Western Securities: Bullish on Gold Prices in the Medium Term, Top-Down Selection of Flexible Leading Stocks

Western Securities has released a research report stating that a sharp drop in gold prices will directly lead to a decrease in the net realizable value of gold inventories, potentially resulting in substantial inventory write-down losses. As the market gradually adjusts hawkish expectations, gold prices have begun to recover. Gold is expected to benefit from the exposure of US inflation risks. The firm predicts that the jewelry industry may see a "quarter-on-quarter recovery" in Q3 2026. It recommends focusing on targets with a high proportion of self-operated stores or low inventory hedging, while also considering the timing of inventory removal from the balance sheet. Profits are expected to improve in the next one to two quarters.

The main points from Western Securities are as follows:

In the first half of 2026, the global gold market experienced wide fluctuations, with the international gold price dropping nearly 8% cumulatively in H1. London spot gold prices surged quickly at the beginning of the year to nearly $5,600 per ounce, reaching a historic high, before rapidly falling back. The maximum drawdown from the yearly high was close to 30%, marking the largest correction since 2013. The second quarter is traditionally an off-season for industry consumption. Coupled with high price volatility, gold jewelry demand fell in Q2. At the same time, the sharp drop in gold prices directly led to a decrease in the net realizable value of gold inventories, potentially resulting in substantial inventory write-down losses.

In July 2026, US nonfarm payrolls fell by 23,000, below market expectations. The year-on-year growth of core CPI in July was 2.5%, weakening month-on-month. As the market gradually adjusts hawkish expectations, gold prices have started to recover. In the short term, hawkish remarks from Waller led to a rise in US Treasury yields and a modest adjustment in gold; however, from a mid-term perspective, the persistent rise in inflation expectations since January stems from higher oil prices, which in turn exacerbates current risks in US production: including the sustainability of CSPCapex and private bond defaults among small and medium-sized businesses. From this perspective, gold is expected to benefit from the exposure of inflation risks in the US.

As gold prices rebound, sales are improving sequentially. The industry usually sees brisk sales in January/February and restocking in March/April, with replenishment by both self-operated and franchise channels occurring at relatively high prices. Therefore, the firm predicts that the jewelry industry may see a "quarter-on-quarter recovery" in Q3 2026. Targets with high proportions of self-operated stores, low inventory hedging, and high sales velocity experienced more inventory impairment in Q2, but may show stronger recovery potential in Q3.

Editor: Zhu Henan