Following Federal Reserve Chairman Jerome Powell’s confirmation of a policy pivot, gold prices have reached new record highs, signaling a fresh phase in the gold bull market. Previously, the rise in gold prices was largely driven by buying from the East, but with the onset of rate cuts, Western investors are now pouring into the gold market.
At the same time, the performance of gold stocks has begun to surpass that of gold itself.
The investment logic behind gold differs for Eastern and Western investors. Currently, there are two main investment frameworks: the traditional real interest rate logic and the de-dollarization logic.
The new gold bull market began with strong purchases from central banks and the Chinese public. For central banks, the acceleration of global de-dollarization has brought about substantial changes, leading to a significant increase in the purchase of gold. The impact of de-dollarization on the gold market primarily manifests as an increase in price growth, similar to how a stock price is driven up when mutual funds substantially increase their holdings.
Simultaneously, citizens in Eastern countries, including China, are also rushing to buy gold. Chinese savers and investors have a strong preference for precious metals, not only due to cultural factors but also because the sluggish stock and real estate markets have limited their investment options.
However, for Western investors and traders, these factors alone have not been compelling reasons to buy gold.
But Fed rate cuts? That’s a trend they can fully trust, and it has already begun. The recent surge in gold prices can be traced back to Fed Chairman Powell’s significant remarks last Friday at the Jackson Hole conference: the Fed will implement its first rate cut at the September 18 meeting. Historically, rate cut cycles have often driven new rounds of gold price increases.
Another important sign that the gold bull market has entered a new phase is the strong performance of gold mining stocks.
Two weeks ago, gold stocks began to outperform gold, with the ratio of the GDX mining stock index to gold itself taking off. This marks the start of a trend, as investors finally recognize that gold stocks are severely undervalued at current gold price levels. Compared to gold, gold stocks are more flexible in price. Generally, in a complete bull market cycle, gold stock prices have a leverage of about 4-5 times compared to gold prices, with this premium primarily derived from re-valuation and volume growth.
