Broker: UOB Kay Hian
Date of Report: October 7, 2024
Gold: Rally Takes a Breather, Downside Cushioned by Escalating Geopolitical Tensions
Gold prices are taking a break around US$2,650 per troy ounce, primarily due to profit-taking activities and a rebound in the U.S. dollar. High gold prices have begun to affect demand for jewelry and central bank purchases, although exchange-traded fund (ETF) inflows continue to support upward momentum, particularly in North America and Europe. While gold prices remain range-bound, geopolitical tensions are offering some downside protection.
Recent Developments in the Gold Market
Spot gold prices have paused after a rally fueled by the first Federal Reserve rate cut, stabilizing around the US$2,650 per troy ounce level. Factors contributing to this pause include profit-taking, a stronger U.S. dollar, and a surge in Chinese equities driven by stimulus measures, which have led to some investors shifting away from traditional safe-haven assets.
Domestic Gold Prices in China
In China, domestic gold prices have been trading at a discount since mid-August 2024. In September, the Shanghai Gold Exchange (SGE) Gold Benchmark price recorded a modest 3.7% increase, trailing behind the international gold price rise of 5.0%. The domestic price discount is primarily due to the appreciation of the renminbi and weaker domestic demand for gold.
Elevated Volatility from Fed Rate Expectations
Gold market volatility remains high, largely driven by changing expectations regarding future Fed rate cuts. Robust U.S. jobs reports in September 2024 cooled market expectations of a steep rate cut, which is expected to weigh on gold prices. According to the CME FedWatch Tool, markets are now pricing in a 97.4% probability of a 25-basis-point rate cut in November 2024 and an 80.2% probability of another cut in December 2024. However, the downside risk for gold prices is cushioned by escalating geopolitical tensions, including the Ukraine-Russia conflict and uncertainties related to the upcoming U.S. presidential election.
Demand for Gold Jewelry and Bars
The spike in gold prices has significantly reduced the demand for gold jewelry. As of October 1, the listed prices for major gold jewelers ranged from Rmb748 to Rmb768 per gram, compared to early 2024 prices of Rmb620 per gram. China Gold’s basic gold price was Rmb597.60 per gram, with a retail price of Rmb611.60 per gram on the same day. Sales volumes of gold jewelry during Golden Week dropped by about 20% year-over-year, indicating a reluctance among consumers to make purchases. Despite the challenges, gold bars have emerged as a new favorite due to their value preservation qualities and avoidance of the additional making charges imposed by jewelers.
Central Banks’ Gold Purchases and ETF Inflows
According to the World Gold Council, central banks’ net buying slowed to eight tonnes in August 2024, a 78% month-over-month decrease and the lowest monthly net purchase since March 2024. However, gross sales have not shown signs of acceleration, suggesting that central banks have adopted a wait-and-see approach rather than reversing their buying trends.
Global gold ETFs continue to experience persistent inflows, particularly from North America and Europe. As of September 20, 2024, global gold ETFs had an assets under management (AUM) of US$267.9 billion, collectively holding 3,196 tonnes of gold, representing an increase of US$10.6 billion and 14.3 tonnes compared to the end of August 2024. North America contributed US$1.6 billion to these inflows. This trend is expected to continue, especially in western countries, providing a key pillar of support for gold prices.
Market Outlook
The metals and mining sector remains market-weight, with precious metals being the top pick. While range-bound gold prices may deter momentum-seeking investors, the market’s focus will likely remain on the Federal Reserve’s future rate cut pathways. However, the downside appears well cushioned by geopolitical tensions and U.S. election uncertainties. With central banks’ de-dollarization efforts still ongoing, the long-term outlook for gold remains bullish.
Company Analysis
Shandong Gold: Positioned for Bullion Price Rally
- Recommendation: Buy
- Target Price: HK$20.50
- Current Share Price: HK$18.10
- Valuation: 2024F PE of 20x
- Gold Output: Targeting no less than 47 tonnes in 2024
Shandong Gold, China’s largest domestic gold miner, is poised to benefit from the anticipated bullion price rally. The company has projected its gold mine output to reach at least 47 tonnes in 2024, up from 41.78 tonnes in 2023. Given its pure-gold exposure, Shandong Gold is one of the key beneficiaries of the ongoing rally in gold prices.
The company has demonstrated operational efficiency, making it a solid investment choice amid the current gold market dynamics. With upcoming Federal Reserve rate cuts and an expected decline in treasury yields, the weakening U.S. dollar is likely to lift metal prices denominated in dollars. This, in turn, boosts the appeal of non-yielding assets like gold, benefiting Shandong Gold.
Zijin Mining: A Global Gold Powerhouse
- Recommendation: Buy
- Target Price: HK$21.00
- Current Share Price: HK$18.56
- Valuation: 2024F PE of 17x (+2SD)
- Gold Output: Targeting 85 tonnes in 2025 and 100-110 tonnes by 2028
Zijin Mining is among the top 10 global miners in terms of attributable gold reserves, positioning itself as a global powerhouse in gold production. The company aims to achieve mine-produced gold output of 85 tonnes by 2025 and 100-110 tonnes by 2028, significantly enhancing its earnings profile. Zijin’s production plans indicate a move towards a more balanced earnings contribution.
The company’s gold all-in-sustaining cost was the second-lowest globally in 2023 at US$1,161 per ounce. This cost advantage, coupled with Zijin’s ambitious production targets, provides a compelling growth narrative. With a valuation pegged at a 17x 2024F PE, the stock offers a strong upside potential.
