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.

Gold bullion (+5.2%) strengthened materially during July, driven by its two key macroeconomic drivers (the yield on long-dated US Treasury notes in real terms and the US dollar) shifting favourably. The US dollar weakened (the trade weighted US dollar index -1.7%) and Treasury yields in real terms (the nominal yield minus expected inflation) moved lower (the nominal yield on 10-year US Treasury notes fell by 37 basis points, driving the implied real yield 23 basis points lower).

Key economic data was interpreted as increasing the likelihood of interest rate cuts before the end of the year (inflation decreased and unemployment increased). The impact was especially apparent at the front end of the curve (yields on 2-year US Treasuries contracted 50 basis points to 4.26%), indicating that the expectations for interest rate cuts is increasing. At the end of July, markets were pricing in an interest rate cut of 25 basis points by the end of 2024.

With US interest rate cuts coming into focus, financial market participants in the gold market have continued the shift to accumulate bullion. During July, exchange traded funds (ETFs) added to their gold holdings for the third consecutive month, posting the strongest monthly inflow since March 2022.

You will recall that Gold ETFs are the key swing factor in the gold market on the basis that they can contribute to both demand and supply, depending on whether ETFs are accumulating or liquidating. While ETFs typically account for 5-10% of demand or supply within these cycles, history has often seen individual quarters where they have accounted for 20% and in extreme cases as much as 40% of demand or supply. The cycles are driven by gold’s two key macroeconomic drivers, described above. We believe gold ETFs have entered a new accumulation cycle, which stands to be a powerful upward catalyst for the gold price. The last accumulation cycle ran for nearly 5 years up to the third quarter of 2020, averaging 10% of demand.

The price of gold bullion finished July at US$2,384 per ounce (+5.2%) and silver at US$28 per ounce (-0.5%). Both metals appear to remain in an established uptrend. Silver, often considered gold’s poorest cousin, is attracting considerable attention driven by a combination of industrial demand from the solar industry (the photovoltaic solar industry accounts for 15-20% of total demand, growing at approximately 20% per annum) and as a precious metal similar to gold bullion (silver and gold have had a nearly 0.9 correlation over the last 10 years) for investment purposes.

While the current gold price is trading near to recently achieved new all-time highs in nominal terms (US$2,469 per ounce on 16 July), it remains below its all-time high in real terms (US$2,533 per ounce in January 1980). More significantly, silver is trading nowhere near its all-time highs in either nominal terms (nearly US$50 per ounce in 1980 and 2011) or real terms (nearly $150 per ounce in January 1980). We note that economists attempt to adjust for structural inflation factors (inflation not captured in government inflation data and inflation related to the cost of producing gold or silver specifically, which increases structurally over time as grades mined fall and mines get deeper). Adjusting for these factors, we estimate the all-time high gold price in 2023 dollars (real terms) would be approximately US$3,500 per ounce and silver US$200 per ounce.

Gold equities (+10.9%) strengthened, in line with their typical beta of 2 to the gold bullion price. In terms of valuations, the index of gold mining stocks remains at valuations that we believe is a roughly 25-year low in terms of 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). More so, we observe that gold equities have rarely been cheaper than the present time over the last 40 years.