We share our latest observations on gold markets

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

Key points

• NO17 Gold posted a positive return in May, outperforming both gold bullion and the broader universe of gold miners for the month. Please refer to the monthly report for detail specific to the performance of the fund.
• Gold has corrected approximately 20% from its January all-time high of US$5,589 per ounce, to be +5.1% year-to-date as of the end of May. The universe of gold miners has fallen further and is +4.5% year-to-date. We attribute the correction to liquidity, technical and systematic-flow factors, rather than a deterioration to fundamentals.
• Gold’s correlation (r²) to the S&P 500 spiked to 0.79 during May, relative to its 20-year average of approximately 0.05. We also consider this a temporary anomaly rather than a breakdown in gold’s diversification properties.
• Gold markets are consolidating in what we believe will prove to be a much longer uptrend. This creates an entry point for investors looking to gain exposure (or to add to their positions).
• What about the fundamentals? Despite some describing central bank demand as moderating, net purchases for the latest month reported was in line with the 12-month average (despite gold sales by countries including Turkey and Russia, due to economic pressures magnified by the Iran-related energy crisis) and remains a key structural demand driver driven by reserve diversification away from US Treasuries.
• While it hasn’t received any attention in the gold market or the mainstream media, we believe it is plausible that commercial banks (which are estimated to hold in the order of US$3-5 trillion of US Treasuries, a similar amount to central banks) have been purchasing gold in significant quantities for their regulated reserves under Basel III, also driven by reserve diversification away from US Treasuries. This only recently became feasible following the framework’s explicit upgrade of gold bullion to ‘Tier 1 High-Quality Liquid Asset’ status in July 2025.
• While May saw net outflows from gold bullion ETFs, we attribute this to the above mentioned short-term factors as well as US dollar strength, higher real yields on US Treasuries and greater appetite for higher-risk assets such as semiconductor stocks. There is no change to our view that ETFs remain in an accumulation cycle which we expect to be a material tailwind over the next 1-2 years at least.
• The fundamentals of the gold mining sector are compelling (i.e. EBITDA margins comparable to or better than Nvidia, un-levered balance sheets, and trading on 10x 1-year forward P/FCF which is a material discount to fair value and historic norms).

Market update

Summary

The gold market continued a phase of healthy consolidation.

The most notable observation is gold’s uncharacteristic recent correlation with risk assets. Since the beginning of the conflict, gold bullion has exhibited a correlation (r²) of greater than 0.5 to the S&P 500. During May, the correlation was as high as 0.79. This is at juxtaposition to its correlation over the long-term which has averaged approximately 0.05 over the last 10-20 years.

This behaviour and gold’s recent weakness at a time of heightened geopolitical uncertainty (which is perceived to be good for gold) has naturally caused some to question gold’s fundamentals.

Our view is that this has been driven by liquidity, technical factors and systematic flows, rather than fundamentals (we articulated this in a letter to our investors during March) and that these factors will normalise following a period of consolidation.

We remain firmly of the view that the structural bull case for gold is intact and that gold miners offer extraordinary reward vs risk.

Gold market fundamentals

Central banks

Central banks accounted for 19 tonnes of net purchases during the month of April (the latest data available) broadly in line with the c.20-tonnes-per-month 12-month average.

You will recall that central banks have been an important driver of gold demand and have accounted for over 20% of total demand since the second quarter of 2022 when Russia invaded Ukraine (and Russia’s foreign currency reserves were frozen) which is more than double the post-financial crisis average of approximately 10%.

What is driving central bank demand for gold?

We remain of the view that elevated gold demand from central banks is a secular trend (a robust, longer-term trend). We also see genuine potential for this level of demand to increase materially, driven by an acceleration to the established trend within central banks of reserve diversification (reducing exposure to US Treasuries and the US dollar). There has been a clear and measurable decline in the share of US Treasuries held by central banks since early 2024 which stands in contrast to the post-financial crisis decade (during which foreign official holdings of US Treasuries steadily increased). We believe that President Trump’s unpredictable policies are likely to accelerate this trend, rather than decrease or reverse it.

Further, we believe the higher and higher prices at which central banks have been purchasing gold, especially over the last 18-months, has the potential to create a floor under the gold price, or a dynamic akin to a ‘central bank put’.

How material is central bank demand for gold?

Central banks (other than the US Federal Reserve) hold approximately US$4 trillion of US Treasuries. Substituting just 1% of these holdings for gold over a 12-month period would roughly double the rate of total gold demand growth (we estimate that it would increase total global gold demand by approximately 0.8% relative to gold demand which grew at 0.4% year-over-year in 2024 and 0.8% in 2025). You will recall that gold demand grows very slowly (demand growth has averaged 1% per annum over the last 10-15 years), so even substituting a relatively small amount of US Treasuries for gold would stand to have a significant impact on the price of gold.

What if central banks substitute US Treasuries for gold more rapidly?

The amount of gold required to substitute 10% of non-US central bank holdings of US Treasuries is equivalent to two-thirds of the gold presently held in gold bullion ETFs globally (approximately 4,000 tonnes valued at nearly US$600 billion) or equivalent to approximately 60% of total annual demand.

What is driving aversion to US Treasuries?

It is no longer certain that US Treasuries are the lowest-risk, highly liquid asset class. The unprecedented amount of debt at federal level (over US$39 trillion) in the US combined with eye watering federal government budget deficits (the 2026 budget deficit is projected at US$1.9 trillion) are undermining confidence in US Treasuries and the US dollar.

The low confidence in US Treasuries (and absence of safe haven characteristics) was evident during the recent ‘Liberation Day’ market stress when 10-year US Treasury yields spiked sharply by 64 basis points within just two days, marking one of the largest two-day increases on record.

Commercial banks

While it hasn’t received any attention in the gold market or the mainstream media, we believe it is plausible that commercial banks have been purchasing gold in material quantities as part of their regulatory reserves under Basel III, in response to the rising risk profile of US Treasuries (which account for the largest share of commercial bank reserves).

This only recently became feasible following the framework’s explicit upgrade of gold bullion (in ‘allocated’ physical form) to ‘Tier 1 High-Quality Liquid Asset’ status in July 2025, which allows banks to count it at 100% market value toward core capital and liquidity requirements (prior to July 2025, physical gold bullion held by banks under Basel III was generally classified as a Tier 3 asset and was valued at only 50% of its market value for reserves or liquidity requirements).

Estimates of the value of US Treasuries held by commercial banks globally varies, however the consensus is in the order of US$3-5 trillion. The impact on gold demand under a scenario whereby commercial banks diversify their reserves, by reducing their holdings of US Treasuries, would be similar to our estimates for central banks (refer above).

Gold-backed ETFs

You will recall that gold bullion ETFs are the most dynamic variable in the gold market on the basis that their behaviour is cyclical and can contribute materially to both demand and supply (depending on whether they are in an accumulation or liquidation cycle). The key driver of these cycles are real yields (therefore the US interest rate cycle and inflation expectations) and the US dollar (on the basis that gold is priced in US dollars, so the gold price typically moves inversely to the dollar’s value).

May saw net outflows from gold bullion ETFs of 16.2 tonnes. We attribute this to a combination of short-term factors (US dollar strength, higher real yields on US Treasuries, and greater appetite for higher-risk assets such as semiconductor stocks) and there is no change to our view that ETFs remain in an accumulation cycle which we expect to be a material tailwind over the next 1-2 years at least.

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 on approximately US$600 billion (less than 15% of Nvidia’s market capitalisation).

While total ETF gold holdings have volumetrically surpassed the highs achieved during the COVID-19 pandemic (4,121 tonnes relative to 3,929 tonnes in November 2020), this volume is immaterial in the context of the total physical gold market, 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 sought after by the US consumer (the world’s most influential demographic). In fact, it was actually illegal to own gold in the US between 1934 and 1974. Bank of America and Goldman Sachs estimate that on average US investors have only a negligible exposure to gold. We see considerable scope for investors globally to materially increase their allocation to gold in the present environment.

Gold bullion

The gold price fell 1.7% in May, consolidating following its drawn-down in March (gold’s largest monthly decline since June 2013).

Since its all-time high in late January of US$5,589 per ounce, as of the end of May, gold had sold off to US$4,540 per ounce, a decline of almost 20% and gold miners were hit even harder with the universe falling over 20%. This has naturally caused some to question gold’s fundamentals.

Our view is that this has been driven by liquidity, technical factors and systematic flows, rather than fundamentals, which we articulated in a letter to our investors during March) which will normalise following a period of consolidation.

We remain firmly of the view that the structural bull case for gold is intact.

Gold’s recent experience has been no different to equally unexpected episodes in 2008 and 2020 when gold demonstrated its sensitivity to a market liquidity squeeze. Gold’s fundamentals ultimately prevailed and the gold price rallied by 167% and 40% respectively following the lows in those episodes.

Technical observations

Momentum, as measured by the 14-day relative strength indicator (RSI) ended the month on the oversold side of neutral (a reading of 46), more or less the level where it spent the entire month. The key resistance level we’re monitoring on the downside is US$4,400 per ounce (corresponding with the 200-day moving average) and should that be broken, US$4,000 per ounce (a key round-number resistance level).

Gold futures

Net speculative positioning in gold (non-commercial positions) ended April lower month-over-month. Non-commercial speculative positioning has fallen to a level not seen since the early part of 2024 which provides considerable scope for the level of speculative positioning to be a supportive factor for the gold price going forward.

Outlook for the gold price

Looking forward, gold’s fundamentals remain strong, driven by tight supply and its key structural demand driver which underpins our outlook for gold to remain in a multi-year uptrend: Global reserve asset diversification – the continued diversification away from US financial assets as the primary reserve asset appears inevitable. Gold is one of the main beneficiaries of this established trend and we see considerable potential for acceleration.

Looking at the big picture, it is critical to appreciate that we haven’t seen a demand environment quite like this ever before – the last major uptrend from 2001-2011 was driven by ETFs accumulating gold for the first time combined with gold miners closing out hedge books (miners had sold their future production in the 1990s and they bought it back in the 2000s), while central banks were actually selling gold. Today’s strong demand, combined with a tight supply side (gold mining accounts for approximately three-quarters of total gold supply) creates a strong fundamental basis for higher gold prices. On our base case demand scenario, we assume the period of supply rebalancing will last 5-6-years and drive the gold price considerably higher than present levels.

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 demand shocks. 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 both reducing supply and steepening the cost curve.

Gold mining equities

Gold miners (GDM Index +0.7%) consolidated in line with gold bullion.

The fundamentals of most gold miners is very strong (i.e. EBITDA margins comparable or better than Nvidia, un-levered balance sheets, trading on valuation multiples below fair value and historic norms while providing leverage to higher gold prices).

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 expect gold miners to outperform gold bullion and global equities, 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.

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, since the peak of the last gold cycle in August 2011, the gold bullion price has appreciated 139.3% while the gold miners index has only risen 38.3%. In 2011, we estimate that the top-5 gold producers by market capitalisation were trading on 29 times one-year forward price-to-free cashflow (relative to fair value at approximately 20-22 times) whereas the same cohort is trading on approximately 10 times one-year forward price-to-free cashflow presently.

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.

We believe one of the factors contributing to the 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. When it comes to forecasting the gold price, we encourage investors to consider the forecasts from the banks which actually trade gold bullion (and are therefore qualified to opine on it). This cohort of banks are upgrading forecasts to levels much higher than the current spot price on a 12-month view.

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 and equity investors seeking gold mining equities’ strong fundamentals and compelling valuations.