CICC: Ending the gold trend requires the United States to pay a high price to solve the trust issues of the United States and US debt.

CICC released a research report stating that within just one month of the new year, gold has set multiple records: 1) The rate of increase has almost exceeded everyone's expectations. Although being bullish on gold is the mainstream in the market, the increase of 25% in just one month is the first time since the 1980s, which even most gold bulls probably did not anticipate; 2) In a blink of an eye, after briefly exceeding $5500 per ounce, there was a "full reduction", with a drop of over 10% in one day, which is unprecedented since 1984. The bank believes that to completely end this trend of gold, it is necessary to see the United States begin to pay a big price to start solving the "three-choice-two" dilemma of low inflation, low interest rates, and the dominance of the US dollar, reshaping confidence in U.S. Treasury bonds and even in the United States. CICC's main points are as follows: What is driving the rise in gold prices? Partial substitution of U.S. dollar credit due to lack of trust in the United States While traditional inflation and safe-haven demand can explain some of the rise in gold, they cannot explain such a large increase, which has led to a deviation of gold prices from traditional pricing models. The more crucial driving force is the lack of trust in the United States (more precisely, in the United States during the Trump era), which has led to a partial substitution of U.S. dollar credit, known as "de-dollarization". It is not difficult to see that in the past one or two years, many geopolitical and policy risks have actually come from the United States itself, so the U.S. dollar, which can also serve as a safe haven, is ineffective. A simple comparison is that although the second half of Biden's government from 2022 to 2024 will also face a series of similar issues such as the Russia-Ukraine geopolitical situation, a weakening U.S. dollar, soaring U.S. debt, and rising inflation, the increase in gold prices does not exceed that of Trump's second term. From the start of this bull market in gold in September 2022 to the November 2024 election, the price of gold rose by only 50% in two years, while in Trump's first year in office alone, the price of gold rose by over 100%. Issues with U.S. Treasury bonds? Debt service constraints becoming "rigid", holdings structure becoming "endogenous", relative value shrinking In addition to various policies of Trump undermining global trust, whether U.S. Treasury bonds themselves are still "safe" is an actual reason prompting global monetary authorities and investment institutions to consider the need for diversified allocation. In other words, if a new president were to take office in the future, would this trend be reversed? "No longer safe" does not mean defaulting, but rather lower returns and declining credit quality, specifically: Debt service constraints becoming "rigid": While U.S. Treasury bonds cannot default, their sovereign status naturally demands even greater security, with the interest coverage ratio of U.S. bonds (interest expense/fiscal revenue) continuously rising to a historic high of 18.5% as of 2021, exceeding the 15% "warning line" set by institutions such as Standard & Poor's and Moody's in sovereign credit ratings. The increasing interest burden also means that for the United States to maintain debt sustainability, fiscal discretion space and flexibility are narrowing, squeezing out other fiscal spending areas. In other words, the "quality of debt that can be serviced" is declining. Endogenous structural shifts in holdings: Changes in the proportion of foreign investors holding U.S. Treasury bonds reflect the intensity of global demand for U.S. bonds as safe assets, with this indicator dropping continuously from a high of 34% in 2014 to 23% in 2022 and then slightly rising to the current level of 25%. This shift from a global reserve asset to a common sovereign debt model implies that U.S. bonds have enjoyed "additional credit demand" in the past, which is now diminishing. Shrinking relative value: The ratio of nominal gold value to U.S. Treasury bonds has steadily risen from 0.35 in 2022 to 0.99 currently, reflecting investors' marginal decline in preference for U.S. sovereign credit assets and turning to physical gold as the ultimate value hedge. In simple terms, from a fundamental perspective, high interest rates, high debt service, and leverage make U.S. Treasury bonds a source of criticism and concern. What does gold scale exceeding U.S. Treasury bonds mean? Not an immediate numerical checkpoint, but a psychologically important watershed For countries already engaged in "de-dollarization" it goes without saying that they need to increase their gold reserves, but for countries still within the U.S. dollar system, especially those wavering "moderate parties," once they perceive that U.S. Treasury bonds are being downgraded from the "globally unique risk-free asset" to simply a "common high-risk sovereign asset," no longer special, unique, or absolutely safe, then there may be a self-fulfilling cycle of expectations. "De-dollarization" cannot be achieved quickly, nor does it need to be immediately realized, but confidence is gradually eroded; sometimes just having this doubt is enough to prompt some investors to start considering the need for diversified allocation, albeit slowly. Of course, this process needs to be viewed rationally. In the foreseeable future, the U.S. dollar and U.S. Treasury bonds are unlikely to be completely replaced, and it is undeniable that the U.S. dollar's status as a reserve currency remains stable. What is more likely is a partial loosening of the U.S. dollar system, moving from uniformity to diversity. Furthermore, the process of "de-dollarization" could also oscillate or even reverse, and the "old order" is unlikely to passively allow itself to be replaced, for example, possible variables could come from the U.S. new president adopting a new approach, embracing globalization once again, or at least cooperating actively with allies to regain trust; the U.S. economy finding a turning point and achieving strong growth; the U.S. emphasizing fiscal discipline and the Federal Reserve aggressively curbing financial expansion, reshaping trust in U.S. debt as a safe asset through short-term pain; or even executive measures such as controlling gold, selling gold, and imposing punitive taxes on gold. In the 1980s, there was a situation where gold exceeded U.S. Treasury bonds, but it ultimately required the huge cost of Volcker's aggressive rate hikes to reshape trust in U.S. bonds, securing the U.S. global dominance of the dollar for the following forty years. Can we determine if the gold trend has ended now? Not yet, it requires the United States to pay a big price to resolve trust issues with the U.S. and U.S. bonds The bank believes that to completely end this trend of gold, it is necessary to see the United States begin to pay a big price to start solving the "three-choice-two" dilemma of low inflation, low interest rates, and the dominance of the US dollar, reshaping confidence in U.S. Treasury bonds and even in the United States. Drawing from the experience of the 1970s, a significant pullback in gold prices requires the following conditions, while ending the trend requires addressing issues of trust in U.S. Treasury bonds, U.S. trust, and asset returns: The United States emphasizes fiscal discipline and the Federal Reserve aggressively curtails financial expansion to resolve trust issues with U.S. Treasury bonds. If the combination of rate cuts and balance sheet reduction like Volcker's policies can work, it could be a new attempt worth close attention. The significant drop in the price of gold on January 30 was to some extent a psychological prelude to a "Volcker moment," representing a potential shift in thinking, although the impact of balance sheet reduction itself is not that great (gold prices fell by only 0.4% and 1.9% in the month following the balance sheet reductions in 2017 and 2022, respectively). However, this path requires strong will, as well as favorable timing (AI), favorable conditions (financial markets), and political environment, the U.S. and the Federal Reserve may still have a chance to reshape trust in the U.S. dollar and U.S. bonds, but if this opportunity is missed, the situation could spiral out of control. The United States adopts a new approach, embracing globalization, or at least actively cooperating with "allies" to regain trust, resolving trust issues in the U.S. This requires Trump to stop causing geopolitical disturbances; market expectations for the remainder of Trump's term are low, and observations can be made after the midterm elections. The U.S. economy finds a turning point and achieves strong growth to address asset return issues. This requires a significant upturn in the U.S. credit cycle, and AI is the most likely candidate to assume this responsibility, as neither rate cuts nor fiscal expansion can completely resolve the underlying issues with U.S. Treasury bonds. Government takes control measures. Implementing control measures on gold, such as selling gold and imposing punitive taxes, such as the U.S. government openly selling gold in 1975, may increase short-term fluctuations, but do not resolve the root problem.