Gold and Silver Enjoy Continued Rally

Theme and Background

This chapter focuses on the price performance and driving factors of gold and silver in the third quarter of 2024. The report notes that both gold and silver recorded significant gains in Q3, with gold hitting a new all-time high and silver approaching an 11-year peak, marking the market's entry into a new bull phase.

Core Views

The author's core judgment is: Gold has entered a new bull market driven by emerging market central bank gold purchases, rising U.S. debt, and the potential peaking of the U.S. dollar. Counterintuitive views include: the main driver of gold's surge in Q3 was not ETF or futures speculation, but implicit purchases by central banks (especially sovereign institutions); silver's volatility is higher than gold's, but its industrial demand (electrification, energy transition) is forming a higher correlation with copper, providing additional support.

Key Arguments and Data

• Price Performance: Gold closed Q3 at $2,634.58/oz, with a quarterly gain of 13.23% (the largest since Q1 2016), and a year-to-date gain of 27.71% (the best start since 1986); silver closed Q3 at $31.16/oz, with a quarterly gain of 6.92% and a year-to-date gain of 30.95%.
• Driving Factors: The U.S. Dollar Index (DXY) fell 4.81% in Q3; the Fed cut rates by 50 basis points in September and signaled another 50 bps cut in 2024 and 100 bps in 2025; U.S. debt and deficit expectations are set to rise significantly under either a Trump or Harris administration; geopolitical tensions in the Middle East escalated.
• Purchase Source Analysis: CFTC net non-commercial gold positions increased by 215 tons in Q3 (about 1 standard deviation); gold ETFs added only 68 tons (0.4 standard deviations), but this was the first quarterly net inflow since Q1 2022; the Shanghai gold premium averaged -0.17%, making Chinese purchases unlikely. Models suggest central banks or sovereign institutions are the most likely buyers.
• Historical Correlation: Since Q2 2013, the R-squared value of quarterly gold price changes against net purchases by central banks, CFTC futures, and ETFs is 0.70, with each $100/oz change in gold price corresponding to approximately 450 tons of net purchases. The Q3 gold price increase of $307.82/oz implies potentially record-breaking purchase volumes.
• Silver Technical Target: The author expects silver to break through to a technical target of $40-42/oz.

Key Comparison Data Table:

Indicator	2024/9/30	2024/6/30	Quarterly Change	Quarterly % Change	Year-to-Date % Change
Gold Spot	$2,634.58	$2,326.75	+$307.83	+13.23%	+27.71%
Silver Spot	$31.16	$29.14	+$2.02	+6.92%	+30.95%
U.S. Dollar Index (DXY)	100.78	105.87	-5.09	-4.81%	-0.55%
Gold ETF Holdings (tons)	83.33	81.05	+2.28	+2.81%	-2.63%
Silver ETF Holdings (tons)	721.88	690.00	+31.88	+4.62%	+3.14%

Companies/Assets Involved

• Gold: Bullish. The report argues that gold has broken through resistance, with the next long-term technical target at $3,000-$3,200/oz.
• Silver: Bullish. Expected to hit a new cycle high, with a technical target of $40-42/oz, benefiting from electrification, energy transition demand, and the global monetary easing cycle.
• Gold Mining Stocks (NYSE Arca Gold Miners GDM Index): Bullish. Up 16.64% in Q3 and 26.98% year-to-date, with the chart suggesting a potential retest of the 2020 highs.
• U.S. Dollar (DXY): Bearish. The report believes the dollar is at a key long-term support level and may be peaking.
• U.S. Treasuries: Rose in Q3 due to growth fears and Fed rate cuts, with the 10-year real yield falling 51 basis points to 1.59%.

Investment Implications

• Gold: Investors should focus on central bank gold purchase trends, especially sovereign buying from emerging markets. After gold breaks above $2,700, the next key resistance is at $3,000-$3,200. Consider allocating to gold ETFs or physical gold.
• Silver: Silver has both precious metal and industrial attributes. Its correlation with copper is currently rising, and global monetary easing along with China's stimulus policies (about 3% of GDP) will provide additional support. Technically, after breaking above $32, the target is $40-42, suitable for investors with higher risk tolerance.
• U.S. Dollar: The weakening trend of the dollar may persist, benefiting dollar-denominated precious metals. Investors could consider shorting the dollar or increasing holdings of non-dollar assets.
• Risk Warning: Silver's volatility is higher than gold's, and it may be dragged down by deleveraging events in industrial metals in the short term; central bank gold purchase data is lagging and requires subsequent confirmation.

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Theme and Background

This chapter provides an in-depth analysis of gold prices entering a new bullish pricing regime. By reviewing four pricing mechanism cycles since 1990, the report argues that the core drivers of gold prices are not singular but rather the interconnected result of central bank gold purchases, dollar trends, and changes in U.S. debt.

Core Thesis

The author's core judgment is that gold has entered a new bull phase driven by structural factors, not a short-term rebound. This judgment is based on three key and mutually reinforcing catalysts: sustained large-scale gold purchases by emerging market central banks, an irreversible surge in the U.S. debt-to-GDP ratio, and the potential formation of a long-term top in the dollar index.

Counter-Intuitive/Contrarian Judgments:

• The market generally focuses on the impact of the Federal Reserve's interest rate policy on gold prices, but the report argues that debt sustainability, monetary credibility, and central bank reserve diversification are more fundamental long-term drivers, with interest rates being only short-term disturbances.
• Although the U.S. debt-to-GDP ratio was already high during 2012-2021 (averaging about 105%), gold prices did not surge at that time because the Fed's QE/ZIRP policies suppressed interest expenses. The current environment is different: debt is higher, and interest expenses have surged to $1.1 trillion, which can no longer be suppressed.

Key Arguments and Data

1. Historical Mechanism Comparison: Central Bank Gold Purchases, the Dollar, and Debt as Core Variables

By comparing four periods, the report demonstrates the decisive role of these three variables:

Period	Gold Price Performance	Central Bank Gold Purchase Behavior	Dollar Index (DXY) Change	U.S. Debt/GDP Change
1990-2000 Bear Market	Down ~35%	Large-scale selling (400-500 tonnes/year in late 1990s)	Up ~50%	Flat (balanced budget)
2001-2011 Bull Market	Up 7x (peak $1,900)	Stopped selling, resumed buying (especially post-2008)	Down 40%	Nearly doubled (54%→96%)
2012-2021 Consolidation	Roughly flat	Stable buying	Up 50% (but slow)	Rose from 96% to 119% (but interest expenses suppressed by QE/ZIRP, averaging ~$460 billion)
2022-Present Bull Market	Sustained rise (record high in Q3 2024)	Average annual purchases of 1,176 tonnes (2.4x the previous decade)	Potentially peaking	Reached 121%, interest expenses exceed $1 trillion

2. Specific Data on the Three Catalysts

• Central Bank Gold Purchases: As of July 31, 2024, global gold reserves accounted for 18.66% of total world reserves, the highest since 1997. This ratio has doubled (from about 9%) since its 2016 low. China holds 2,264 tonnes of gold, representing only 5.32% of its total reserves, leaving significant room for further accumulation.
• U.S. Debt: U.S. national debt has reached $35.5 trillion, with a debt-to-GDP ratio of 121%. According to CBO projections, this ratio will rise to 140%, 167%, and 205% by 2030, 2040, and 2050, respectively. Interest expenses have surged to $1.1 trillion and are expected to reach approximately $1.7 trillion over the next decade.
• Dollar Index: DXY has been trading within an upward channel for over 15 years and is now approaching a key long-term support level, with weakening MACD momentum. The report notes that the U.S. 2-year Treasury yield was as high as 5.2%, compared to 3.2% in Germany (a 200-basis-point spread). As the global economy enters a rate-cutting cycle, U.S. yields have more room to decline, potentially narrowing the spread and putting pressure on the dollar.

3. Long-Term Depreciation of Dollar Purchasing Power

The report uses the USDXAU cross rate (i.e., how many ounces of gold one dollar can buy) to measure the dollar's value relative to gold. Since January 29, 1971, the dollar has depreciated by 98.56% relative to gold. Over the past 20 and 10 years, this cross rate has fallen by 84.1% and 54.1%, respectively. The author believes that with the certainty of rising debt, this cross rate will decline further.

Companies/Assets Involved

This chapter does not cover specific companies; it primarily analyzes the asset class of gold bullion itself. Institutions mentioned include:

• Central banks (especially the People's Bank of China): As major buyers of gold, their purchasing behavior is a core driver of the new gold pricing mechanism. The report argues that China has both the incentive and the room to continue increasing its holdings.
• Federal Reserve (Fed): Its monetary policy (the end of QE/ZIRP) is a key factor behind the surge in U.S. interest expenses.

Investment Implications

1. Strategic Bullishness on Gold: The report argues that gold has entered a new bull market driven by three structural forces: central bank gold purchases, debt expansion, and potential dollar depreciation. Investors should view it as a core part of long-term asset allocation, not merely a short-term safe-haven tool.

2. Focus on the "Death Spiral" of Debt and Interest Expenses: The simultaneous surge in the U.S. debt-to-GDP ratio and interest expenses is a combination never seen before in history. This could lead to a long-term erosion of market confidence in the dollar, thereby consistently benefiting gold.

3. Beware of the Risk of a Dollar Peak: The DXY index may be forming a 15-year top. If it breaks below key support, it could initiate a prolonged dollar depreciation cycle, providing strong upward momentum for dollar-denominated gold. Investors should consider reducing dollar exposure and increasing allocations to non-dollar assets such as gold.

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Theme and Background

This chapter focuses on the core drivers and future outlook for the gold and silver markets. The report notes that amid persistent inflationary pressures and global economic challenges, central banks and investors are increasingly inclined to allocate to precious metals, while the US Dollar Index (DXY) is at a key support level and may face further downside risk.

Core Views

The author believes that the long-term outlook for gold and silver is strong, driven primarily by central bank gold purchases, expanding debt levels, and the potential peaking of the US dollar due to government policies and deepening deglobalization trends. A contrarian view is that despite changes in the interest rate environment, central bank gold buying (especially by emerging markets) has provided structural support for gold prices, rather than short-term trading factors.

Key Arguments and Data

• Surge in central bank gold purchases: Since Q3 2022, central bank gold buying has increased by approximately 2.4 times, aiming to reduce overall USD exposure and diversify reserve risks.
• Elevated inflation expectations: The 5Y5Y inflation swap rate and a higher neutral interest rate suggest persistent inflation expectations, driving gold and silver as hedges against the erosion of fiat currency purchasing power.
• Declining interest rates: Lower interest rates reduce the opportunity cost of holding non-yielding assets such as gold and silver.
• Geopolitical risks: Global conflicts and geopolitical instability boost demand for gold as a safe-haven asset, with central banks accelerating purchases to guard against political risks, sanctions, and asset confiscation.
• Supply and demand dynamics: Industrial demand for silver (especially in the photovoltaic sector) supports prices, while central bank gold buying is a key driver of gold demand.
• Position of the US Dollar Index: The report's chart shows that DXY is at a key support level in the long-term trend from 2000 to 2024; a break below could accelerate USD weakness.

Companies/Assets Involved

This chapter does not mention specific companies, focusing instead on the analysis of gold and silver as asset classes. The report emphasizes:

• Gold: As a safe-haven asset, demand rises amid economic weakness, currency depreciation, and geopolitical risks.
• Silver: Possessing dual attributes as both a precious metal and an industrial metal, its demand grows faster than GDP in the energy transition (renewable energy, electric vehicles, electronics). Mine production has been flat for over a decade, and supply constraints may lead to an imbalance.

Investment Implications

• Bullish on gold: Central bank gold buying, US debt expansion, and the potential peaking of the USD provide long-term structural support. Investors should consider gold allocations to hedge against fiat currency depreciation and geopolitical risks.
• Bullish on silver: Growth in industrial demand (especially from photovoltaics) combined with supply constraints could make silver stand out in a resource commodity bull market and economic recovery, though its volatility is higher than that of gold.
• Monitor interest rate policy: If central banks cut rates or struggle to control inflation, gold and silver prices will benefit further. Conversely, rising rates may pressure prices in the short term, but central bank gold buying and de-dollarization trends provide a floor.