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 (0.0%) was unchanged during June, with its two key macroeconomic drivers (the yield on long-dated US Treasury notes in real terms and the US dollar) moving in opposite directions.

The US dollar strengthened (the trade weighted US dollar index +1.1%) 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 10 basis points, driving the implied real yield 8 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 unemployment rate increased to 4.0% (which is still considered low by historical standards), and the personal consumption expenditures (PCE) price index (the US Federal Reserve’s preferred measure of inflation) ticked down 10 basis points to 2.6% in May against the prior month’s reading. Core PCE (a measure of underlying inflation) also contracted to 2.6%. Inflation remains slightly elevated relative to the US Federal Reserve’s stated target of 2%.

With US interest rate cuts coming into focus, financial market participants in the gold market are beginning to accumulate bullion. During June, exchange traded funds (ETFs) added to their gold holdings for the second consecutive month (the final week of May tipped the net flow for that month positive, which was the first positive month since May 2023).

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 are entering a new accumulation cycle, which would 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 June at US$2,327 per ounce (unchanged) and silver at US$29 per ounce (-4.2%). 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$2,425 per ounce on 20 May), 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 (-3.8%) and silver equities (-9.5%) declined, driven by a combination of issues, including:

• The absence of a positive movement in the gold price, a weaker silver price, and weaker industrial metals prices (relevant for by-products);
• The typical gold equity is a value, small cap and both of these factors experienced headwinds (value -1.1% and small caps -1.1%); and
• A stronger US dollar (+1.1%) and oil price (+5.9%) which were a headwind for the typical gold miner’s cost base.

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). Further, a headline in the FT during April asserted that gold miners had rarely been cheaper than the present time over the last 40 years.