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• 2024-10-29

Banking Innovations for Gold: Navigating Price Rises

The surge in international gold prices has transformed gold into a standout investment option, prompting a variety of financial institutions to dive into this lucrative arena. As the allure of gold shines brighter, numerous investment firms have initiated strategies to capitalize on this trend, primarily structuring their offerings around bonds while integrating financial derivatives linked to gold, such as those from the Shanghai Gold Exchange, gold ETFs, and over-the-counter options. Industry analysts interpret this strategy as an effort to secure stable returns from the bond market while simultaneously benefiting from gold price appreciation as it rises.

This year, gold prices have demonstrated remarkable resilience, suggesting a future that may see elevated prices rather than declines. On April 19, the international gold price reached an impressive high of $2,400 per ounce, following a brief period of correction. Year-to-date, gold has appreciated by 15.96%, with the potential to rival the cumulative increase of 17% seen in the first half of 2020.

Many firms are racing to offer gold-linked financial products as a response. Notable names like China Merchants Bank Wealth Management, Everbright Wealth, Xiyin Wealth, Ping An Wealth, and Beijing Bank Wealth have taken the lead in this initiative. These firms have introduced numerous products directly tied to gold, leveraging their offerings to attract investors.

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For example, China Merchants Bank has rolled out 16 different financial products that directly tie into gold, with most offering benchmark performance standards hovering around 3%, and some even reaching up to 5%. The durations for these products vary from three months to one year, predominantly structured as closed-end investments. One specific product, “Zhaorui Target Profit and Stability Gold No. 3,” primarily utilizes strategies based on gold investments and quantitative neutrality, while promising an annualized return between 2.6% and 4.5%.

Another offering from the same firm, the “Zhaorui Focus Linked Stable Progress Gold Binary Call,” ties its performance to the Shanghai Gold Exchange's SGE 9999 gold pricing. Similarly, Ping An Wealth has introduced a product titled "New Anxin Gold Star No. 1," which is a six-month closed-end investment. It offers a benchmark yield of between 2% and 4% and is also correlated with the SGE 9999 gold price, designed with a two-way shark fin structure suitable for investors with a risk level of R2.

Beijing Bank Wealth took an early step by launching its “Mouding Stop Profit No. 1” product, which combines fixed income with gold investments. The underlying assets for this product consist of at least 80% fixed-income securities, designed to secure stable yield while also allocating around 15% to gold ETFs and related assets.

In addition, various investment firms have begun to offer products linked to gold ETFs and specialized gold funds. Xiyin Wealth's "Ruili Xingcheng Gold Chen 1," for instance, primarily targets debt-type assets while maintaining a set proportion of gold assets, alongside selections of gold ETFs and gold-themed funds.

Moreover, some institutions have developed products that link to international gold assets, like UBS's offshore wealth management dual-win notes associated with SPDR Gold Trust and BlackRock's World Gold Fund through QDII systems.

Overall, the gold-linked financial products developed by asset management entities show a strong emphasis on stability. These typically fall into two categories: the “fixed income + gold” products, which utilize traditional bond investments as foundational assets to ensure steady yield, with gold making up 10% to 20% of the portfolio to enhance returns. The investment durations typically range from three months to a year, with some products extending up to three years, displayed predominantly in closed fund structures.

According to Zhou Maohua, an analyst with Everbright Bank's financial markets department, the recent uptick in banks launching gold-linked products primarily stems from the consistent record-breaking highs of gold prices throughout the year. The escalating gold prices have heightened market enthusiasm for investment, drawing greater attention from potential investors.

Some industry experts argue that products linked to gold possess specific advantages. Researcher Qu Ying from Pu Yi Standard explains that compared to direct purchases of physical gold or engagement in gold futures trading, gold-linked investment products typically have a lower investment threshold, enabling broader participation among investors.

Nevertheless, there are concerns about these gold-linked products, particularly regarding their mixed-asset portfolios. The overall performance of these investments is heavily reliant on the combined performance of the underlying assets. Furthermore, the closed-end nature of these products can complicate the redemption process for investors.

In recent months, international gold prices have made a notable ascent from over $2,000 per ounce to reach the $2,400 mark, resulting in Goldman Sachs revising its year-end gold price forecast upward to $2,700 an ounce—its fourth such adjustment this year. Historically, key drivers of gold pricing have been the real yield on U.S. Treasury securities and the strength of the dollar, which share an inverse relationship. As the dollar strengthens, gold prices tend to fall, and vice versa. However, recent developments have challenged this traditional correlation.

Yi Han, Chief Macro Economist at Huatai Securities, notes that the recent gold price trends affirm that, amid the current global macroeconomic climate and geopolitical tensions, gold has remained largely insulated from the impact of rising real interest rates—an anomaly observed since real yields have risen from below -1% to above +2% without significantly affecting gold prices.

Central banks worldwide bolstering their gold reserves is widely perceived as another substantial factor contributing to the strength of gold prices. Analysts at Galaxy Securities report that 2023 saw the second-highest level of gold accumulation by global central banks on record, only marginally lower than in 2022. In January 2024, global official gold reserves rose by 39 tons, marking over double the amount recorded in December 2023, indicating that central banks have consistently achieved net increases in gold holdings for eight consecutive months.

As indicated by a previous analyst, the correlation between rising gold prices and increases in official central bank reserves and market purchases cannot be ignored. Under conditions where both the dollar index and U.S. Treasury yields are climbing, gold’s performance deviating from historical precedents illustrates an erosion in market confidence regarding the safety of the dollar and Treasury assets.

Wang Yanqing, Chief Researcher on precious metals at CITIC Jiantou Futures, believes that a long-term shift from a tight to a more lenient U.S. monetary policy is inevitable, especially given increasing geopolitical risks and ongoing central bank gold accumulation. This suggests a future where gold prices may continue to experience upward pressure with potentially less risk of decline.

In a report from Guosheng Securities, analyst Wang Qi highlights that the short-term gold price structure reflects upward momentum, with the market awaiting clearer signals regarding the Federal Reserve's monetary policy direction. In the medium to long term, persistent high interest rates could amplify economic downturn pressures, further enhancing gold’s appeal as a safe-haven asset, especially in scenarios where speculative positions do not meet expectations as the Fed's easing timeline may adjust. Consequently, gold prices are poised to benefit from this dual dynamic of interest rate adjustments alongside heightened risk premiums.