy, gold, as a risk-avoiding asset, is favored by investors. Gold-linked financial products have become the focus of investors, especially structured financial products, which are configured with a "fixed income + gold" strategy. The proportion of gold is generally not too high, but it is sufficient to cope with short-term market fluctuations and achieve good investment returns.

Zhou Maohua, a macro researcher at the financial market department of China Everbright Bank (601818.SH), analyzed that the recent gold price is at a historical high, and the fluctuation of gold prices has intensified, increasing the potential risk of volatility. The investment threshold for gold-linked financial products is low, and the market liquidity is good. Due to the asset portfolio and professional team management, the risk is relatively lower compared to investing in gold itself.

At the same time, financial institutions are also actively deploying financial products linked to gold assets. Wind data statistics show that since 2024, 52 "gold" theme financial products have been established, mainly medium and low-risk "fixed income +" or fixed income products. Among them, there have been 24 new products established since July alone.

Chen Long pointed out that financial institutions are quite active in the layout of gold-linked products, most of which are structured financial products. This year, due to the continuous breakthrough of gold prices to new highs, the scale growth rate of such products is faster than in previous years. Financial institutions meet investors' needs for risk avoidance through these products and also enrich product types, enhancing market competitiveness.

Chen Long further emphasized that under the current economic environment, investors are seeking stable investment channels. Gold-linked financial products, due to their relatively low risk and certain income potential, have become a new choice in investors' asset allocation. Investors are increasingly inclined to include a certain proportion of gold in their investment portfolios to strengthen the portfolio's risk resistance and improve risk-adjusted returns.

Be vigilant about the risk of high volatility. Investor interest in gold ETFs continues to rise. As of August 20, the year-to-date increase in gold ETFs, Shanghai Gold ETFs, and other categories has exceeded 18%, significantly enhancing their "attraction."Aiwen Zhilue's Chief Investment Officer, Cao Che, believes that due to gold's good risk-aversion capabilities, especially in times of economic uncertainty, more and more investors are considering gold and its related assets as a focus in asset allocation. Among them, gold ETFs and gold funds have become the focus of market attention.

According to the latest data from the World Gold Council's report on August 12, 2024, so far this year, the inflow of funds into China's gold ETFs has reached 18 billion yuan (about 2.5 billion US dollars), which is the strongest ever. Its total asset management scale has soared by 80% to 53 billion yuan (about 7.3 billion US dollars), and the holding volume has increased by 52% to 94 tons, both setting historical highs.

When looking at the outlook and analysis of China's gold market by the World Gold Council, it is believed that in the context of weak local assets, the demand for gold ETFs may continue, but investors in gold bars and coins may continue to adopt a "wait-and-see" attitude until there is a more obvious upward trend in gold prices.

From the perspective of investors, Yu Fenghui, a new finance expert, said that in the face of an uncertain market environment, both individual and institutional investors are looking for the preservation, appreciation, and risk management of assets. They tend to include gold in a diversified investment portfolio to mitigate the impact of stock market fluctuations. In addition, the method of indirectly holding gold by purchasing related financial products is also becoming more and more popular.

Cao Che also emphasized that in the current financial environment, investors pay more attention to the safety and liquidity of assets, and gold, as a risk-aversion asset, can provide a certain level of protection for investors. At the same time, as the market's recognition of gold-related products increases, investors also begin to focus on the balance between returns and risks.

Although gold as a risk-aversion asset has high attractiveness, investors also face many risks and challenges when allocating gold-related financial products. An Guangyong said that first, gold prices may fluctuate sharply when global market sentiment changes and monetary policy is adjusted. Second, geopolitical risks may also have unpredictable impacts on the gold market. In addition, the liquidity risk of gold-related products cannot be ignored, especially when the market experiences extreme fluctuations, some products may face insufficient liquidity issues.

Zhou Maohua also emphasized that from the current complex international political and economic environment, gold prices are at a historical high, and based on the inflation prospects of Europe and the United States, real interest rates may still pose a certain headwind to gold prices.

"Gold is currently at a historically high level, and there are still many uncertain factors affecting the trend of gold, which requires a higher level of professionalism from investors. From a conservative investment perspective, it is more inclined to diversify investment portfolios, invest cautiously, and pay attention to short-term market volatility risks." Zhou Maohua believes.

Chen Lu also said that in terms of the allocation of gold-related financial products, the risks and challenges faced by investors mainly include the volatility of gold prices and the market's expectations for future interest rate changes. Although gold usually performs well in a low-interest-rate environment, price fluctuations may affect the returns of gold-linked financial products. In addition, if the market's expectations for the Fed's interest rate cuts change, it may also affect gold prices. Investors should make reasonable allocations based on their own risk tolerance and investment objectives, while paying attention to market dynamics and adjusting investment strategies in a timely manner.

Zheng Lei, Chief Economist of Samoyed Cloud Technology Group, also pointed out that investors need to pay attention to market dynamics and adjust investment strategies in a timely manner to cope with market changes. It is also necessary to choose reputable financial institutions for investment to ensure the safety of funds.However, in the long run, allocating assets related to gold remains a preferred strategy for a stable return portfolio. Guoxin Securities, in its research report, analyzes that in the medium to long term, considering the special asset properties of gold, its ability to hedge against inflation and risks, and its low correlation with other asset classes in asset allocation, the value of gold allocation continues to highlight as the timing of interest rate cuts gradually approaches.

Xiong Siyuan, a senior investment consultant at Yingmi Fund, also said that in 2024 and for a longer period, gold will be an asset class of significant value in the next asset cycle. The demand for gold in the international financial market is expected to continue the logic of 2023 and be further strengthened. "From the perspective of asset allocation in investment portfolios, gold and other assets have negative correlation in fluctuations. If we include gold in our asset portfolio, the negative correlation between gold and other assets helps to reduce the overall fluctuation of the portfolio, providing higher cost-effectiveness for the investment portfolio."

Huatai Securities also emphasized in its research report that gold may fluctuate at any time in the short term, but the medium and long-term driving factors are still favorable, and it is necessary to adhere to the strategic allocation thinking.