21 Editorial | Using Policy Resilience to Address the Global Financial Changes Amid Gold Market Fluctuations

How should China’s policy resilience respond to changes amid fluctuations in gold prices?

Recently, the international gold market has experienced significant volatility. After the spot gold price recorded its largest weekly decline in 43 years and briefly fell below $4,100 per ounce on March 23, spot gold rebounded above $4,500 on March 25. The rapid decline and rise within just a few days have attracted widespread attention from global market investors.

In the current context of geopolitical conflicts in the Middle East, this round of gold price decline has shattered the conventional understanding of gold as a “safe-haven asset.” The driving factors behind this round of gold price drop are not a reversal in the supply and demand fundamentals of gold itself, but rather geopolitical conflicts driving up international oil prices, triggering a liquidity crisis in global capital markets, combined with a sharp reversal in expectations regarding the Federal Reserve’s monetary policy, resulting in irrational sell-offs. Behind this is a profound change in asset pricing logic brought about by the restructuring of the global geopolitical landscape and fluctuations in the U.S. dollar credit system.

Firstly, the transmission chain of stagflation risks in the U.S. Geopolitical conflict—rising oil prices—high inflation—reversal of expectations for Federal Reserve rate cuts—strengthening dollar—devaluation of gold is the main reason for this round of gold decline. The escalation of geopolitical conflicts in the Middle East has driven international oil prices to break through the $100 per barrel mark, reversing market expectations for a decline in U.S. inflation and breaking the pricing logic that anticipated multiple rate cuts by the Federal Reserve within the year. Market expectations have rapidly shifted from discussions of rate cuts to discussions of rate hikes, leading to a strengthening dollar index that has surpassed the 100.1 mark, setting a new yearly high, while gold prices have come under pressure and declined. Meanwhile, persistently high oil prices are continuously exacerbating stagflation risks in the U.S., and the Fed’s dilemma of “anti-inflation” versus “stabilizing growth” further amplifies the uncertainty in global asset pricing.

Secondly, the synchronized decline of global capital markets has amplified the extent of the gold price drop. Three effects have collectively driven the continued expansion of gold’s decline: First, the shift in investment opportunities. Rising oil prices have opened up allocation opportunities in cyclical resource products like oil and gas, weakening the cost-effectiveness of gold at historical highs, leading to a clear diversion of funds; second, the “profit-taking” effect. After a 40-month upward cycle, gold has accumulated substantial gains, and price corrections have triggered concentrated profit-taking, forming a negative cycle of “decline—capital outflow—accelerated decline”; third, high liquidity and realizability have exacerbated the extent of gold’s decline. Volatility in international oil prices has raised concerns about economic recession in Europe and the U.S., causing fluctuations in global stock markets and other assets, with highly liquid gold becoming the preferred asset for investors to sell off for cash.

In terms of impact, the extreme volatility in the gold market is signaling global liquidity challenges to the world.

Firstly, the traditional pricing logic of safe-haven assets is changing, which will continue to impact global market confidence. Gold, as a globally recognized safe-haven asset, has experienced a significant drop amid escalating geopolitical conflicts, disrupting long-standing asset allocation logic and, to some extent, increasing investor concerns about asset safety, triggering a sustained contraction in market risk appetite.

Secondly, the spread of liquidity crises will exacerbate the fragility of global financial markets. The global liquidity issues behind gold sell-offs, combined with expectations of a strengthening dollar index, will pose dual challenges of capital outflows and currency depreciation for emerging markets, threatening global financial stability.

In the face of the massive shocks in the global gold market and the complex and severe external environment, our country should adhere to a policy tone of “self-reliance” and respond to changes in the global market with policy resilience, firmly maintaining the bottom line of preventing systemic financial risks.

Firstly, maintain a prudent monetary policy anchored to the domestic economic fundamentals to sustain policy resilience. Always prioritize steady growth and stable prices in the domestic economy as core monetary policy objectives, maintaining reasonable liquidity levels and continuously increasing support for the real economy, thereby solidifying the fundamentals for high-quality economic development. This is the fundamental guarantee for our country to respond to all external shocks. Additionally, we must effectively guard against the risks posed by the weakening expectations of Federal Reserve rate cuts and a strengthening dollar index.

Secondly, improve the cross-border risk prevention system and strengthen the defenses against inbound risks. Enhance dynamic monitoring and early warning of changes in global liquidity and cross-border capital flows, and improve the macro-prudential management toolbox to accurately prevent inbound risks brought by sharp fluctuations in external markets, maintaining basic stability of the foreign exchange market and the RMB exchange rate at reasonable and balanced levels, safeguarding the bottom line against cross-border financial risks.

Thirdly, regulate the operation of the domestic gold market, enhancing investor protection and guiding expectations. Strengthen supervision over the spot gold, futures, and related derivatives markets, and severely crack down on illegal and irregular speculative activities to maintain a stable and orderly market; at the same time, enhance investor education to guide market participants to rationally view gold price fluctuations and remain alert to risks of unilateral speculative trading, effectively protecting the legitimate rights and interests of small and medium-sized investors.

Additionally, steadily promote high-level institutional opening up, continuously improve diversified reserve and settlement, pricing systems, and steadily advance the internationalization of the RMB, enhancing resilience to respond to changes in the global monetary system, which is an ongoing and long-term task for our country.

SFC

Produced by 21st Century Financial Client 21st Century Economic Report