Oil, US Debt Rise; Tons of Gold Arrive in China

On May 6th, during the Asian trading session, international oil prices maintained a volatile upward trend, with U.S. crude and Brent crude trading in the range of $105 to $115. This was due to concerns over supply and the OPEC+ decision to adhere to a modest increase in production for June, which stimulated the rise in oil prices. U.S. crude and Brent crude reached their highest settlement prices since April 18th and March 25th, respectively. However, the strength of the U.S. dollar index and the decline in global stock markets limited the rise in oil prices. Since the beginning of March, when international oil prices rose to their highest level since 2008 ($139), they have been trading within the $105 to $115 range.

Industry research institution Investec stated on May 6th that OPEC+ still believes that the current crude oil supply issues and high prices are problems caused by Western countries themselves, not fundamental supply issues that the organization should address. They emphasized that if they significantly increased oil supplies, the resulting discord with Russian oil companies could potentially destabilize OPEC+ and bring unpredictable outcomes to the global oil market.

At the same time, as the Federal Reserve tightens monetary policy more quickly, scorching U.S. inflation expectations, and traders question the Fed's ability to prevent the economy from falling into a recession, these factors have prompted investors to move away from the U.S. bond market. What is even more concerning for the market is that the largest buyer of U.S. bonds, the Federal Reserve, has officially announced the start of large-scale sales of U.S. bond assets (quantitative tightening) from June, which will further suppress long-term U.S. bonds.

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On May 6th, U.S. bond yields rose significantly, with the two-year U.S. bond yield increasing by 9.6 basis points to 2.712%, and the 10-year U.S. bond yield rising by 13.9 basis points to 3.054%, reaching a high not seen in over three years. At the same time, the yield spread between the two-year and 10-year U.S. bonds further moved towards negative territory. Bond yields and prices are inversely proportional; a rise in yields indicates that net sales exceed purchases.

This also led to a decline in gold prices, with spot gold falling by more than 0.2%, trading around $1876 per ounce. The rise in U.S. bond yields and the U.S. dollar index, along with market expectations that the Federal Reserve will further tighten monetary policy, offset the safe-haven demand for gold triggered by regional conflicts.

However, history has shown that during the initial stages of commodity inflation, changes in gold often lag behind other commodities, but eventually, gold outperforms them. Currently, under the influence of the Russia-Ukraine conflict, which is driving inflation higher and causing supply chain issues, gold may play the role of a "catch-up" in 2022. Data indicates that in tail events related to significant regional conflict crises, gold often reacts positively, and although prices can fluctuate violently, they tend to remain high in the months following the event.

As shown in the data below, since February 25th, gold has significantly outperformed the U.S. dollar and U.S. bonds. In the long term, the demand for gold, including from global central banks, will continue to be supported by supply chain shortages, high inflation, geopolitical strategic risks, and corrections in high-valued assets.

According to the latest report released by the World Gold Council on May 3rd, gold plays a significant role as a safe haven during crises. Against the backdrop of the U.S. using the dollar as a tool to restrict finance, potentially leading to a decline in demand from global U.S. bond buyers, central banks worldwide are turning to diversify international reserve assets and reduce dependence on the dollar, using gold as a means of diversification and security. This has led to global official gold reserves reaching 35,536.8 tons, the highest level in nearly 30 years, indicating that gold plays a significant role as a safe haven during crises.

For example, a report published by the Bank of Israel a week ago showed that the country significantly sold U.S. dollars in 2022 in exchange for non-U.S. currencies such as the Chinese yuan and Japanese yen. At this time, gold is expected to return to its financial attributes, providing additional support for global central banks to stabilize markets and currencies. This indicates that gold is returning from the periphery of human monetary history to hedge against the risks of dollar exposure.

Wall Street generally believes that there is a possibility for the two-year U.S. bond yield to break through 3%. According to the stress test model updated by the MSCI Risk Management team, if U.S. inflation remains at 8% over the next two months and the U.S. economy shows signs of recession, the U.S. bond yield curves, which reflect the health of the economy, have already inverted. In that case, the investment return rate of U.S. bonds may decrease by 13% to around 5%.In response to this, according to the latest views of some economists cited by the American Quartz website on May 6th, although the Federal Reserve has raised interest rates twice since March and there is a trend of acceleration, it still cannot make the actual yield of 10-year U.S. Treasury bonds become a positive data value after deducting monthly inflation data. Currently, the actual yield of 10-year U.S. Treasury bonds is -5.39%. As the actual yield of U.S. Treasury bonds remains in the negative range for a long time (after deducting inflation), it also means that the high inflation at a 40-year high has offset the interest costs of the United States, and there is a possibility of implicit default in the U.S. bond market.

This also makes it very likely that global central bank investors at the cornerstone level of U.S. Treasury bonds, including Japan, China, the United Kingdom, Australia, Russia, Turkey, Germany, etc., will continue to significantly sell U.S. Treasury bonds in 2022. If the Russia-Ukraine conflict continues to increase pressure on U.S. inflation risks, there is a possibility of zeroing out U.S. Treasury bonds.

According to the World Gold Council, the return on bonds will become worse in the future. If bonds increasingly and continuously show a positive correlation with stocks, they may even lose their risk diversification and hedging capabilities. The low yield of bonds may limit their ability to respond to safe-haven events, and investors may also regard gold, oil, and cash as a viable hedging option.

The report data from the World Gold Council also shows that more than 60% of the total inflow of Asian gold ETFs in the 14 months ending in March came from the Chinese market. China's total gold ETF holdings exceeded 80 tons, the highest on record. In addition, over the past 14 months, China has also significantly increased its gold imports. Customs data show that 180 tons were imported in the first two months of 2022, and China imported a total of 818 tons of gold in 2021, 36% more than in 2020.

The data cited on May 1st shows that since 2012, when Switzerland had data, until 2021, Switzerland exported an average of about 600 tons of gold to China per year. According to the U.S. financial website ZeroHedge, citing customs reports from Switzerland and Dubai on May 2nd, the total gold exports to the Chinese market surged to the highest level since 2018 in the 16 months ending on April 30th (there was a slight decline in February and March this year due to the epidemic). Among them, the most recent batch of about 209 tons of gold has arrived in China from Europe and America between March and April. The above market statistics indicate that since 2021, at least 1,000 tons of gold have arrived in China in batches.