We share our latest observations on global asset markets in relation to NO17 Gold

All movements are expressed in United States (US) dollar terms, unless otherwise stated.

Key points

• NO17 Gold outperformed gold bullion as profit margins expanded with the higher gold price.
• Gold strengthened as a result of its safe haven status against uncertainty in relation to tariffs and the slowing US economy. It also benefitted from the weaker US dollar.
• The general perception among investors (especially those who are not allocated to the sector) is that there isn’t much more upside for gold. This couldn’t be further from our base case. We have a very positive outlook for the gold price and we believe ‘Liberation Day’ has lit the fuse on a much bigger upward move as capital is allocated away from US assets (especially US Treasuries).
• Gold mining stocks remain extremely attractive with valuations at what we believe are 25-year lows, notwithstanding a continuing uptrend in the gold price. We see this disconnect as temporary and a significant opportunity which markets are only just beginning to recognise. The launch of various new funds specifically targeting gold miners is a lead indicator that this dislocation will normalise.
• The potential for the global trade war to cause an inflation shock (at a time when inflation is already elevated and proving sticky), should be motivating investors to identify investments which would stand to benefit from such a scenario. We recall that the second inflation shock in the 1970s resulted in the gold price spiking by 179% over 12 months.

Market update

Gold was one of the biggest beneficiaries of President Trump’s ‘Liberation Day’ policy shock, strengthening amid the flight to safety as other defensive assets such as US Treasuries and the US dollar came under pressure against the uncertainty in relation to tariffs and the outlook for the US economy. Our view is that Liberation Day has lit the fuse on a much bigger upward move in the gold market as capital is allocated away from US assets (especially US Treasuries). NO17 Gold’s portfolio of established gold miners outperformed gold bullion. We expect the uptrend in gold bullion to continue in the medium term and for gold miners to outperform, driven by expanding profit margins and upside to valuation multiples as they normalise from presently depressed levels.

Macroeconomic data

While the economic data reported during April was completely overshadowed by Liberation Day and its aftermath, the data was nevertheless relatively benign. Looking ahead, with company reporting season out of the way, in the absence of left field shocks, economic data (especially inflation, unemployment and indicators of economic activity) will be the key catalysts for asset markets over the next 2-3 months.

The key question is the impact of tariffs on the world’s most important demographic: the US consumer

Consumer confidence remains low (you will recall that consumer spending accounts for nearly 70% of US economic activity) and slipped further from 92.9 to 86 during April. This is an important data point as readings of less than 100 indicate a more pessimistic outlook and month over month changes of more than 5 points are considered significant.

The latest reading indicates that tariffs are exacerbating already weak and weakening consumer confidence, continuing a trend since late November last year. The present level is comparable with the lows during the COVID-19 pandemic although still above the levels experienced during the Global Financial Crisis and the recession of the early 1990s.

The response of US consumers to the trade war will be a key determining factor for the trajectory of the US economy. In the short term we are cautious, if not pessimistic, on the basis that the key drivers of improving consumer confidence are believed to be a combination of high job security, rising wages, low inflation and falling interest rates – none of which are the base case.

The outlook for interest rate cuts increased notwithstanding elevated inflation and low unemployment

Interest rate expectations continue to oscillate. The market is pricing in four interest rate cuts during 2025 (relative to the 3 interest rate cuts that were predicted last month). The cuts are anticipated notwithstanding the fact that US Federal Reserve’s clear ‘dual mandate’ (to keep unemployment low and inflation around 2%) is inconsistent with cuts at the present time (unemployment is currently low and inflation is above 2% and elevated by historical standards). It isn’t clear whether the market expects inflation to suddenly drop and unemployment to spike or that the Fed will abandon its mandate.

The Core Personal Consumption expenditures Price Index (Core PCE) contracted to 2.6% (from 2.8% in the prior month and 10 basis points below market expectations). While a contraction in these circumstances would normally be seen as increasing the prospect for interest rate cuts, the assumption that tariffs will be inflationary makes the reading less relevant. The magnitude to which tariffs increase inflation and therefore prevent interest rate cuts is a critical issue to monitor.

The labour market remains very solid with the economy adding 228 thousand jobs during March (you will recall that 100 to 150 thousand is considered to have a more or less neutral impact on unemployment), considerably more than the 140 thousand expected. While an increase to the participation rate resulted in a small increase to unemployment (to 4.2%, an increase of 10 basis points on the prior month), unemployment is not at a level which is concerning to the US Federal Reserve. Once again, the impact tariffs may have on the labour market is a critical issue to monitor.

We note an increasing number of market commentators forecasting economic stagflation (defined as the combination of high inflation, high unemployment, and stagnant or slow economic growth). We observe that the solid US labour market remains the only factor standing between the US and this particularly undesirable condition which, should it eventuate, would be a major headwind for risk appetite but likely to be very good for safe havens such as electric utilities and gold.

Market impacts

Capital flows seeking a safe haven following the Liberation Day shock propelled the gold price sharply higher. While real yields (US Treasury yields in real terms or the nominal yield minus expected inflation) didn’t move significantly month-over-month, the US dollar weakened materially (US Dollar Index -4.6% to 99) which was a fundamental tailwind for the gold price.

Gold bullion market

Central banks

Based on data reported so far (central bank gold purchases are not always reported completely, or on time, or in some cases ever), central banks reported 17 tonnes of net purchases during the month of March. Poland adding 16 tonnes was the largest buyer. While the volume purchased was slightly below the prior month’s 24 tonnes, reports have been circulating suggesting that China’s officially reported net purchase of 5 tonnes in February was closer 50 tonnes. We believe central bank purchases of gold at elevated volumes will not only continue for the foreseeable future, we also see genuine potential for the level of demand to increase.

You will recall that central banks accounted for approximately 21% of total gold demand in 2024, which is more than double the post-financial crisis average of around 10%.

We believe the higher and higher prices at which central banks have been purchasing gold, especially over the last six months, has the potential to create a floor under the gold price, or a dynamic akin to a ‘central bank put’.

Gold ETFs

You will recall that Gold ETFs are the key swing factor in the gold market on the basis that they are cyclical and can contribute materially to both demand and supply (depending on whether they are in an accumulation or liquidation cycle).

The surge in demand from gold bullion-backed ETFs is continuing. April saw net inflows of 115.0 tonnes, exceeding February’s multi-year high level (the strongest month since Russia invaded Ukraine). Noteworthy, was the fact the spike in flows was driven by ETFs in Asia which recorded their largest ever month for inflows by an order of magnitude. At 69.3 tonnes, it was roughly 3 times greater than previous spikes.

At April’s level of demand, we estimate ETFs accounted for nearly 30% of total demand for the month, which is comparable to other periods of elevated demand from financial markets (such as the beginning of the COVID-19 pandemic in 2020 – during 2020, ETFs averaged 20% of total gold demand for the entire year and peaked at 42% during the second quarter of that year).

We observe that gold bullion ETFs remain in an established accumulation cycle which we expect to be a material tailwind over the next 1-2 years on our base case.

We believe gold demand from ETFs is a potential catalyst for the gold price to be driven considerably higher than present levels. We reflect on the immaterial penetration of gold as an asset class in exchange-traded investment markets: the market capitalisation of all the gold bullion contained in ETFs globally is less than US$400 billion (or little more than one-tenth of the Nvidia market capitalisation).

ETF holdings are also immaterial volumetrically, accounting for less than 2% of all above-ground gold in existence in its various forms. We see considerable potential for the demand for gold from exchange-traded investment markets to increase substantially.

We reflect that gold bullion is the only major commodity or asset class which has never been materially impacted by the US consumer (it was actually illegal to own gold in the US between 1934 and 1974) and we see considerable scope for this to change, especially in the present environment.

Outlook for the gold price

The price of gold bullion finished April at US$3,289 per ounce (+5.3%) continuing its established uptrend with considerable momentum.

At the end of February, we forecast that should the current level of gold demand from ETFs be sustained (or accelerate), coincident with central banks continuing to buy at historically significant volumes, we would expect to see a powerful upward move in the gold price over a relatively short timeframe (i.e. US$400-500 per ounce over three to six months), all else being equal.

While this played out as we had predicted, we believe that Liberation Day will have significant long-term consequences, lighting the fuse on a much larger move for the gold price. We now see material upside to the gold bullion price relative to recent all-time highs (intraday US$3,500 per ounce). We have elaborated on this in a paper which we will publish in the near future.

While gold is trading near to all-time-high prices (in both nominal and real terms), our analysis of the gold mining industry and the supply cost curve indicates that incremental increases in demand will drive the gold price materially higher (the equilibrium price is being driven up the steep tail of the cost curve). Gold mining has experienced under-investment for more than a decade (since the end of the last cycle in 2011). This period of neglect means the industry will be less able to respond quickly to the present demand shock. We anticipate the cost curve will steepen, as some producers pursue a ‘volume’ over ‘value’ strategy (this is a characteristic cyclical reaction) which is fundamentally supportive of a higher gold price.

Gold mining equities

The stronger gold price and its positive impact the profitability of gold miners resulted in gold mining equities (+6.9%) posting strong gains and outperforming gold bullion (+5.3%). This relative performance is the result of a gold miner’s profit margin which typically expands (and contracts) by roughly double the movement in the gold price.

Within gold equities, mid-caps (both senior and emerging) were the best performers while gold miners exposed to critical by-products (such as silver and copper) underperformed given the less defensive nature of more cyclical metals.

Outlook for gold mining equities

You will recall that the key variable driving the performance of gold mining equities is each company’s operating profit margin, which typically expands (and contracts) by roughly double the movement in the gold price. Gold miners are therefore described as ‘leveraged’ to the gold price.

We anticipate gold miners will continue to appreciate in value, reflecting the expansion of their profit margin as the gold price appreciates (refer above for our outlook for the gold price).

It is noteworthy that in recent years, gold mining stocks have not been exhibiting this characteristic relationship to the gold price. For example, during 2024, the gold price strengthened by 26.7%, whereas the index of gold mining stocks only appreciated by 9.2%. Going further back to the peak of the last gold cycle in August 2011, the gold bullion price has appreciated 73.3% while the gold miners index has actually declined 22.0%. At that time, we estimate that the top-5 gold producers by market capitalisation were trading on 29 times one-year forward price-to-free cashflow whereas today the same cohort is trading on less than 10 times.

The recent strengthening of the gold price (and therefore expansion of gold mining profit margins) has not been reflected in stock prices. This has contributed to valuations on gold mining stocks sitting at what we believe is a 25-year low (in terms of their discount to gold bullion, based on the spread between the spot gold price and the gold price implied by the market price of the equities). Further, we observe that gold equities have rarely been cheaper than the present time over the last 40 years.

We believe one of the factors contributing to dislocation is the apparent divergent forecasts for the gold price between gold bullion traders and gold mining equities analysts which we have examined in a separate report.

We see this disconnect as temporary and a significant opportunity which markets are only just beginning to recognise. We believe a normalisation (a mean reversion of valuation multiples on gold miners back to long term norms) is inevitable driven by the bull market in gold bullion, mergers and acquisitions chasing gold mining equities’ strong fundamentals and compelling valuations and equity investors looking for defensive assets with the increased risk of recession. We have also observed numerous funds being raised which are specifically targeting gold miners which indicates active flows will be increasingly directed to this opportunity. History suggests that the normalisation of such a dislocation is likely to be rapid (as opposed to gradual).