CITIC Construction Investment: How to evaluate the pace and space of gold

The Zhitong Finance App learned that CITIC Construction Investment released a research report saying that since 2026, gold has gone through three rounds of significant market changes. Essentially, it is not a medium- to long-term pricing logic restructuring, but rather an intense game in a short-term liquidity environment. Stable clues during the year anchor the long-term allocation power of global central banks in diversified allocations of funds and reserves; the main uncertainty comes from the liquidity path co-shaped by geographical conflicts and the impact of the Wash policy. Since July, gold has completed the first round of restoration based on fiscal constraints and correction of austerity expectations. The price of gold begins the second round of trending upward slope and is subject to confirmation of substantial easing by the Federal Reserve. Penetrating through short-term inflation and employment data, the Fed's currency is easy to loosen and difficult to tighten. This policy asymmetry may determine that this gold upward cycle is not over yet.

CITIC Construction Investment's main views are as follows:

1. Gold experienced three rounds of significant market changes this year, with capital and volatility mutually reinforcing

The first phase was January-February. Gold continued its previous upward trend and accelerated its rise.

At the capital level, global gold ETF holdings increased by 120 tons in January, reaching a record high. Among them, Asia and North America increased their holdings by 62 tons and 43 tons, respectively. Gold options trading and market volatility increased markedly during the same period, and prices experienced large intraday fluctuations several times at the end of January.

The second stage is March-June, and gold is continuously adjusted from a high level to continuous adjustment.

The flow of funds weakened at the same time. The net outflow of global gold ETFs in the second quarter was 45 tons, and the outflow from the North American market was quite obvious; the gold positions of some Chinese investment capital and European and American trend funds also declined. By the end of June, gold prices and market positions had cooled significantly from their high levels at the beginning of the year.

In the third phase, since July, the price of gold has bottomed out at around 4,000 to 4,200 US dollars/ounce, and the first round of restoration has begun.

Ahead of the sharp recovery in gold prices in August, the capital flow in July was the first to improve: global gold ETFs had a net inflow of about 3 billion US dollars and an increase of 23 tons in July, ending two consecutive months of net outflows. Europe became the main inflow region, Asian capital continued to increase, and North America also switched from net outflows to small net inflows.

The second and third round of market switching is not an iterative long-term logical restructuring; the essence is still an intense game of short-term liquidity

Short-term fluctuations in gold are mainly affected by liquidity and private sector positions (ETF capital flow), which determine the slope and fluctuation range of the market; medium- to long-term trends depend more on US fiscal credit, changes in the global monetary system, and diversification of central bank reserves, which determine the allocation center and downward support of gold prices.

The clue for relative stability this year is that the US fiscal deficit and high interest burden, as well as medium- to long-term support provided by global central bank purchases; the real uncertain variables come from the currency liquidity path.

Liquidity expectations are also mainly affected by a combination of the geographical conflict and the impact of the Walsh policy. The former changes policy expectations through oil prices and inflation, while the latter directly changes the market's understanding of the Fed's reaction function. Together, the two push gold to shift from rising at the beginning of the year to two rounds of adjustments.

In the first phase, gold ushered in the first wave of correction (March-April) after the geopolitical conflict boosted oil prices and strengthened inflationary pressure.

In the second phase, Walsh took office to further change the market's understanding of the Fed's reaction function, and gold experienced a second wave of decline (June).

Signals for March and July: Austerity expectations loosen and credit narratives resonate.

The core signal for the July market was not that the Federal Reserve had entered an easing cycle, but that high interest rates were no longer sufficient to suppress gold alone.

The pricing direction of July gold can be summarized in two directions:

First, employment, inflation, and consumption have cooled down, causing expectations of continuous interest rate hikes to begin to correct, and short-term liquidity pressure has declined;

Second, prolonged geopolitics, fiscal deficits, and rising maturity premiums on US bonds have increased demand for medium- to long-term credit hedging.

The former reduces the amount of pressure on gold, while the latter increases the support for gold, and jointly pushes the recovery of the gold market to resonate with liquidity and credit logic.

First, since July, employment in the US has continued to cool down, inflation has been relatively moderate, and unilateral pricing, which has continued to be tight since Walsh took office, began to loosen.

In terms of employment, the level of tension in the US labor market has declined markedly, and demand for new jobs is close to a standstill. Wage and labor supply indicators also point to a loosening of the job market.

In terms of inflation, price pressure eased marginally in July, and the risk of secondary inflation has yet to spread further. Consumption data further strengthened the signal that the economy is cooling marginally.

After employment, inflation, and consumption data were released, the market began to re-evaluate the logic of unilateral austerity after Walsh took office. As of August 17, the market's implied probability of an interest rate hike in September had dropped to about 33%, significantly lower than 51.2% a month ago.

Second, geopolitical conflicts have been transformed from one-off to ongoing energy, fiscal, and policy constraints, fiscal credit has re-entered pricing, and demand for credit hedging has increased.

The geographical conflict became protracted, and it began to gradually shift from a single suppression of short-term interest rates to long-term policy credit support.

On July 8, Trump announced the “end” of the US-Iran Memorandum. Since then, passage through the Strait of Hormuz has continued to be blocked, the military and economic game between the US and Iran has been repeated, and the geographical conflict has begun to transform from a one-time shock to continuous energy, fiscal, and policy constraints.

The protracted geographical conflict mainly supports gold through three paths.

First, energy prices have been high for a long time, which will increase the government's financial pressure to maintain economic growth and stabilize residents' costs;

Second, spending on defense, energy security, and supply chain restructuring has risen, further expanding fiscal deficits and treasury bond financing needs;

Third, as long-term interest rates continue to rise and affect fiscal stability and financial conditions, the market will accordingly raise expectations for policy intervention, liquidity support, and even future monetary easing.

The US bond maturity premium rose again in July, pointing to a rekindling of monetary credit risk.

The New York Federal Reserve's ACM model also shows that the US bond maturity premium rose markedly in July. The 10-year US bond maturity premium rose from about 0.51% on June 30 to about 0.84% on July 31, rising about 33 basis points a month; it further remained in the high range of 0.80% to 0.90% in mid-August, and once approached 0.90% on August 17. This means that even if employment and inflation cool down marginally and market expectations for continued austerity relax, long-term US bond yields still need to be included in higher long-term risk compensation.

The US Treasury Department later announced that it would increase the size of a single liquidity-supported repurchase of 10-30 year US bonds from 2 billion US dollars to at least 4 billion US dollars, which also shows that policy department's sensitivity to long-term market liquidity and maturity risks is increasing. The US Treasury's operation itself is not equivalent to quantitative easing, nor can it simply be understood as debt monetization, but it shows that as long-term interest rates continue to rise, restrictions on fiscal and monetary policies are increasing.

For gold, this change is significant: if the rise in long-term interest rates is mainly due to improved economic growth and actual returns, it will usually suppress gold; however, if the rise in long-term interest rates comes from fiscal deficits, bond supply, and policy credit risk, gold and long-term yields may rise at the same time.

Third, the diversification of central bank purchases and reserves still provides bottom support.

Against the backdrop of deepening geographical games, it is still clear that the central bank's logic of buying funds is shifting to a more active medium- to long-term strategic allocation.

As can be seen from the data for the second quarter, the long-term trend of central bank gold purchases has not been reversed due to a pullback in gold prices. In the second quarter, the net purchases of global central banks reached 289 tons, an increase of about four times over the revised 57 tons in the first quarter, and the highest level in the second quarter of the year; among them, the Bank of Poland increased its holdings by 51 tons, the Central Bank of China increased its holdings by 33 tons, and central banks such as Uzbekistan, Kazakhstan, Jordan, and the Czech Republic continued their net purchases.

Practical evidence of the central bank's strategic allocation of gold this year is also reflected in the continuation of the gold return trend, and diversification of reserves has begun to obtain regional (Hong Kong, China) trading and clearing carriers.

On the one hand, the return of gold in 2026 will further shift from individual events to a trend in reserve management.

India has drastically increased its domestic gold storage ratio, France has completed the standardized replacement of New York gold and switched to Paris escrow, and discussions between Germany and Venezuela over overseas control have also clearly heated up.

On the other hand, a series of infrastructure projects in the Hong Kong gold market, China, have also confirmed the improvement of the strategic nature of gold from a practical level.

From a penetrating perspective, the central bank's purchase of funds, the return of reserves, and the construction of gold infrastructure in Hong Kong, China this year still point to the same trend: gold is shifting from a passive historical heritage in the central bank's balance sheet to a strategic reserve asset that is actively managed.

4. Fiscal credit determines the direction of allocation, and monetary policy determines the next phase of upward slope

As the US fiscal problem is shifting from long-term expectations to short-term market constraints, gold may have completed the first round of valuation repair from “excessive price tightening” to “relative balance in fiscal and monetary directions.”

Since July, gold has completed the first round of restoration from around $4,000 to $4,600 per ounce. The essence of this is not that the easing policy has been implemented; rather, the market is shifting from a single “high interest rate, strong dollar, and continued austerity” pricing to simultaneously take into account economic cooling, fiscal credit risk, and the possibility of marginal monetary policy shift.

After the first round of valuation repair is completed, fiscal credit and central bank purchases can still raise the gold allocation center and limit downward space, but it is difficult to continue to determine the short-term upward slope. If gold is to fix its valuation and move further into the second round of trend growth, it will still need to wait for confirmation of substantial easing.

In the future, we can focus on observing three groups of signals:

The first is whether the labor market continues to cool down, driving a shift in policy focus from inflation to employment;

The second is whether inflation can remain manageable, and whether the Federal Reserve is willing to tolerate a certain level of energy inflation;

The third is whether North American gold ETFs can shift from exploratory backflows to trending net inflows. Together, the three decide whether easing expectations can be transformed from directional judgments into policy facts and financial confirmation.

Penetrating through short-term inflation and employment data, the bottom line of the Fed's policy serves the basic interests of the US economy and financial system. The current technology game, where the Fed's currency is easy to loosen and difficult, has determined that the current upward trend in gold is not over.

CITIC Construction Investment has systematically discussed in previous reports that the bottom line of the Federal Reserve's policy is to serve America's basic interests. The so-called independence of the Federal Reserve and the monetary framework are adjusted over time; the 1970s are the best example. For the US, the most important thing is to maintain technological leadership to ensure monetary and financial stability. Second, focus on the social stability risks inherent in K-type differentiation, and finally focus on the level of inflation.

Once you understand the US model, America's current predicament, and the Federal Reserve's basic position, you can grasp a medium- to long-term main line. In the current technological game, the Fed's currency is easy to loosen and difficult to tighten. This policy asymmetry also forms the basis for the policy that the gold bull market is not over yet.

Technological competition is increasing America's dependence on long-term capital and easy financial conditions. Monetary policy can be phased out, or it is difficult to allow real interest rates and financing costs to rise indefinitely in the long term.

Risk warning:

There is still uncertainty about the sustainability of the recovery in consumption. Whether it continues to fluctuate at a low level in the future or whether it can continue to move closer to a normalized growth rate still needs to be closely monitored. If consumption continues to be weak, the momentum for economic recovery will be limited.

Whether the real estate industry can continue to improve remains uncertain. The current downturn in real estate has been going on for a long time. Currently, there is a brief recovery trend, but many indicators are still negative growth. Whether the recovery trend can be maintained in the future remains to be observed.

Limited to data availability, there is a risk of insufficient statistics, a risk of measurement errors due to model failure, and a risk of statistical errors in data.

The impact of tight monetary policies in Europe and the US may exceed expectations, dragging down global economic growth and asset price performance.

Geopolitical conflicts remain uncertain, disrupting global economic growth prospects and market risk appetite.