Market update (T8 Gold) – December 2023

Insights — January 2024

We share our latest observations on global asset markets regarding T8 Gold

Gold bullion’s positive momentum slowed in December (+1.3%) after rallying by +10% in the previous two months. In the last quarter of 2023, the price of gold bullion moved between a trough of US$1,820 per ounce (in early October) to a peak of US$2,077 per ounce (in late December), its largest range for the year.

Gold finished 2023 just below its peak at US$2,063 per ounce, generating an annual return of 13.1%. Notably, gold miners lagged bullion in 2023, posting a return of +8.8%. This is unusual (because commodity producers typically exhibit leverage to their underlying commodity, related to their operating margin and ore reserves), however it is the continuation of a longer-term characteristic which has created an extraordinary dislocation between the valuation of gold mining equities and the gold price. Since the peak of the last gold cycle in 2011, the gold bullion price has appreciated by 8.6% while the Gold Miners Index has declined by 53.5%. While there are various potential explanations, we see no reason why this should persist in the long term, creating an extremely attractive entry point into gold mining equities. This view is shared by investment bank BMO, which recently reported that gold mining stock valuations are at 25-year lows (based on the spread between the spot gold price and the gold price implied by the market price of the equities).

While the rally in gold started due to heightened geopolitical risks (the conflict between Israel and Hamas), it was sustained through November and December because of investors positioning for possible interest rate cuts in 2024 (a ‘Fed pivot’) which saw yields on 10-year US Treasury bonds fall by another 45 basis points in December and the US dollar retreat by 2.1% following on from its 3.0% pullback in November. Falling US Treasury yields, and a weakening US dollar are fundamental tailwinds for the gold price.

A ‘pivot’ from the US Federal Reserve would be a catalyst to see these macroeconomic tailwinds for gold be sustained and possibly intensify. It is worth remembering history in relation to Fed pivots (when the Fed signals a reversal of its existing monetary policy stance, e.g. from contractionary to expansionary). The ‘Fed pivot’ at the present time, will be when rate cuts finally materialise. Fed pivots (both expansionary and contractionary) over the last 20 years have resulted in significant downward movements in real yields as well as significant appreciation in the value of gold bullion and gold mining equities, for example:

  • May 2000 to January 2008: gold bullion +234%, Gold Miners Index +508%
  • January 2016 to August 2016: gold bullion +24%, Gold Miners Index +148%
  • March 2020 to July 2020: gold bullion +30%, Gold Miners Index +110%

Silver (which has the characteristics of both an industrial metal and a precious metal), fell by 5.8% in December after outperforming gold the previous month (silver rallied +10.6% in November). Gold outperformed silver by 13.8% in 2023, its largest annual outperformance since 2014. The price of silver finished the year at US$ 23.80 per ounce. The price of copper increased by another +0.9% in December, following on from its 4.5% rally the previous month. Despite the headwinds (concern about a global recession and a weak China recovery), copper finished the year at US$ 8,464 per mt (+1.2% over the year).