Gold prices have been weakening recently, trading below the 200-day moving average, with significant downward pressure. The core reason for this round of price decline is the better-than-expected US non-farm payroll data, which significantly boosted market expectations for interest rate hikes. The US added 172,000 jobs in May, far exceeding market expectations, completely reversing the previous mainstream market prediction of a Fed rate cut. Currently, the market predicts that the probability of a Fed rate hike in October is close to 50%. The continued increase in rate hike expectations raises the opportunity cost of holding gold as a non-interest-bearing asset, thus triggering a sell-off in gold.



Nitesh Shah, head of commodities and macro research at Zhishu Capital, believes that current market sentiment and expectations are too far ahead of their time. The pressure on gold prices caused by short-term interest rate hike expectations is only a temporary phenomenon. The inflation risks that the market is currently worried about will not be a long-term negative factor for gold. On the contrary, they will become the core driving force supporting the medium- and long-term trend of gold and driving gold prices to start a new round of upward trend.

The market generally underestimates the upside risks to inflation.

Shah emphasized that the core factor determining the long-term trend of gold prices is not the adjustment of the Federal Reserve's nominal interest rate, but the change in the overall inflation level. The current continuously rising inflation environment has completely deprived the Federal Reserve of the policy space for large-scale interest rate cuts. A hasty interest rate cut would seriously damage the Federal Reserve's policy credibility. Even if the Federal Reserve chooses to maintain the nominal interest rate unchanged, the continuously rising inflation will continue to suppress the real interest rate in the market, and may even push the real interest rate into negative territory, significantly reducing the cost of holding gold, thereby attracting a large amount of funds to continuously invest in gold assets.

At the same time, most investors are underestimating the potential for further inflation and the risk of exceeding expectations. Global crude oil inventories continue to decline rapidly, and the tightening supply side is likely to trigger a sharp rise in oil prices. The rise in energy prices will gradually be transmitted to the entire industrial chain, pushing up the overall price level of the whole society. Although technological innovations such as artificial intelligence can improve production efficiency and alleviate inflationary pressures in the service sector in the long term, inflationary pressures on the commodity side are difficult to effectively resolve. The high-inflation market pattern may continue for a long time, providing continuous support for the rise in gold prices.

Multiple positive factors converge, solidifying the foundation for gold's medium- to long-term upward trend.

Beyond the core positive factors of inflation and real interest rates, a confluence of positive factors has further solidified the foundation for gold's medium- to long-term upward trend. Among these factors, the gradual slowdown in US economic growth and the rising market expectations of an economic downturn or even recession can fully activate gold's defensive and safe-haven attributes, providing ample momentum for continued price increases. Meanwhile, the scale of US Treasury interest payments is approaching national defense spending, and market concerns about the long-term sustainability of US fiscal policy and government debt are intensifying, becoming an important structural long-term positive factor supporting gold prices at high levels.

While newly appointed Federal Reserve Chairman Warsh has expressed his desire to advance balance sheet reduction and reduce market reliance on loose monetary policy, Shah is not optimistic. He believes that neither the political environment nor the current economic situation can support the Fed to implement large-scale, substantial balance sheet reduction. He also believes that the subsequent economic slowdown coupled with rising fiscal pressure will likely force the Fed to return to loose monetary policy, further enhancing the investment value of gold.

In summary, with persistently rising inflation, declining real interest rates, increasing risks of economic recession, and heightened concerns about the US debt crisis, coupled with the continued gold purchases by global central banks, Shah believes that the current price correction in gold is merely a short-term, temporary phenomenon, not a long-term trend reversal. Gold currently possesses extremely high investment value and represents a clear value opportunity. If inflation continues to rise beyond expectations, safe-haven funds will continue to flow into hard currency assets like gold. Based on current market fundamentals, gold prices are expected to recover the nearly $1,000 drop within the next year, initiating a new round of strong upward movement.