On the evening of October 14th, Shandong Gold released a performance forecast, estimating that the net profit attributable to the parent company for the first three quarters of 2024 would be between 1.85 billion yuan and 2.25 billion yuan, an increase of 505 million yuan to 905 million yuan compared to the same period last year, representing a year-on-year increase of 37.52% to 67.26%.

Additionally, Hunan Gold also disclosed its performance forecast for the first three quarters. The company expects the net profit attributable to shareholders of the listed company for the first three quarters of 2024 to be between 650 million yuan and 690 million yuan, a year-on-year increase of 68.50% to 79.40%.

The significant improvement in the performance of gold companies is inseparable from the continuous rise in gold prices.

According to incomplete statistics, the number of times international gold prices have reached new highs this year has already exceeded 20 times.

Li Xunlei, Chief Economist at Zhongtai International, made a bold prediction in an interview with Panorama Network: "Even if gold prices fail to reach $3,000 per ounce in the short term, this target is still expected in the long term."

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As is well known, gold has three major attributes, including financial, safe-haven, and commodity.

The financial attribute is mainly priced by two indicators, one is inflation expectations, and the other is nominal interest rates. Simply put, gold has been an anti-inflation "hard currency" over the years—when inflation rises, gold tends to rise; when deflation occurs, gold tends to fall. Nominal interest rates generally consider the 10-year U.S. Treasury yield as the opportunity cost. When nominal interest rates fall, gold tends to rise, and vice versa.

Combining the two factors, the real interest rate (nominal interest rate - inflation expectations) is one of the important logics determining the medium and long-term trend of gold prices.

Safe-haven is the most important attribute for short-term fluctuations in gold, but it cannot support gold price performance from a medium to long-term perspective. The commodity attribute is even weaker than the former two, because gold consumption demand (such as gold jewelry) is relatively stable, and supply is also relatively stable, often having a smaller impact on gold prices.

So, why has gold experienced a sharp bull market since October 2018, and how is this cycle different from the past?At the end of 2018, the Federal Reserve entered the tail end of the interest rate hiking cycle that began in 2015, and subsequently implemented three interest rate cuts in 2019. In 2020, faced with the COVID-19 crisis, the Federal Reserve rapidly lowered the federal funds rate to 0, and its balance sheet expanded by $5 trillion. An influx of massive monetary liquidity into the market led to a significant decline in real interest rates, and gold prices generally showed a continuous upward trend.

Starting from the end of 2022 to the present, U.S. real interest rates have fluctuated and risen, yet gold has continued to strengthen. Including recently, strong macroeconomic data such as U.S. non-farm employment and inflation indicate a robust economic foundation, and the yield on 10-year U.S. Treasury bonds has also rebounded to above 4.4%, driving real interest rates higher. However, gold remains unmoved and has surged wildly.

The main pricing factors of real interest rates from past major cycles can no longer effectively explain the significant rise in the second phase of this gold bull market. The reason is that the frenzied gold purchases by global central banks have become another important factor leading the trend in gold prices.

In 2022, global central banks net purchased 1,082 tons of gold, a significant increase from the previous 450 tons, setting a historical record. In 2023, they again net purchased 1,037.4 tons, maintaining a high level, close to 20% of the annual gold supply. Among them, the largest buyer originated from the People's Bank of China.

As of March 2024, the People's Bank of China's gold reserves stood at 72.74 million ounces, continuing to rise by 160,000 ounces month-on-month. It is noteworthy that this marks the 17th consecutive month of increases by the People's Bank of China, with a cumulative increase of 10.1 million ounces, equivalent to approximately 286 tons. Based on the current gold price, the amount of gold added exceeds 170 billion yuan.

Since March, gold has continued to soar, stimulating a rapid increase in global non-commercial long positions in gold aimed at speculative profits and a relative decline in short positions. This undoubtedly exacerbates the steep rise in gold prices.

From a medium to short-term perspective, the Federal Reserve is expected to enter a multi-year interest rate reduction cycle in the future, and the high U.S. Treasury rates have significant room for decline. From a long-term perspective, due to distrust in the U.S. dollar as a sovereign currency, the systematic increase in gold by global central banks will drive gold prices to trend upwards.

The resonance of short and long cycles means that the future gold market remains promising.

Specifically, in the gold industry chain, the upstream mainly engages in gold mining and smelting operations, with leading companies including Zijin Mining and Shandong Gold, among others. The downstream mainly involves the production and sales of gold jewelry, with leading companies including Lao Feng Xiang and Chow Tai Fook, among others.

The profitability of leading companies in the upstream resource segment is relatively stronger, especially for Zijin Mining, with a market value exceeding 440 billion yuan. Its gross margin increased from 8.5% in 2015 to 15.8% in 2023, and its net profit margin increased from 1.8% during the same period to 9%.Zijin Mining's scale in gold business is undoubtedly the largest in China. In terms of reserves, it reached as high as 1191 tons in 2022 (with gold resources amounting to 3117 tons), far exceeding the 507 tons and 417 tons of China National Gold Group Corporation and Shandong Gold Group, respectively. In addition to gold business, Zijin Mining also mines non-ferrous metals such as copper and zinc, with its production ranking among the top globally.

These businesses have seen explosive growth over the past few years. From 2005 to 2023, revenue swelled from 3.07 billion yuan to 293.4 billion yuan, with a compound annual growth rate (CAGR) of 29%. Net profit attributable to the parent company grew from 700 million yuan to 21.1 billion yuan, with a CAGR of 21%.

One of the core competencies driving the sustained growth of performance comes from low costs. On one hand, Zijin Mining possesses mining technologies that are not available to its peers or that they cannot match, enabling it to extract benefits from low-grade ores. On the other hand, Zijin Mining is adept at leveraging market cycles to acquire mineral resources at low prices against market trends.

Furthermore, while China National Gold Group Corporation and Shandong Gold Group are not poorly managed, their cyclical nature is stronger compared to Zijin Mining, and their stock prices also roughly follow the significant fluctuations in gold prices.

Lao Feng Xiang, a core leader in the downstream of the gold industry chain, is also a super bull stock. Although its gross and net profit margins are low and not much different from most manufacturing companies, its business scale continues to expand, which also drives its profits to grow continuously.

Lao Feng Xiang's good growth stems from benefiting from the dividends of China's gold jewelry industry. According to Euromonitor, the industry market size was 815.9 billion yuan at the end of 2022 and is expected to reach 942.9 billion yuan by 2025, with a 5-year compound annual growth rate of 7.8%. Additionally, in terms of per capita jewelry consumption, China's 82 USD is lower than Hong Kong's 693 USD, Singapore's 309 USD, and the United States' 250 USD, indicating there is still considerable room for growth in the future.

In the Chinese jewelry market, the consumption proportion of gold products is significantly higher, accounting for 58.3% in 2021, and in many years it has been above 60%. In contrast, the global market's largest segment is diamond jewelry, accounting for 47%, followed by gold at 42%. It is evident that leading enterprises in China that focus on gold jewelry will benefit more.

In summary, from a historical perspective and the logic of driving factors, this round of the gold bull market may far from be over.