Non-ferrous metals sector continues to decline in afternoon trading; institutions expect gold sector to reach new highs following this round of conflict

(Source: Caixin)

Looking ahead to this round of conflicts, the continuation of two major trends—liquidity easing and weakening of the US dollar credit—are expected to further drive up gold prices.

On March 19, the Hong Kong stock market’s non-ferrous metals sector continued to decline in the afternoon, with China Gold International (02099.HK) dropping nearly 10%, Zijin Mining (601899.SH) falling over 8%, and Wanguo Gold Group (03939.HK) dropping more than 18%. Minmetals Resources (01208.HK) also followed the decline.

In the A-share market, Shan Jin International (000975.SZ) fell nearly 8%, China National Gold (600489.SH) dropped close to 7%, and stocks such as Zhaojin Gold (000506.SZ), Shandong Gold (600547.SH), and Hunan Silver (002716.SZ) declined nearly 6%.

On the news front, on March 18, U.S. inflation pressures intensified again, further reducing the Federal Reserve’s room to cut interest rates. Data released by the U.S. Bureau of Labor Statistics showed that driven by rising service prices, the Producer Price Index (PPI) for February rebounded significantly both month-over-month and year-over-year, indicating renewed inflationary pressures in the U.S. markets. Market expectations for Fed rate cuts this year further diminished. On that day, the US dollar index rose above 100, putting pressure on gold, silver, and other precious metals. At the close, April gold futures on the New York Mercantile Exchange (COMEX) were at $4,896.20 per ounce, down 2.24%. May silver futures on COMEX were at $77.592 per ounce, down 2.91%.

The Federal Reserve also announced during its rate meeting that it would keep interest rates unchanged, a decision in line with market expectations. In its statement, the Fed mentioned that the impact of the Middle East situation on the U.S. economy remains uncertain, and economic outlook uncertainties remain high. Fed Chair Powell stated at the Wednesday press conference that the current decline in U.S. inflation has not yet met expectations. The surge in oil prices caused by the Middle East conflict will likely exert downward pressure on consumption and employment while pushing inflation higher, which will undoubtedly put pressure on the U.S. economy. However, it is still too early to assess the scope and duration of the conflict’s impact on the U.S. economy. If inflation remains stubborn, the Fed’s expectations for rate cuts over the next one or two years could change.

Citi Bank recently forecasted that Brent crude oil prices could surge to $120 per barrel in the coming days. If energy infrastructure in the Middle East suffers widespread attacks and the Strait of Hormuz remains closed for an extended period, Brent crude prices could average $130 per barrel in the second and third quarters of this year.

CITIC Securities’ latest research report pointed out that after previous Middle East conflicts, the medium-term trend of gold prices still depends on the US dollar’s credit and liquidity factors. Looking ahead to this round of conflicts, the continuation of two major trends—liquidity easing and weakening of the US dollar credit—are expected to further push up gold prices. Historically, valuation or stock price percentile advantages tend to strengthen the upside potential of the gold sector. Currently, the PE valuation levels of leading companies have fallen to a historic low of 15-20x. Considering that recent high points in stock prices and gold prices have been highly synchronized, we are optimistic about new highs in gold prices driving new highs in stock prices.