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

• Gold miners consolidated during the month with the gold bullion price near to all-time highs and following the sector’s very strong performance in January. While this was the catalyst for some profit taking in a number of stocks, at sector level, numerous dips were decisively bought, which we believe is a bullish signal.
• Gold strengthened on lower real yields, the weaker US dollar and its safe haven status against a backdrop of falling risk appetite as a result of tariffs and worries about the US economy.
• The general perception among investors who are not allocated to the sector is that they have missed the rally. This couldn’t be further from our base case.
• Gold mining stocks remain extremely attractive with valuations at what we believe are 25-year lows, during a continuing uptrend in the gold price. We see this dislocation as a significant opportunity which markets haven’t yet recognised. The launch of various new gold equity funds is a lead indicator that this is beginning to be recognised.
• We have a very positive outlook for the price of gold bullion also and there is no change to our belief that gold bullion ETFs are in an accumulation cycle at the same time as central banks are buying gold in volumes not seen since the 1960s.
• The potential for a protracted global trade war (which would be inflationary) 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 strengthened on lower real yields, the weaker US dollar, and its safe haven status against a backdrop of falling risk appetite as a result of tariffs and worries about the US economy. Gold miners consolidated during the month following their strong performance in January and with gold bullion near to all-time highs, which created the potential for profit taking. Numerous dips were decisively bought which we believe is a very positive signal for the level of underlying demand for gold and gold mining equities.

Macroeconomic data

Slowing consumer spending

Worry about the US economy stemmed from data indicating falling consumer confidence and slowing consumer spending (you will recall that consumer spending accounts for nearly 70% of US economic activity). Personal spending reversed materially, contracting 0.2% month-over-month relative to consensus for an expansion of 0.2% and the prior month’s expansion of 0.8% (revised upward from 0.7%). Consumer confidence slipped to 98.3 against a prior reading of 105.3 and expectations for a smaller contraction to 102.5. It is worth noting that readings of less than 100 indicate a more pessimistic outlook and month-over-month changes of more than 5 points are considered significant.

Forecasts for declining US GDP

The Federal Reserve Bank of Atlanta appears to be capturing this slowdown in its outlook for US gross domestic product (GDP), forecasting a decline of 1.5% quarter-over-quarter annualised for the first quarter relative to the latest estimate of 2.3% growth for the last quarter of 2024.

High inflation and low unemployment prevent immediate interest rate cuts

While slowing economic activity can often precede interest rate cuts, the inflation and employment data reported during the month complicates the picture – inflation appears to be stuck at too elevated a level and the labour market remains too strong to necessitate a cut in the immediate term.

The Consumer Price Index (CPI) at 3.0% and Core CPI (excluding food and energy) at 3.3% both came in moderately higher month-over-month and relative to forecasts. While the US Federal Reserve’s preferred measure of inflation, the Core Personal Consumption Expenditures Price Index (Core PCE), cooled to 2.6% (from the prior month’s upwardly revised 2.9%) in line with market expectations.

The labour market appears solid with unemployment 10 basis points lower month-over-month at 4.0% and the economy adding 143 thousand jobs during January (100,000 to 150,000 is considered to have a more or less neutral impact on unemployment), although this was fewer than the 175 thousand expected and fewer than the prior month’s upwardly revised 307 thousand.

The solid US labour market is the only factor standing between the US and economic stagflation (defined as the combination of high inflation, high unemployment, and stagnant or slow economic growth), which would be a headwind for risk appetite but very good for safe havens such as gold.

Markets suddenly pricing in two rate cuts in 2025, with the first in June

While the data didn’t result in an official change to the US Federal Reserve’s outlook for interest rates (while interest rates remain ‘meaningfully’ above the neutral rate, there is no urgency to cut rates based on persistent inflation and a strong labour market), it has resulted in market expectations increasing to two cuts during 2025 (instead of one) and the next interest rate cut being brought forward to June from July.

Market impacts

Real yields (US Treasury yields in real terms or the nominal yield minus expected inflation) ended the month lower (the nominal yield on 10-year US Treasury notes contracted by 33 basis points, driving the implied real yield 30 basis points lower to 1.86%).

The US dollar also weakened (US Dollar Index -0.7% to 108).

Of significance, the fallout from the DeepSeek shock in late January continued and was the first seed of doubt in what had been a prevailing belief that US mega-cap technology stocks would be perpetually dominant (US exceptionalism). We believe that the recent performance of these stocks indicates that they are losing (or have lost) their safe haven status, which is likely drive investors into other safe havens, such as gold.

Gold bullion market

Central banks

Central banks reported 18 tonnes of net purchases during January with emerging markets leading the net buying. Uzbekistan, China and Kazakhstan were the largest buyers while India also continue to accumulate gold reserves.

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’.

We believe central bank purchases of gold at elevated volumes will continue for the foreseeable future.

Gold ETFs

You will recall that Gold ETFs are the key swing factor in the gold market on the basis that they can contribute materially to both demand and supply (depending on whether they are in an accumulation or liquidation cycle). We believe that gold bullion ETFs remain in an accumulation cycle which we expect to be a materially positive driver of the gold price over a multi-year timeframe.

In the shorter term, we believe ETFs are a potential catalyst for the gold price to be squeezed considerably higher.

Gold bullion-backed ETFs experienced a demand surge during February, recording net inflows of 99.9 tonnes, more than double January’s net inflow. We estimate ETFs are likely to have accounted for approximately 24% of total demand for the month, which is comparable to other periods of elevated financial market demand (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).

Should the current level of gold demand be sustained (or accelerate), coincident with central banks continuing to buy at historically significant volumes, we would see the potential for a powerful short term upward move in the gold price (i.e. US$400-500/oz), all else being equal.

Outlook for the gold price

The price of gold bullion finished January at US$2,858 per ounce (+2.1%) and silver at US$31 per ounce (-0.5%). Both metals remain in established uptrends.

There is no change to our belief that gold bullion ETFs are in an accumulation cycle at the same time as central banks are buying gold in volumes not seen since the 1960s. Add to this the potential for a protracted global trade war (trade wars are inflationary) at a time when inflation is already elevated and proving sticky. This, combined with President Trump declaring an ‘energy emergency’, makes the backdrop sound eerily like the 1970s when an energy crisis (an oil shock following the Iranian revolution) and an inflation shock resulted in the gold price spiking by 179% in the 12 months following January 1979.

Our base case forecast is for the gold bullion price to strengthen by 25% on a 12-month view. While gold is trading near to all-time-high prices (in nominal terms), valuing gold in nominal terms overlooks structural inflation to the cost of gold production over time. Adjusting for structural inflation factors, we estimate the all-time-high gold price at closer to US$3,500/oz.

Gold mining equities

Gold mining equities (+1.9%) consolidated during the month following their strong performance in January (+14.9%) and with gold bullion near to all-time highs, which created the potential for profit taking. We observe that numerous dips were decisively bought which we believe is a very positive signal for the level of underlying demand for gold and gold mining equities.

Within gold equities, we observed some quite significant divergent stock price movements between otherwise comparable stocks, which wasn’t entirely explained by stock specific news flow. For example, within the major producers, Barrick (+8.4%) materially outperformed Newmont (+0.3%); in the senior mid-caps, Gold Fields (+6.1%) outperformed peers AngloGold Ashanti (-2.4%) and Kinross (-5.0%); and in critical by-products (predominantly silver), Pan American Silver (+2.7%) outperformed First Majestic (-5.8%).

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 49.6% while the gold miners index has actually declined 40.4%.

We believe one of the factors contributing to this 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.

The recent strengthening of the gold price and coincident expansion of profit margins has not been reflected in valuations in the gold mining sector and 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 see this dislocation as a significant opportunity which markets haven’t yet recognised. We believe a normalisation is inevitable driven by gold sector momentum becoming impossible for equity investors to ignore and mergers and acquisitions chasing gold mining equities’ strong fundamentals and compelling valuations. History suggests that the normalisation of such a dislocation is likely to be rapid (as opposed to gradual).