CITIC Securities: $4,000 is likely the bottom range this cycle; gold prices are expected to return to an upward channel within the year

According to Zhitong Finance APP, CITIC Securities released a research report stating that although gold prices surged earlier this year and then quickly declined, gold remains in a major bull market. The reasons include the rapid expansion of the U.S. fiscal deficit, persistent geopolitical rifts under deglobalization, and continuous gold purchases by global central banks providing a price floor. Therefore, the current decline in gold prices is merely a temporary correction within a bull market. The current pullback is approaching historical extremes, with a high probability that around $4,000/oz marks the bottom for this cycle. Looking ahead, tensions in the Strait of Hormuz are expected to shift from suppressing to supporting gold prices. Federal Reserve monetary policy could be more optimistic than the market expects, and the surge in U.S. military spending is expected to further inflate the deficit. As a result, gold prices are projected to return to an upward trajectory within the year.

The main viewpoints of CITIC Securities are as follows:

Gold remains in the major bull market that began in 2015, driven by three long-term factors that have not changed.

1. The U.S. federal deficit is expected to climb year by year. Due to expanding military and interest expenditures, federal government spending and the deficit growth are seen as almost irreversible. 2. Geopolitical frictions remain unresolved. Deglobalization and intensifying conflicts continue to underpin gold pricing. 3. Central banks continue to buy gold. According to the World Gold Council, in recent years central banks have consistently made large gold purchases, with increasing emphasis on gold each year.

The current pullback is approaching historical extremes, with clear signs of a bottom.

Gold is still in the third major bull market since 1968, with the maximum drawdown in each bull market gradually narrowing. The shift of global central banks to net buyers is likely the key reason. Excluding exceptional circumstances in the first cycle, the maximum drawdowns in the first two bull markets were both around -29%, which, if applied to this cycle, indicate a bottom for international gold prices at $3,840/oz, already close to the lowest prices seen in this round. Additionally, the six-factor gold price model projects a pessimistic scenario bottom around $3,970/oz. Both perspectives agree: the current gold price is already near the bottom for this correction phase.

A review of gold price movements since the start of the year points to four phases, with speculative capital clearing as the key driver.

Phase 1 (Jan–Feb): Geopolitical conflict expectations drove a sharp rise in gold prices. Phase 2 (Mar–Apr): The evolution of the U.S.-Iran-Israel conflict triggered panic-driven outflows of speculative funds, with gold behaving as a risk asset and prices falling. Phase 3 (Apr–mid Jun): The market became desensitized to geopolitical risks, speculative capital shifted to the AI sector, and gold prices continued to decline. Phase 4 (late Jun–Jul): Speculative capital was largely cleared out, and gold prices began to bottom out.

The impact of the U.S.-Iran-Israel conflict on gold is expected to flip from suppression to support.

Since July, the negative correlation between oil and gold prices has begun to decouple, and the influence of the Strait of Hormuz situation on gold price trends is reversing. Gold's asset nature is shifting from a risk asset to a safe haven. The U.S.-Iran-Israel conflict is still unlikely to be resolved in the short term; once speculative capital is fully cleared, negative sentiment toward the geopolitical outlook may once again become supportive for gold prices.

The accelerated expansion of U.S. fiscal spending this year will provide stronger support for gold prices.

According to the 2027 U.S. President’s Fiscal Budget, this year and next the U.S. fiscal deficit may accelerate its expansion driven by a surge in military spending, which is expected to give gold prices even stronger support.

Waller faces multiple cross-currents, but Fed policy may still be looser than the market expects.

Historically, Waller has shown inconsistent stances and his network with Trump points to a dovish monetary policy inclination. However, during the July FOMC, three voting members dissented against rate hikes, reflecting complex internal divisions. Waller seeks to bypass Fed establishment via working groups, which also signals a complicated reform process. Amid these entanglements, the Fed is more likely to hold steady before the U.S. midterms in November. Current market pricing of rate hike expectations may be overly pessimistic.

Overall, the outlook for the gold market in the second half of the year remains optimistic, with increased attention warranted towards the Fed’s movements.

The Fed’s policy meetings and the Jackson Hole Symposium before the November mid-term elections will be particularly noteworthy, potentially serving as signals for the next leg of the gold bull market. The updated six-factor model projects that, under neutral assumptions, gold prices could reach new record highs by early next year.

Risk factors:

Federal Reserve monetary policy falling short of expectations, escalation risks of the U.S.-Israel-Iran war, other geopolitical risks, U.S. economic growth exceeding forecasts, and significant overall volatility in the financial markets.