The gold pit was already dug on Friday.

I estimate that people who have bought accumulated gold or physical gold must have a jolt the first thing they do when they wake up this morning: the price dived by more than 3% during intraday trading, nearly 4%, while everything was perfectly fine at the close of trading last Friday.

01

The incident happened on Friday night, at 10 p.m. Beijing time, when Wash, Chair of the Federal Reserve, delivered a speech at the annual meeting of global central banks. Right after his speech, the international gold price plunged immediately, dropping by nearly 3% overnight.

At that time, domestic retail gold shops were closed, and the Gold Exchange was also off the market.

On Saturday, Lao Miao, Lao Feng Xiang, Chow Sang Sang and other major gold jewelry brands collectively adjusted their prices, cutting the price of gold jewelry by 36 to 39 yuan per gram.

On Monday morning today, the Shanghai Gold Exchange opened with a sharp drop. At 10:30, the price was reported at 954.3 yuan per gram, down 4% from Friday's close.

The trap for gold prices was already dug on Friday night, and domestic investors did not fall into it until Monday morning.

Many people ask: why did the gold price drop sharply out of nowhere? It was clearly the best-performing asset in the whole market in August.

At the beginning of August, the gold price stood at 4000 US dollars, and it surged to 4677 US dollars on August 25, rising by 600 US dollars, or 15% in just one month. The core support for this rally came from the market's growing doubts about the credit of the US dollar.

First of all, what are US Treasury bonds? They are IOUs auctioned regularly by the US government. The bidders offering higher yields get the bonds first, and the final transaction yield is called the awarded rate.

The higher this rate is, the more expensive it is for the Ministry of Finance to borrow money, and it also means that investors are unwilling to take over the bonds at low yields.

In mid-August, the US held three Treasury bond auctions: the 10-year awarded rate hit 4.683%, the highest level since 2007, and the 30-year awarded rate reached 5.216%, the highest since 2001. There was even a "tail" phenomenon, which means that buyers thought the yields were not high enough and demanded higher returns before taking over the bonds.

The proportion of overseas buyers willing to take over the bonds dropped from 77.7% to 66.8%.

The Federal Reserve not only stopped increasing its bond purchases, but also quietly reduced its bond holdings, while AI giants are issuing bonds to compete with the Ministry of Finance for capital.

In mid-August, the US federal debt exceeded 40 trillion US dollars, which translates to more than 110,000 US dollars per capita for every American, with annual interest expenditure alone exceeding 1 trillion US dollars.

This is not just a problem for the United States. The yields of long-term bonds in Germany, France, and Japan have all hit new highs in 10 to 20 years.

When fiat money loses its purchasing power, people will turn to buy gold.

The rally in August was driven by the expectation that the US dollar credit would face risks. On August 19, the US Department of the Treasury announced that it would expand long-term Treasury bond repurchases. The market interpreted this move as the official being worried that no one would take over long-term bonds, and the gold price soared by 4.35% that day.

However, as soon as Wash spoke, the pricing anchor changed completely.

Wash took office as Chair of the Federal Reserve in May. He is a lawyer by background, not a professional economist. After taking office, he canceled the Fed's interest rate forecasting chart, cut a large part of the post-meeting statement, and said that the old practice of giving the market advance guidance "has long been outdated".

The market was uncertain about his policy style. In this speech, he explicitly stated that the 2% inflation target is "firm and fixed", and if inflation does not fall back fast enough, the Fed "still has work to do".

This is the closest he has ever been to acknowledging a possible interest rate hike since he took office.

Right after the speech, the market's bet on a September interest rate hike jumped directly from 35% to nearly 60%, and the probability of a December rate hike was close to 90%. The 2-year US Treasury yield rose by 0.12 percentage points in a single day, hitting the largest single-day fluctuation during the annual meeting of global central banks.

Unlike deposits that generate interest, gold held in your hand does not yield any passive income, and its price moves directly with interest rates. Once interest rate expectations rise, the opportunity cost of holding gold becomes higher, so short-term capital will flee immediately.

Spot gold fell from 4630 to 4445 that night, closing at 4454, down 2.95% in a single day, breaking below the 4500 mark. Silver performed even worse, dropping by more than 4%.

Another reason for such a sharp drop is that the Asia-Pacific market was already off the market at that time, and batches of stop-loss orders were triggered, leading to a vicious cycle of falling prices and more selling.

Gold rose by 600 US dollars in August, so there was a lot of profit taking capital in the market. But if it was just pure profit taking, long-term bond prices would not have fallen instead. There is a detail that perfectly explains the situation: after the speech, the 2-year Treasury yield surged sharply, while the 30-year Treasury yield fell by 0.02 percentage points.

The cost of borrowing money for 1 to 2 years has become higher, while the cost of borrowing for 30 years has dropped slightly. The market interprets this as follows:

The Federal Reserve is determined to defend its inflation target, and the credit of the US dollar has stabilized temporarily. This is exactly the bet that people who bought gold in August placed.

After Wash finished his speech, the market believed that the US dollar credit would not face risks in the short term, so they sold gold first and turned to focus on interest rate movements. The pricing anchor switched from credit to interest rate, and the gold price adjusted accordingly.

Zhiyuan specifically checked relevant data:

The exact same scenario happened in August 2022. Powell delivered a hawkish speech at the same event, and the gold price kept falling to 1622 US dollars in September, and did not rebound until the Silicon Valley Bank collapse in March 2023.

As you can see, the invisible hand that determines the gold price is neither in the hands of gold buyers nor in the hands of gold shop sellers. It holds the pen of credit for a while, and then the pen of interest rate for another.

One sentence from Wash changed the pen, the gold price fell back by 230 US dollars in two days, erasing 40% of the August rally. The gold price is decided by others, and you are just paying the price set by them.

02

With the same two-day sharp drop, some people lost 40 yuan per gram, some lost 4% of their principal, and some even lost all their money. It seems strange that for the same gold, the loss situation varies so much?

The gold that ordinary people buy actually falls into three different categories.

The first category: gold jewelry.

After the price adjustment on Saturday, the listed price of gold jewelry was 1344 to 1348 yuan per gram, while the raw material gold price on the same day was only 965 yuan; there was a nearly 400 yuan premium per gram, which covers processing fees and brand value.

At the peak of the gold price rally at the beginning of this year, gold jewelry from first-tier brands was sold at 1713 yuan per gram, with a brand premium of 470 yuan alone. For a 30-gram gold bracelet, the total premium reached 14,000 yuan.

None of this premium can be recovered when you resell the jewelry. Formal gold recycling only calculates the value of the raw material, based on purity and weight, and the brand, design, and newness of the jewelry are not counted at all.

The recycled price will be further discounted. For a bracelet you bought at 1344 yuan per gram, you can only get 800 to 900 yuan per gram when you recycle it, which means you lose 35% of your principal immediately. The recycling agency will also deduct purification fees, testing fees, and other miscellaneous fees, so you get even less money in the end.

Gold jewelry is essentially a consumer product made to be worn, such as the three pieces of gold jewelry for marriage or daily wear. The fluctuation of gold price does not affect your experience of wearing it; if you really want to buy gold by gram, go to wholesale markets like Shuibei, where they sell gold with only a dozen yuan of processing fee added per gram. The money you pay in brand stores is for the brand value.

However, many people do not buy gold jewelry for wearing, but believe that "the gold price keeps rising, so buying it can preserve value", especially many elderly people. This wrong mindset leads to the 400-yuan gap in cost.

Interestingly, when the gold price actually falls, fewer people are willing to buy it.

During the sharp drop in June, gold shops launched discounts and promotions, but the sales clerks said the number of customers was getting smaller, and sometimes they could not make a single deal all day. The "buy on the rise, not on the fall" rule also applies to the gold market.

The second category: accumulated gold and gold funds.

Accumulated gold is a gold account opened by banks, which is registered under your name by gram. The bank quotes the price every day, and there is a spread between buying and selling price, which is a few yuan per gram. Paper gold and account gold also belong to this category, which are traded at the bank's quoted price, and your profit or loss comes entirely from the price spread.

At Friday's close, the domestic gold price was still 993 yuan per gram. This morning it fell to 954.3 yuan per gram, down 4% in two days, so your account value will drop by 4% accordingly.

Most people who bought gold last Friday saw the sharp rally of gold price in August and thought it was too late to get on the bus, but they stepped into the trap before they could get on the "bus".

Of course, some people are not panicked at all. Those who make monthly fixed investment of a few hundred yuan to accumulate small gold beans have amortized their cost, so they do not feel much about the small drop. The panicked people are those who invested all their money in one go last Friday.

I checked the relevant terms:

The agreement of Industrial and Commercial Bank of China stipulates that if the single-day net redemption exceeds 20% of the total account balance, the bank has the right to refuse to accept the redemption application, which means when everyone rushes to redeem their gold at the same time, you may not be able to sell your holdings in time.

Gold funds follow another set of rules. Offshore connected funds calculate the value based on the net value of the day, and confirm the share the next day. If you redeem the fund within 7 days after purchase, you will be charged a 1.5% redemption penalty.

If you bought the fund yesterday and sell it today, you will face both the penalty and the loss from the price drop, which is double the blow.

Today, the largest gold ETF in the exchange fell by 3.95%, with a record high trading volume of 5 billion yuan. Some people are fleeing in a hurry, while some others think the drop creates a good buying opportunity.

This ETF had a net inflow of 6.4 billion yuan in August, ranking first in the whole market. A lot of investors entered the market at the high price level.

The third category: leveraged gold products.

Your profit and loss from these products does not depend on the direction of the gold price movement, but depends on whether you can withstand the price fluctuation.

Most people who dare to touch leveraged products see the continuous rally of gold price and want to make a quick profit, so they even put their house purchase money and betrothal gift money into the market.

Gold T+D and gold futures are typical leveraged products. You only need to pay a small margin to get a position of about 10 times your principal. Once the market moves against your expectation, your account will be liquidated to zero immediately.

Gold stocks are another kind of semi-leveraged product. This morning, the precious metal sector once fell by 5%: Hunan Silver and Shengda Resources hit the limit down directly, China Gold and Zhaojin Gold fell by 6%, and Zijin Mining fell by 4%.

Gold stocks fall more sharply than gold price when the market goes down, and rise more sharply when the market goes up. The gold stock ETF rose by 21% in August, which equals the gold price multiplied by the profit elasticity of the listed companies, multiplied by the market sentiment. The company's own events, such as dividend distribution, profit report, and share reduction, will also affect the stock price.

I saw some people calculate their account, saying that they feel like they are working for the gold market, because their daily earnings are less than the daily loss. Some others opened their accumulated gold account and found that their income is negative more than 7000 yuan.

Three different tools, the same drop in gold price, but the loss multiplier is completely different.

Gold jewelry loses value the moment you buy it, gold funds have full exposure to the price fluctuation, and leveraged products have multiplied exposure to the price fluctuation.

Loss = Gold price drop × The loss multiplier of your tool.

All three products are priced by the same invisible hand, which changes all the time. Central banks are also buying gold every day. But they cannot control your return on investment today.

03

The first thing: why they cannot control it.

First look at how fiercely central banks are buying gold. In the second quarter, global central banks made a net purchase of 289 tons of gold, 60% higher than the same period last year, hitting a new record.

Calculated at the current gold price, 289 tons of gold are worth more than 40 billion US dollars. The People's Bank of China has kept buying gold for 21 consecutive months since November 2024; the proportion of gold in China's official reserve has exceeded US Treasury bonds, making gold the largest reserve asset.

Central banks buy gold as reserve assets, and they never plan to sell it in the short term.

But even with such huge buying volume, they could not stop the gold price from dropping at all on the night of August 28. Central banks did not sell a single gram of gold that day, and they did not participate in the pricing process at all.

The difference lies in the time horizon. Central banks hold gold for several years, while trading funds hold positions for only a few days.

Central banks make purchases on a quarterly basis, they do not follow the Fed's schedule, and they do not set stop-loss orders. Even if the gold price drops by 5%, they will not react at all. When the price drops more, they even think it is a better buying window.

When central banks buy gold, they are buying a national strategic reserve, so they do not care about short-term price fluctuations. Trading funds calculate their profit and loss by the minute, and they can clear all their positions within two hours after a speech from the Fed.

Another point is that the two groups of people are buying gold in completely different markets.

Central banks buy physical gold bars, transport them back to the vault and store them for years without touching them. Trading funds trade paper gold, including futures, ETFs and derivatives, whose trading volume is dozens of times larger than that of physical gold.

The short-term gold price is determined by the dozens of times larger trading volume of paper gold. Central banks only support the long-term bottom of the gold price, and trading funds are the dominator of the market in recent days.

A similar scenario happened a few months ago. In March, Powell made a hawkish speech and cut most of the interest rate cut expectations. The gold price fell by 11% in a week, dropping from above 5000 US dollars to 4098 US dollars. At that time, central banks were still buying gold, but the gold price still fell as usual.