Strong China Demand Boosts Gold Rally

Theme and Background

This chapter focuses on the strong performance of the gold market in January 2023 and its driving factors, analyzing the supportive role of the macro environment (a weakening US dollar, declining real interest rates, and large-scale purchases by Chinese official sectors) on gold prices, and exploring the structural characteristics of gold investment demand.

Core Views

The author argues that the rise in gold is not driven by speculative funds from traditional financial markets, but rather by sustained large-scale purchases from Chinese official sectors (potentially including the People's Bank of China, central bank-related entities, or state-owned banks). These purchases exhibit "non-market" characteristics—they are indifferent to technical overbought conditions. Counterintuitive judgment: Despite the significant rise in gold prices, CFTC net long positions and ETF holdings remain at multi-year lows, implying that the potential for future long position increases far outweighs the risk of selling.

Key Arguments and Data

1. Gold Price Performance: Spot gold rose by $104.34 (+5.72%) in January to $1,928.36, marking the best January performance since 2015; since the November 2022 low of $1,625, the three-month gain is the largest since 2011.

2. Macro Drivers: The US dollar index fell by 1.38% in January to 102.10, with a three-month decline being the largest since 2009; the 10-year real yield dropped by 31 basis points to 1.26%.

3. Chinese Official Purchases: The trading desk has confirmed sustained flow demand from China since early November 2022, with estimated purchase tonnage being the highest since 2017.

4. Weak Investment Demand: Gold ETF holdings (93.17 million ounces) are near a +2.5-year low, and CFTC non-commercial net long positions are at the lower end of the 10-year range; combined, they are at a -2 standard deviation level.

5. Dollar and Treasury Liquidity: The three-month change rate of DXY is the second fastest decline in 20 years; the US Treasury liquidity index has exceeded the March 2020 crisis level; the proportion of foreign holdings of US Treasuries has been declining since its 2013 peak, with foreign holders selling approximately $516 billion in March 2022.

Indicator	January 31, 2023	December 30, 2022	Change	Monthly Change
Spot Gold	$1,928.36	$1,824.02	+$104.34	+5.72%
US Dollar Index	102.10	103.52	-1.43	-1.38%
10-Year Real Yield	1.26%	1.57%	-31bps	-31bps
NYSE Arca Gold Miners	897.17	805.50	+91.67	+11.38%
Gold ETF Holdings (Million Ounces)	93.17	93.75	-0.58	-0.62%

Companies/Assets Involved

• Spot Gold: Bullish. The author believes that Chinese official purchases represent sustained demand, and extremely low investment positions provide upside potential.
• Spot Silver: Fell by 0.94% in January to $23.73, marking the first monthly decline since August, but silver ETF holdings saw their first rebound since the summer sell-off (+1.49%).
• NYSE Arca Gold Miners Index: Rose by 11.38% in January to 897.17, rebounding 47.7% from its low, outperforming gold itself.
• US Treasuries: Implicitly bearish. The proportion of foreign holdings is declining at an accelerating pace, and liquidity is deteriorating; the author believes that a forced restart of QE or YCC may be necessary in the future.

Investment Implications

1. Long Gold: Chinese official purchases provide a solid floor, while extremely low investment positions mean that once the trend is confirmed, short covering will drive gold prices further up.

2. Beware of Further Dollar Weakness: The rapid decline in DXY has already eased financial conditions; if policy coordination pushes the dollar lower, gold and risk assets will benefit continuously.

3. Monitor US Treasury Liquidity Risks: Accelerated foreign selling combined with deteriorating liquidity may force the Fed to restart easing even while inflation remains high, which is structurally positive for gold.

4. Gold Mining Stocks Are More Resilient Relative to Gold: The GDM index's rebound from its low (47.7%) far exceeds the rise in gold prices, indicating that mining stocks have higher beta during gold's upward cycle.

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Theme and Background

This chapter focuses on the structural trend of major global central banks (especially China and Japan) persistently reducing holdings of U.S. Treasury bonds and increasing gold reserves, as well as the profound impact of this behavior on the U.S. dollar, interest rates, and gold prices. The report argues that geopolitical risks (such as U.S. sanctions on Russia's foreign exchange reserves) and the loosening of the Bank of Japan's yield curve control (YCC) policy are accelerating this "de-dollarization" process.

Core Viewpoint

The author's core judgment is: China and Japan, as the top two foreign holders of U.S. Treasury bonds, are systematically reducing their holdings of U.S. Treasuries and shifting toward gold. This trend significantly accelerated in 2022 and is expected to persist. A counterintuitive conclusion is that while the adjustment of Japan's YCC policy has pushed up Japanese government bond yields, it will ultimately lower U.S. real interest rates (by weakening economic growth expectations), thereby benefiting gold.

Key Arguments and Data

1. Synchronization of China's Reduction in U.S. Treasuries and Increase in Gold Holdings:

• Since 2018 (the first year of the U.S.-China trade war), China has cumulatively reduced its holdings of U.S. Treasuries by approximately $310 billion (including a reduction of $199 billion in 2022), while importing gold worth about $230 billion.
• The report believes that U.S. sanctions on Russia's foreign exchange reserves are the core motivation for China's accelerated reduction. China is currently the world's seventh-largest bond market, but the top six are all the U.S. and its allies, making gold a more attractive "sanction-resistant" asset.

2. Chain Effects of Japan's YCC Policy Adjustment:

• In December 2022, the Bank of Japan unexpectedly raised the cap on 10-year government bond yields from 0.25% to 0.50%, leading to an appreciation of the yen against the U.S. dollar by approximately 15%.
• In the second half of 2022, Japan conducted 76 trillion yen (approximately $550 billion) in quantitative easing to maintain YCC (about 14% of GDP). The end of this stimulus is equivalent to de facto global tightening.
• Since the beginning of 2022, Japan's holdings of U.S. Treasuries have decreased by about $220 billion.

3. Summary of U.S. Treasury Sell-off Scale:

• In 2022, China and Japan together reduced their holdings of U.S. Treasuries by $420 billion, accounting for 17.5% of their total holdings. The Federal Reserve was simultaneously in a quantitative tightening (QT) state, making domestic U.S. investors the primary buyers of U.S. Treasuries.

4. Long-term Performance of Gold vs. U.S. Treasuries:

• Over the past 20 years (2002-2022), gold's annualized return was 8.65%, higher than U.S. Treasuries' 3.06%, with superior Sharpe ratio (0.51 vs. 0.48) and Sortino ratio (0.83 vs. 0.70).
• Over the past 5 years, gold's Sharpe ratio was 0.47, higher than U.S. equities (0.46) and bonds (-0.23), with the lowest correlation to the market (0.16).

Comparison Table: Gold vs. U.S. Equities vs. U.S. Treasuries (2002-2022)

Metric	U.S. Equities	U.S. Treasuries	Gold
Annualized Return	9.52%	3.06%	8.65%
Standard Deviation	15.29%	3.95%	16.87%
Maximum Drawdown	-50.89%	-17.57%	-42.91%
Sharpe Ratio	0.59	0.48	0.51
Sortino Ratio	0.87	0.70	0.83
Market Correlation	1.00	0.12	0.08

Involved Companies/Assets

• Gold (Spot/Futures): Core bullish asset. The report argues that a weaker U.S. dollar, declining real interest rates, and central bank gold purchases are short-term catalysts; over the long term, gold will continue to outperform U.S. Treasuries in an environment of rising inflation and volatility.
• U.S. Treasury Bonds: Bearish. Systematic selling by foreign buyers (China, Japan), reduced demand from Fed QT, and forced buying by domestic investors increase liquidity risk.
• Japanese Yen/Japanese Government Bonds: The loosening of Japan's YCC policy has led to a stronger yen, but Japanese institutional investors are shifting from foreign bonds back to Japanese government bonds, further reducing global demand for U.S. Treasuries.

Investment Implications

• Reduce Exposure to U.S. Treasuries: Given the persistent selling by the two largest holders, China and Japan, and the compression of demand from Fed QT, U.S. Treasury prices face structural pressure. Investors should lower their allocation to long-duration U.S. Treasuries.
• Increase Gold Holdings: Gold outperforms U.S. Treasuries in risk-adjusted returns, downside protection, and diversification. The report argues that even in the bond-friendly macro environment of the past 20 years (low inflation, low volatility, Fed easing), gold still outperformed U.S. Treasuries; the future environment of rising inflation and volatility will be even more favorable for gold.
• Monitor Further Adjustments to Japan's YCC: If the Bank of Japan completely abandons YCC, it will push the global interest rate anchor higher, but may lower real interest rates by weakening economic growth expectations, providing additional support for gold.