Western Securities Cao Liulong: Gold is being wrongly punished!

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Source: Liu Long Vision

Introduction

INTRODUCTION

Gold was mispriced! It’s very likely now is a “gold pit” during a long-term bull market for gold. Since the outbreak of the Iran-U.S. conflict, London gold has fallen by more than 17% at one point, as if the “de-dollarization” logic that supported gold’s rise has already failed. But we believe the current correction in gold is being oversold. We maintain the judgment from 3.19’s 《Iran-U.S. Conflict: The “Dusk” of the Petrodollar》: “The petrodollar” may strengthen the dollar’s credibility on a temporary basis, but it cannot reverse the trend of medium-term weakening in dollar credibility. Dollar credibility is very likely to weaken in a trend, and the gold price’s midline is also expected to break to new highs!**

Key Takeaways

1、The primary pricing of gold today is reserve value; behind it, the dollar credibility fracture keeps widening

Since October 2022, U.S. long-term real interest rates have stayed at high levels, yet gold prices have risen rapidly. The market is pricing gold’s reserve value rather than its trading value. The reason is that after the Russia-Ukraine conflict, the U.S. excluded some Russian banks from the SWIFT system, accelerating the widening of dollar credibility fractures. In the 1970s, the market also priced gold based on reserve value. From the breakdown of the Bretton Woods system in 1971 to after the second oil crisis in 1980, gold’s ten-year peak increase was nearly 20x. During the two oil crises, gold rose by 79% and 291%, respectively. In the 1970s, the U.S. spent a decade rebuilding dollar credibility; today, U.S. industrial strength and military hegemony both face challenges, and it is unlikely to be able to reverse the trend of dollar credibility fractures widening in the short term.

2、As the scale of petrodollar trade expands, it creates a temporary constraint on gold prices

In 3.19’s 《Iran-U.S. Conflict: The “Dusk” of the Petrodollar》, we pointed out that within the petrodollar system, oil exporters use the dollars they earn to buy U.S. assets such as U.S. Treasuries, thereby supporting the credibility of the dollar/U.S. Treasuries. (1) Earlier this year, the U.S. took control of Venezuela’s regime and oil facilities, and Venezuelan crude entered the dollar settlement system; (2) after the Iran-U.S. conflict broke out, oil prices rose from around a 70 USD/barrel midpoint to about 100 USD/barrel, and the scale of petrodollar trade kept prices steady while increasing in volume, expanding further. Because dollar credibility is linked to the scale of petrodollar trade to some extent, the recent rise in oil prices not only siphoned liquidity but also, in name, repaired dollar credibility—causing gold’s drawdown to be larger than that of assets like stocks.

3、If Iran controls the Strait of Hormuz for the long term, dollar credibility will be weakened in the medium to long term

The Strait of Hormuz is a global energy transportation chokepoint. In 2025, average daily crude oil throughput is about 19 million barrels/day, accounting for roughly 18% of global consumption. The International Energy Agency maintained a temporary balance between energy supply and demand by releasing 400 million barrels of oil reserves, which brought about the situation that dollars have oil to buy and dollar credibility can recover temporarily. But if Iran blocks the Strait of Hormuz for the long term, or if passage rights ultimately come under Iran’s dominance, the rules for dollar settlement of oil trade will be challenged—(1) U.S. allies in the Gulf region that use dollar settlement will face limited crude transport; Russia and Iran’s crude shares are expected to rise, and they would not use dollar settlement. (2) If the U.S. cannot use military power to guarantee the security of Gulf countries, it’s also possible that Gulf countries would abandon dollar settlement for oil trade. At that time, dollar credibility would be greatly weakened, and gold prices would return to an upward trend.

4、If the Federal Reserve, under liquidity pressure, chooses QE, dollar credibility fractures will also accelerate widening

If, by mid-year, Wosh successfully takes over as Chair of the Federal Reserve, according to his policy framework—even if inflation cannot fall as expected—he might choose “rate cuts with balance-sheet shrinkage”（see 2.4 《Wosh Shock, Is It Over?》 for details). This would make it easier to trigger a liquidity crisis: (1) Rate cuts by the Federal Reserve would reduce the value of short-term Treasury holdings, accelerating cross-border capital outflows, while the issuance scale of U.S. Treasuries would still continue to expand; a supply-demand imbalance would lead to tighter liquidity. (2) If Wosh truly pushes balance-sheet shrinkage, it would accelerate tightening in U.S. dollar liquidity and trigger a crisis in the financial system. In 3.22’s 《A Konbo Opportunity: The “Leapfrogging” on the Curve for Catch-up Countries》, we pointed out that among the three factors of the financial system, employment, and inflation, the Federal Reserve’s priority order should be financial system > employment > inflation, therefore a liquidity crisis would force the Federal Reserve to loosen policy, and it may even begin QE. Then dollar credibility fractures would accelerate their widening, and gold would also be able to rise faster.

5、The dollar borrows the momentum of oil to pressure gold—this is just “borrowing a tiger’s power”

We believe dollar credibility only gets a nominal “repair” as oil prices rise. In reality, because the Strait of Hormuz is or will be blocked and weakened for a long time, the opposite is more likely. Therefore, gold is only temporarily suppressed by oil; in the medium to long term, the logic is actually stronger. Our judgment is: If the U.S. ultimately fails to seize control of the Strait of Hormuz, or chooses QE under liquidity pressure, both would lead to dollar credibility fractures expanding, and gold would be able to break to new highs again.

In addition, during the Konbo depression period, China’s assets may achieve “leapfrogging on the curve.” “Made in China” may become a consensus among various kinds of capital in 2026, as if it were the next gold. For major asset classes, we recommend paying attention to thegoldopportunities at low levels. At the same time, we are also positive about China’s assets such as A-shares and H-shares, which may be able to withstand geopolitical uncertainty. Before the liquidity inflection point, U.S. Treasuries face pressure, U.S. stocks may remain range-bound, and style may accelerate a shift toward value.

Risk Warning: **Changes in global macro data beyond expectations, changes in overseas geopolitical conditions beyond expectations, and changes in the timing of technical progress and application rollouts, etc.

Report Body

1

Key Changes in Global Major Asset Classes

1.1 China’s domestic economy delivers a strong start

In the first two months, industrial production growth is strong; both retail sales (social consumption) and fixed-asset investment have improved significantly. On the production side, industrial value added grew 6.3% year-on-year, confirming the previously above-expectations exports; manufacturing value added grew 6.6% year-on-year; high-tech industry value added grew 13.1% year-on-year—reflecting accelerating industrial structure transformation and strengthening the trend of export-structure transformation. On the investment side, infrastructure investment improved sharply, up 11.4% year-on-year, reflecting fiscal efforts pushed forward. Manufacturing investment saw a modest rebound, and the decline in real estate investment narrowed, jointly supporting stabilization in investment. However, with fiscal targets roughly comparable to last year, the strength and sustainability of the investment rebound still need to be observed. On the consumption side, due to drag from automobile retail, the overall improvement in social retail sales is relatively limited; restaurant revenue rebounded more, and service retail also continued to improve. Looking ahead, if overseas does not experience a clear downturn, exports and the production they drive still have a chance to remain strong; if overseas does experience a clear downturn, expectations are that the policy will provide more support to domestic demand, and support for consumption could be stronger than support for investment.

1.2 The Fed is hesitant, with limited hawkishness

Interest rates remain unchanged, emphasizing inflation risks, but the dot plot still points to rate cuts. The Fed kept interest rates unchanged as expected and the balance of risks leaned more toward upside inflation risks (both economic growth expectations and inflation expectations were raised), showing a somewhat hawkish stance. However, the degree of hawkishness is limited—more reflecting hesitation. The Fed has no clear judgment on how Middle East conditions will affect the economic outlook, and for tariffs’ impact on inflation, it still tends to believe the impact is one-off and hopes to confirm this in the coming months. The dot plot shows the median expectation still points to one rate cut during the year, and no committee members think hikes are needed, indicating that most officials still believe the policy is constrained, but it is uncertain whether inflation can fall as expected.

At the press conference, Powell highlighted the possibility of staying at the Fed, further confirming that the Fed’s dovish forces may not be able to dominate policy. In other words, rate cuts need inflation data confirmation, but as long as geopolitical risks decline, the threshold for rate cuts may not be that high. With tariff risks falling and weaker employment expected to block the pathway of prices transmitting downward to the downstream, conditions for rate cuts are created.

1.3 U.S. PPI came in above expectations

Energy and trade services are the main contributors to growth. U.S. February PPI rose 3.4% year-on-year, significantly higher than the prior value and the forecast value of 2.9%. On a month-on-month basis, it rose 0.7%, significantly higher than the prior value of 0.5% and the forecast value of 0.3%. All PPI subcomponents saw year-on-year growth. The decline in energy was notably smaller than before, related to oil prices having already risen to some extent ahead of the Iran-U.S. conflict. The trade component (wholesalers’ & retailers’ profits) continued to surge significantly, likely reflecting the process of tariff price pass-through. This means the key stage for validating tariffs’ impact on inflation has arrived (in the past, tariff prices were absorbed by traders; now they are being passed on more to consumers). Looking ahead, in March, because oil prices jumped significantly, it increases inflation pressure; but for the validation of tariff-driven inflation, it is noise, increasing uncertainty about the outlook.

1.4 Middle East developments: a situation of mutual checks and balances around energy infrastructure is likely to form

Last week, Israel attacked an Iranian gas field, and Iran retaliated by striking three countries’ oil facilities. Geopolitical conditions remained tense last week, but a situation of mutual checks and balances around energy infrastructure is likely to take shape. Because energy infrastructure is a core interest for Middle Eastern countries, the U.S. can pressure Iran by threatening Iran’s energy infrastructure, while Iran can also threaten other Middle Eastern countries’ energy infrastructure to pressure the U.S., forming mutual checks and balances.

Although Israel may break this balance, if it continues to attack Iran’s energy infrastructure, it could cause events to spiral out of control—there is also risk. With Netanyahu announcing a “pause” of airstrikes on Iran’s energy infrastructure, a mutual checks-and-balances situation is likely to form, which may help prevent the situation from getting out of control.

1.5 Overseas economic data: there are many factors that are bearish for the dollar

The ECB releases expectations of further rate hikes; marginal improvements in U.S. real estate; and manufacturing indexes****diverge. The ECB kept interest rates unchanged as expected, but signaled it may raise rates in the future. The main reason is the rise in inflation expectations caused by the Iran-U.S. conflict. U.S. February real estate data came in above expectations: existing home sales index rose 1.8% month-on-month, versus the expected decline of 0.5%; the Philadelphia Fed manufacturing index beat expectations, while the New York Fed manufacturing index was below expectations. Economic uncertainty remains high. Initial jobless claims have stayed below expectations, and the labor market has not yet shown obvious risks. It may be too early for the market to price in a recession, especially given that there are ways of mutual checks and balances in the Iran-U.S. conflict scenario, which lowers the probability that things spiral completely out of control.

2

Review of Major Asset Classes Last Week

2.1 Domestic equities: A-shares fell last week

External geopolitical risk increased, putting pressure on A-shares for a pullback. The Shanghai Composite Index fell 3.38% last week, the SSE 50 Index fell 2.47%, the CSI 300 fell 2.19%, and the CSI 500, CSI 1000, and CSI 2000 fell 5.82%, 5.25%, and 5.70%, respectively. In terms of style, value < growth: the CNI value style index fell 3.72%, while the CNI growth style index fell 2.78%. By industry, communications, banking, and food & beverage led; basic chemical, steel, and nonferrous metals lagged.

Outlook: In the short term, the index may see a pullback with expanded volume and fall below 4000, but with bottom-fishing funds holding strong and intense long-vs-short games, after a technical reset it is expected to stabilize and form a bottom. (1) In the first half of the year, increase allocation to the PPI chain of oil/refining and chemicals, while also focusing on “leapfrogging-on-the-curve” Chinese manufacturing (photovoltaics, wind power, energy storage, construction machinery, etc.); (2) In the second half, shift toward the CPI chain represented by liquor.

2.2 Overseas equities**: Stocks in Europe and the U.S. generally fell**

Affected by geopolitical shocks, U.S. stocks’ three major indexes broadly came under pressure and declined. In the U.S., the Nasdaq index fell 2.07% for the whole week; the S&P 500 fell 1.90%; and the Dow Jones fell 2.11%. In European stocks, the FTSE 100 in the U.K. fell 3.34%; France’s CAC40 fell 3.11%; and Germany’s DAX fell 4.55%.

2.3 Overseas bond markets: U.S. Treasury yields rose

The combined effect of rising inflation expectations, the Fed’s somewhat hawkish stance, and geopolitical risks pushed U.S. Treasury yields higher. The 10-year U.S. Treasury yield rose 10bp to 4.38%, and real yields rose 10bp for the whole week to 2.00%. The 30Y-2Y spread was 104bp, and the 10Y-2Y spread was 48bp. Last week, the 10-year sovereign bond yields in Germany, Portugal, Italy, and Spain rose by 6bp, 8bp, 18bp, and 9bp to 3.04%, 3.51%, 3.96%, and 3.58%, respectively. The 30Y-2Y spread for German bonds was 86bp, and the 10Y-2Y spread was 37bp.

**2.4 **Commodities: Oil prices rose; gold prices fell

Tight energy-related conditions raised oil prices, and tight liquidity weighed on gold and led to a decline. For crude, WTI and Brent rose 1.44% and 8.77% over the week, respectively, to 98.2 and 112.2 USD per barrel. In metals, DCE iron ore fell 0.43% over the week, LME copper fell 6.66%, LME aluminum fell 6.53%, gold fell 10.50%, and silver fell 15.69%.

2.5****Foreign exchange: the dollar depreciated; the RMB appreciated

The U.S. Dollar Index moved in a high-range and then declined, supported by fundamentals for the RMB’s appreciation. Last week, the U.S. Dollar Index closed at 99.6, down 0.71% from the previous week. The euro appreciated 1.36%, the pound appreciated 0.84%, and the Japanese yen appreciated 0.31%. Onshore RMB appreciated 0.03% to 6.90; offshore RMB depreciated 0.00% to 6.91. The RMB central parity rate appreciated 0.16% to 6.89.

3

Risk Warning

Changes in global macro data beyond expectations, changes in overseas geopolitical conditions beyond expectations, and changes in the timing of technical progress and application rollouts, etc.

END

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