Precious Blog: China Indicators Remain Solid Against DM Gold Deleveraging

Deutsche Bank notes that gold's recent decline stems from two main factors: extreme sensitivity to the US dollar and positive risk beta. These dynamics, evident since January, have been exacerbated by the Iran conflict, which triggered hawkish monetary policy signals and Treasury sell-offs to finance foreign exchange intervention. Gold's sensitivity to developed-market (DM) ETF holdings currently runs at six times the historical monthly average observed between 2004 and 2025. This suggests that aggressive deleveraging is amplifying the downturn, a trend that may extend into less transparent over-the-counter markets. Furthermore, the yellow metal's beta against the dollar has surged to an unprecedented -7, and it now exhibits positive correlation with the S&P 500. Gold briefly fell below its dollar-implied price during intraday trading at $4,100 per ounce, compressing its premium over convexity model fair value to just 2–3%. Geopolitical analysts warn that further conflict escalation could occur in the coming weeks, potentially prolonging DM ETF outflows. Nevertheless, Chinese demand signals remain robust. Chinese ETF redemptions have been relatively limited, spot premiums persist, and official sector demand likely remained stable through the first quarter. Central banks are unlikely to liquidate gold reserves to fund FX interventions, given the availability of preferable alternatives such as Treasury sales, liquidity swaps, repurchase agreements, and gold-for-FX swaps. Fundamental demand exhaustion is not expected until prices reach approximately $8,400 per ounce, leaving structural upside intact despite the ongoing deleveraging cycle.