Market update (T8 Gold) – December 2024
Insights — January 2025
We share our latest observations on global asset markets in relation to T8 Gold
All movements are expressed in United States (US) dollar terms, unless otherwise stated.
Key points
- A shift in monetary policy expectations (slower pace of rate cuts) resulted in a sharp increase in bond yields, which saw gold remain under pressure.
- A broad-based selloff in global equities combined with the weaker gold price resulted in gold miners pulling back for the second consecutive month.
- Gold mining stocks remain extremely attractive with valuations at what we believe is at 25-year lows. We see the dislocation as a significant opportunity which markets haven’t yet recognised.
- Inflows to gold bullion-backed ETFs resumed in December, with last month marking their first month of net outflows since April 2024.
- The trend of elevated central bank gold buying is continuing with China reporting gold purchases for the second consecutive month in December. China was the largest purchaser of gold among central banks during the first quarter of this year (until it announced a pause to purchasing in April) and was the top buyer in 2023.
- We believe the higher and higher prices at which central banks have been purchasing gold, has the potential to create a floor under the gold price, or a dynamic akin to a ‘central bank put’.
Market update
A shift in monetary policy expectations (slower pace of rate cuts) resulted in a sharp increase in bond yields which saw gold remain under pressure. A broad-based selloff in global equities combined with the weaker gold price resulted in gold miners pulling back for the second consecutive month.
Macroeconomic data
While the US Federal Reserve cut interest rates at its December meeting (a cut of 25-basis points taking the target rate to 4.50-4.75%), this was overshadowed by comments regarding the outlook for interest rates which indicated fewer rate cuts than previously expected in the near term. The Fed ‘dot plot’ now projects two interest rate cuts in 2025, down from the four it had forecast in September, with Chair Jerome Powell stating that the Fed can now “exercise more caution” when considering further adjustments to the policy rate.
The key factors behind this position are sticky inflation, low unemployment and the strong economy. Inflation and unemployment data reported during the month was more or less on trend and in line with consensus expectations with the Core Personal Consumption Expenditures Price Index (Core PCE) steady at 2.8%, unemployment slightly higher at 4.2%. US gross domestic product (GDP) came in stronger than expected at 3.1% quarter-over-quarter annualised relative to consensus at the prior reading at 2.8%, indicting the US economy remains strong.
Real yields (US Treasury yields in real terms or the nominal yield minus expected inflation) ended the month sharply higher (the nominal yield on 10-year US Treasury notes rose by 40 basis points, driving the implied real yield 33 basis points higher to 2.24%).
Gold bullion market
Gold ETFs
Gold bullion-backed ETFs resumed buying in December, recording net inflows of 3.6 tonnes. During November they experienced their first month of net outflows since April 2024.
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.
Central banks
Central banks have accounted for approximately 20% of gold demand based on data reported so far for 2024 (more than double the post-financial crisis average of around 10%).
This trend appears likely to continue with China reporting gold purchases (10 tonnes) for the second consecutive month in December. China was the largest purchaser of gold among central banks during the first quarter of this year and was the top buyer in 2023. November had marked the central bank’s first purchase since April. We believe China’s resumption of gold buying is a very strong signal especially with the gold price near to all-time highs.
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 elevated central bank purchases will continue for the foreseeable future.
Outlook for the gold price
The price of gold bullion finished December at US$2,625 per ounce (-0.7%) and silver at US$29 per ounce (-5.6%). Both metals remain in established longer-term uptrends despite the recent dip.
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 1960’s. Our base case forecast is for the gold bullion price to strengthen by 25% on a 12-month view.
Gold mining equities
The broad-based selloff in global equities combined with the weaker gold price resulted in Gold mining equities (-8.6%) pulling back for the second consecutive month.
Valuations on gold mining stocks are 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).