A recent research report from Caitong Securities Co., Ltd. suggests that the recent surge in oil prices following the US-Iran conflict shifted market expectations for the Federal Reserve from rate cuts to hikes, effectively replaying gold's "lost year" of 2022. However, looking ahead, the brokerage notes that short-term momentum is gradually turning to confirm a right-side reversal, and the probability of a systematic breakout to new highs in the US dollar is narrowing.

The firm believes that the bottom for gold prices has likely appeared, setting a third-quarter target of $4,900 per ounce for London spot gold and a mid-term target of $6,000 per ounce. They recommend that investors actively build positions from an allocation perspective, as gold remains in its bottoming range.

The Long-Term Logic: Sovereign Credit Reassessment Drives Persistent Central Bank Buying

Gold, lacking cash flows and sovereign backing, carries no counterparty risk. When fiscal, monetary, and geopolitical factors themselves become sources of risk, its "liability-free" attribute transforms from a drawback into a scarce value. First, global government leverage tends to rise rather than fall, with the US being particularly problematic. Fiscal expansion leads to increased Treasury supply, which lifts term premiums and interest burdens, thereby tightening constraints on monetary authorities' financial stability. Gold substitutes for part of the store-of-value and insurance functions of dollar assets.

Second, the US's adoption of a "New Monroe Doctrine" and the weaponization of monetary tools have prompted emerging economies to increase gold holdings as a hedge against potential sanctions. Third, while individual conflicts may not immediately boost gold prices, recurring conflicts elevate long-term holding intentions. Central bank gold purchases rebounded notably in the second quarter, with the People's Bank of China continuing to add to its reserves during price adjustments. This "buying more as prices fall" behavior is the most direct reason for the steadily rising gold price floor.

Mid-Term Pricing: Real Rates Unlikely to Surprise to the Upside This Year

Real interest rates remain the starting point for judging gold's medium-term direction, but this cycle cannot be simplified to a linear negative correlation. Real rates set valuation constraints, while central banks and ETFs determine the direction and magnitude of price deviations from these constraints. The firm expects the Fed to hold rates steady this year: oil-driven inflation has not spilled over into trend inflation, wage-price spirals continue to cool, the employment recovery has been disproven, and the falling unemployment rate is more of a "false decline" driven by labor force exits. The real risk lies in "bond vigilantes" pushing long-end yields out of control, but even if a forced rate hike occurs, its purpose would likely be to stabilize expectations rather than initiate sustained tightening.

Coordinated intervention also narrows the upside for the US dollar. While the dollar index may remain volatile and firm in the short term, the scope for a systematic breakout is further constrained: the Fed is likely to stay put this year, Europe and Japan have already tightened early, and there is no basis for sustained interest rate differential expansion. US-Japan joint intervention has also brought the one-way rise in USD/JPY under policy constraints. The recent decline in gold's correlation with US equities suggests that the earlier resonance of liquidity and trend trading is receding, with gold once again reflecting sovereign credit, real rates, and safe-haven demand.

Short-Term Momentum Improving

Price moving above moving averages reduces selling pressure from CTAs, leading to a return of discretionary capital and ETF inflows. ETF inflows, combined with trend improvement, confirm a bottoming process. In July, global gold ETFs swung from net outflows to net inflows, with Asian buying continuing and North America ending its significant reductions. The trajectory going forward still depends on whether North American capital can sustain its return. The pricing discovery weight continues to shift toward Asia, explaining why there has been bottom-fishing support even during the decline. COMEX has reclaimed its 60-day moving average, and asset managers' net long positions are recovering, indicating a shift back to position building.

Key Risks

The firm warns of several risks, including the Fed turning more hawkish than expected, geopolitical conflicts escalating again and pushing oil prices higher, and structural buying proving weaker than anticipated.