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 (+1.8%) continued its upward move during May, driven by its two key macroeconomic drivers (the yield on long-dated US Treasury notes in real terms and the US dollar). The US dollar weakened (the trade weighted US dollar index -1.5%) 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 18 basis points, driving the implied real yield 12 basis points lower) while key economic data (and expectations in relation to rate cuts) tracked sideways. The US Federal Reserve’s preferred measure of inflation, the personal consumption expenditures (PCE) price index was unchanged at 2.7% in April, relative to its stated target of 2%. Core PCE (a measure of underlying inflation) came in at 2.8%, also unchanged on its March level. While this headline doesn’t demonstrate any progress in the battle against inflation, we believe the key point is that we are much nearer the end of the interest rate cycle than the beginning (supported by inflation’s level in absolute terms and the fact that its trajectory continues to trend lower overall). Further, we reflect that expectations in relation to the trajectory of inflation (and therefore the trajectory of interest rates) have been pushed out based on an assumption that the economic data will be linear and predictable when this is unlikely to be the case.

Notwithstanding the macroeconomic factors experienced during the month which would typically result in financial market participants in the gold market moving to accumulate bullion, exchange traded funds (ETFs) continued to liquidate holdings during May (according to the data released up to 24 May). Holdings fell 7 tonnes during the period relative to an average of 31 tonnes per month over the last two years as interest rates have been rising, which may indicate the cycle is maturing.

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. They typically account for 5-10% of demand or supply between these cycles, however history has often seen individual quarters where ETFs 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. Gold ETFs remain in a liquidation cycle which has been underway since the fourth quarter of 2020, averaging 5% of supply. The last accumulation cycle ran for nearly 5 years up to the third quarter of 2020, averaging 10% of demand. We believe the present liquidation cycle is nearing its end (driven by the interest rate cycle in the US) and that the inevitable pivot back to accumulation will be a powerful upward catalyst for the gold price.

The price of gold bullion finished May at US$2,327 per ounce (+1.8%) and silver at US$30 per ounce (+15.6%). Both clearly remain in an 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 well off 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 minded 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 (+5.8%) and silver equities (+12.6%) followed their respective bullion prices higher. In gold’s case, gold mining equities are displaying their characteristic leverage (beta) to the gold price whereby commodity producers typically provide a beta of 2 to the commodity that they produce (i.e. if the commodity price moves by one unit, the equity price would be expected to move by two units on the basis that the operating margin expands by more than the movement in the commodity price). While this wasn’t the case for silver mining equities during the month, there is no reason to doubt this structural characteristic in the longer term. 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 over the last 40 years (than the present time).