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

• Gold rebounded after cooler than expected inflation data triggered a reversal in bond yields.
• Markets were rattled by multiple left field factors (US Presidential executive orders, DeepSeek and tariffs) which increased the appeal of gold and gold miners as a safe haven.
• An improvement in equity risk appetite combined with the stronger gold price resulted in gold mining equities posting solid gains and outperforming gold bullion.
• Gold mining stocks remain extremely attractive with valuations at what we believe are 25-year lows. We see this dislocation as a significant opportunity which markets haven’t yet recognised.
• 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 rebounded after cooler than expected inflation data triggered a reversal in bond yields. Markets were rattled by multiple left field factors (US Presidential executive orders, DeepSeek and tariffs – which we have covered in a separate paper) which increased the appeal of gold and gold miners as a safe haven.

Macroeconomic data

Inflation and unemployment data reported during the month painted a mixed picture. While the data didn’t result in a 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 was enough to trigger a reversal in the rapid ascent of bond yields in recent months.

The data catalysing this reversal appears to have been the Producer Price Index (PPI) and Consumer Price Index (CPI). PPI (excluding food and energy) at 3.5% remains elevated but much lower than the 3.8% which had been anticipated and CPI (excluding food and energy) at 3.2% was also cooler than the 3.3% forecast.

The US Federal Reserve’s preferred measure, the Core Personal Consumption Expenditures Price Index (Core PCE), was steady at 2.8% and in line with market expectations. A stronger labour market with unemployment 10 basis points lower month-over-month at 4.1% and US gross domestic product (GDP) weaker at 2.3% quarter-over-quarter annualised relative to consensus at 2.6% and the prior reading of 3.1%, added to the complex and mixed picture which was devoid of decisive signals.

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 3 basis points, driving the implied real yield 8 basis points lower to 2.16%).

The US dollar also took a breather from its recent upward trajectory (US Dollar Index -0.1% to 108).

Gold bullion market

Central banks

Central banks accounted for approximately 21% of total gold demand in 2024, based on data reported so far. This is more than double the post-financial crisis average of around 10%.

This trend may even be gaining momentum with China reporting gold purchases (5 tonnes) for the third consecutive month in January. China was the largest purchaser of gold among central banks in 2023 and first quarter of 2024 until it sat out of the market for six months from May 2024. We believe China’s continued 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 central bank purchases of gold at elevated volumes will continue for the foreseeable future.

Gold ETFs

Gold bullion-backed ETFs continued buying in January, recording net inflows of 34.5 tonnes.

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.

Further, ETFs may also hold a catalyst for the gold price to be squeezed considerably higher over a shorter time horizon. We note that while the volume of demand in January was nearly 2 times the monthly average since the present accumulation cycle began in May 2024, it was only approximately 8% of total demand for the month and considerably less than 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 gold market experience this magnitude of demand, coincident with central banks continuing to buy at historically significant volumes, we would see the potential for a powerful short term 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$2,798 per ounce (+6.6%) and silver at US$31 per ounce (+8.3%). 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 a second 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 already 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

The improvement in equity risk appetite combined with the stronger gold price resulted in gold mining equities (+14.9%) posting solid gains and outperforming gold bullion (+6.6%). This relative performance is the result of a gold miner’s profit margin which typically expands (and contracts) by roughly double the movement in 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%.

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).