CITIC Securities: How to view the fluctuations and subsequent trends of gold and gold jewelry stocks?

According to the Zhitong Finance APP, China Merchants Securities released a research report stating that the rise in gold prices since 2022 has been driven by three core logics: 1) Cyclical factors: The Federal Reserve's monetary policy shift from slowing interest rate hikes to rate cuts. 2) Market concerns about the creditworthiness of the US dollar, prompting global central banks to actively purchase gold for diversification of reserve assets; 3) Short-term factors, including increased geopolitical risks and uncertainties in the global trade environment, leading a large amount of investment capital to view gold as a safe-haven asset, thus opening up upward space for gold prices. Looking ahead, the short-term turning point for gold lies in the alleviation of geopolitical risk factors, including US-China trade friction and the Russia-Ukraine conflict. The medium-term turning point will depend on the Federal Reserve's monetary policy shift or a turning point in the expansion of US government debt.

The main viewpoints of China Merchants Securities are as follows:

Macroeconomics

Gold prices are expected to fluctuate significantly in the short term, temporarily entering a consolidation phase. However, in the medium to long term, three factors will continue to drive the upward movement of gold prices: 1) Continuous purchases of gold by global central banks to hedge against US dollar credit risks; 2) Global gold ETFs shifting from net sellers to net buyers of gold; 3) Market expectations of two more rate cuts by the Federal Reserve this year, and after the change of the Fed chair next year, the rate cuts may exceed the levels reflected in the current interest rate dot plot. In other words, future gold prices will be driven by at least two rounds, namely the monetary and financial attributes.

Asset Allocation

Gold valuations are still at acceptable levels, and compared to theoretical calculations, domestic institutions still have room to increase their gold allocations: Based on quantitative indicators, it is recommended to focus on the economic policy uncertainty index to assess market demand for safe-haven assets in the short term. From a medium-term valuation perspective, the historical percentile of the ratio of gold priced in US dollars to reserve currency M2 is 77%, which is still at an acceptable level. This article compares the optimal allocation ratios of gold in mean-variance, risk budgeting, and all-weather strategies, corresponding to ranges of 5%~10%, 10%~20%, and 20%~25%, respectively. Currently, public FOFs, bank wealth management, and insurance institutions' allocations to gold are still at marginal growth levels, but there is still room for improvement in absolute terms.

Non-ferrous Metals

Since mid-October, gold stocks have shown that their prices do not follow the rise in gold prices mainly because gold prices have continued to rise sharply since August. Under severe overbought conditions in various technical indicators, the equity market has been cautious and risk-averse, leading to a peak and subsequent decline in gold prices ahead of time. The bank believes that as gold prices correct from high levels and build a bottom, gold stock prices will restore their correlation with gold prices. Current valuations of gold stocks are still at historical lows, with a rolling price-to-earnings ratio of only about 30 times, and indicators excluding large-cap influences are also at historically low levels. Recommended stocks include Lingbao Gold, Tongguan Gold, Zijin Mining International, SD-GOLD, Chifeng Gold, Shanjin International, and ZHONGJIN GOLD, while for silver, focus on Industrial Bank Silver Tin and Shengda Resources.

Textiles, Apparel, and Light Industry

Starting in 2024, the gold jewelry industry will show structural characteristics in demand: First, consumption among the middle class and high-net-worth individuals in mainland China is weak and more rational; Second, the continuous rise in gold prices will lead to a decline in the consumption of gold for jewelry starting in 2024; Third, brands like Lao Pu, Chao Hong Ji, and CHOW TAI FOOK are focusing on upgrading craftsmanship and integrating traditional Chinese culture, allowing gold to break out of its conventional boundaries and become mainstream in the domestic jewelry fashion market through craftsmanship upgrades. Among them, CHOW TAI FOOK has returned to a mid-to-high-end positioning, with channel reform efforts and product upgrade effects exceeding expectations. In the third quarter of this year, the company's overall retail value increased by 4.1% year-on-year, with same-store growth in mainland China at 7.6% The contribution of high-margin priced products to retail value has reached 30%, and profitability continues to improve. During the operational adjustments, we consistently hold jewelry and art exhibitions to enhance brand momentum.

Risk Warning: Economic data may fall short of expectations, overseas tightening may exceed expectations, and historical experience does not guarantee future results