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 generated a positive return and outperformed gold bullion during May. Please refer to the monthly report for detail specific to the performance of the fund.
• The gold market consolidated following its significant move in the prior month in response to April’s Liberation Day shock.
• 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 expectation. 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 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 consolidated during May following its recent strong performance and as equity markets continued an extraordinary V-shaped recovery from April’s Liberation Day shock. Improved risk appetite was driven by tariff de-escalation (especially between the US and China), solid economic data, neutral monetary policy and robust corporate earnings.

We reflect that this increase in risk appetite is ignoring elevated US debt levels; the unsustainably high budget deficit; President Trump’s tax bill (which may exacerbate these issues, at least in the short term); uncertainty in relation to the impacts of tariffs (especially on inflation); and heightened fears of a recession. These uncertainties are unlikely to be resolved in the short term and are therefore likely to motivate investors to seek safe haven asset classes (such as gold).

We expect the uptrend in gold bullion to continue in the medium-to-longer term and for gold miners to outperform, driven by their profit margins expanding by more than the movement of the gold price. We also expect valuation multiples on gold miners to expand as they normalise from cyclically depressed levels.

Macroeconomic data

Economic data (especially inflation, unemployment and indicators of economic activity) will be the key catalysts for asset markets over the next 2-3 months (in the absence of left field shocks which seem more likely than usual under President Trump).

The outlook for fewer interest rate cuts this year reflects elevated inflation and low unemployment

Interest rate expectations continue to oscillate. The market is presently pricing in two interest rate cuts during 2025 (relative to the 4 interest rate cuts that were predicted last month), with the first cut not priced-in until October. This reflects the elevated inflation and low unemployment data. We reflect that these factors can change rapidly and therefore so too can interest rate expectations.

The Core Personal Consumption expenditures Price Index (Core PCE) contracted to 2.5% in line with expectations (from 2.7% in the prior month). The assumption that tariffs will be inflationary makes the present 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 solid with the economy adding 177 thousand jobs during April, considerably more than the 138 thousand expected (you will recall that 100 to 150 thousand is considered to have a more or less neutral impact on unemployment). This is an indication that the US economy remains strong and tariffs did not have an immediately identifiable impact on unemployment during April (it is arguably too soon). The unemployment rate was steady at 4.2%. Once again, the impact tariffs may have on the labour market is a critical issue to monitor.

The key question is how tariffs will impact the US economy

While consumer confidence rebounded spectacularly in May to 98.0 from 86.0 in April (you will recall that consumer spending accounts for nearly 70% of US economic activity and month over month changes of more than 5 points are considered significant), the level in absolute terms remains weak in the context that readings of less than 100 indicate a more pessimistic than normal outlook.

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 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 in the short term.

Market impacts

The whole yield curve shifted upwards during May with the yield on 10-year US Treasuries ending the month 24 basis points higher at 4.40%.

Bonds suffered with the increased risk appetite. Once again, we believe the performance of the Global Aggregate Bond Index (-0.4%) relative to an index of US Treasury notes with similar duration (7-10 year US Treasuries -1.6%) is a warning sign that not all is well in the US Treasury market. This is especially apparent at the long end of the curve (20+ year US Treasuries -3.6%).

The US dollar finished the month flat, failing to rebound following its sudden drop during April (US Dollar Index -0.1% to 99).

The key issues appear to be concerns over US debt levels; the unsustainably high budget deficit; President Trump’s tax bill (which may exacerbate these issues, at least in the short term); uncertainty in relation to the impacts of tariffs (especially on inflation); and heightened fears of a recession. We reflect that these uncertainties are unlikely to be resolved in the short term and are therefore likely to motivate investors to seek safe haven asset classes such as gold.

Commodities were mixed with crude oil (+1.2%) rebounding only modestly following its 15.5% drop in April while copper (+4.7%) and silver (+1.1%) partially recovered their draw-downs from the prior month. The gold market consolidated following its significant move in the prior month in response to April’s Liberation Day shock.

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 12 tonnes of net purchases during the month of April (the latest data available), slightly below the prior month’s 17 tonnes and below the 12-month average of 28 tonnes. Once again, Poland was the largest buyer acquiring 12 tonnes.

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 central bank purchases of gold at elevated volumes is a long-term trend and it is not unexpected to see demand fluctuate from month to month (especially while the gold price is consolidating following strong performance over the last 12-months). We also see genuine potential for the level of demand from central banks to increase, driven by diversification away from US Treasuries and the US dollar.

Further, we believe the higher and higher prices at which central banks have been purchasing gold, especially over the last 12-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).

May saw net outflows from ETFs of 19.1 tonnes, which is not unusual following such a strong prior month (the strongest month since Russia invaded Ukraine and the largest ever month for inflows to Asian ETFs, roughly 3 times greater than previous peaks) and the price consolidation occurring in the gold market.

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.

Ultimately, 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 (only roughly one-tenth of Nvidia’s 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 May flat month-over-month at US$3,289 per ounce, consolidating following a period of very strong appreciation.

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).

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) and this period of neglect means the industry will be less able to respond quickly to the present demand shock. We anticipate that the mine supply of gold will tighten further in the short-to-medium term, as some producers pursue a ‘mine life over value’ strategy by lowering cut-off grades (this is a characteristic cyclical reaction) which is fundamentally supportive of a higher gold price by steepening the cost curve and reducing supply.

Gold mining equities

The bull market in gold and its positive impact on the profitability of gold miners may be coming into focus for more investors with gold mining equities (+2.8%) posting gains notwithstanding a flat gold bullion price. You will recall that a gold miner’s profit margin 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, led by companies including Oceana Gold (OGC CN +25.65) and Endeavour Mining (EDV CN +12.6%). Both benefitted from stronger than expected first quarter financial results. Gold miners exposed to critical by-products (such as silver and copper) were relatively sluggish despite the price of silver (+1.1%) and copper (+4.7%) outperforming gold (flat). The exception was Coeur Mining (CDE US +45.6%) which announced stronger than expected financial results and a share buy-back.

Outlook for gold mining equities

You will recall that the key factor 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 73.4% while the gold miners index has actually declined 23.3%. 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. We believe this is on account of the fact that it has been easy to ignore the sector for the last 10-12 years, since the peak of the last cycle and a run of disappointments. Gold miners have remained off the radar for the majority of investors on the basis that they are immaterial within global equity indices, technically complex, deeply cyclical, and have been overshadowed by miners exposed to more exciting metals such as copper, lithium, rare earths and uranium, etc. 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).