We share our latest observations on global asset markets in relation to T8 Gold

Gold bullion (+9.1%) moved sharply higher in the first week of March, driven by a weakening US dollar (the trade weighted US dollar index -1.4% intra-month by 8 March) and falling bond yields (10-year US Treasury yield -18 basis points intra-month). You will recall that these two factors are the key macroeconomic drivers of the gold market.

Both of these factors moderated during the balance of the month, following stronger than expected labour market data and slightly higher than expected inflation data. The month ended with a slightly stronger US dollar (the trade weighted US dollar index +0.3% month-over-month) offset by slightly lower bond yields (10-year US Treasury yield -5 basis points) driving real yields to fall 4 basis points (the nominal yield on a 10-year US Treasury minus expected inflation).

Notwithstanding these factors, the remainder of the month saw gold bullion continue to strengthen following March’s Federal Open Market Committee (FOMC) meeting which maintained its policy forecast of 75 basis points of rate cuts for 2024. Gold most likely also benefitted from momentum and a combination of other factors such as over-the-counter flows and central bank buying (which are typically not reported in real time and/or in entirety).

In terms of physical flows of gold bullion, central bank gold buying remained a decisive factor during March with China’s central bank reporting gold purchases for a 17th straight month. China’s gold holdings at 4.3% of its foreign reserves remains significantly below the global average of approximately 16% and highlights the potential for China to significantly increase its gold holdings. Turkey, India, Kazakhstan and some eastern European countries have also reported gold purchases this year.

We believe we have observed a structural upward shift in central bank gold buying (we have reported about this on our website). Central banks have accounted for 24% of gold demand since the Russia/Ukraine conflict began, more than double the post-financial crisis average of c.10%. This indicates a level of demand not seen since the 1960’s. This is significant because central banks tend to move in deliberate patterns over longer periods of time and are likely to be motivated by factors other than real yields and the US dollar. We believe the increase in central bank demand for gold is a secular trend.

Financial market gold investors continued to liquidate holdings from physical-backed gold ETFs during the month with aggregate holdings declining by 13.6 tonnes. Notably, March marked the tenth consecutive month of net outflows. We believe this trend (which we have written about on our website) is maturing and the likelihood of a reversal (which may ultimately be triggered by the first interest rate cut from the US Federal Reserve) is increasing. Europe was the key driver of net outflows during the month. This trend is significant because while it has had a material impact on the gold price, the FOMC continuing to signal three interest rate cuts during 2024 indicates the trend is likely to reverse in the near future, which would be a new tailwind for the gold price. Financial market investors remain under-allocated to gold (according to Bank of America, 75% of investment advisors have less than 1% exposure to gold) and we believe that if buying by financial market investors approached the level experienced between 2008 and 2011 (1,645 tonnes added to physical-backed gold ETFs), the gold price could rise 25-50% higher (all else being equal).

The price of gold bullion finished March at US$2,230 per ounce and silver at US$25 per ounce and both remain in an uptrend from a technical perspective, having hit a trough in early October 2023 (US$1,820 and US$21 per ounce, respectively). While the current gold price has achieved a new all-time high in nominal terms, it remains well off its all-time high in real terms (achieved in January 1980). We note that various economists attempt to adjust for structural inflation factors (inflation not captured in government inflation data). Adjusting for these factors would imply the all-time high gold price in 2023 dollars would be US$3,000-3,500 per ounce. Gold equities (+19.3%) and silver equities (+18.7%) followed bullion prices higher. 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).