Monthly report (T8 Gold) – October 2024

Monthly fund update

Key points

• We forecast the gold price will continue strengthening over the medium-term, driven by investors shifting from a cycle of liquidating to accumulating gold bullion in exchange traded funds (ETFs).
• The accumulation cycle in ETFs (driven by the interest rates cycle, real yields and the US dollar) is occurring coincident with central banks buying gold at the most elevated rates in decades – creating a squeeze in the gold bullion market.
• We also see the potential for recent central bank buying behaviour to create a floor under the gold price (a dynamic akin to a ‘central bank put’).
• The gold price is up 33% year-to-date (as of 31 October 2024) and trading near to all-time-high prices (in nominal terms). Some don’t anticipate further upside. Valuing gold in nominal terms overlooks structural inflation to the cost of gold production over time. Adjusting for these structural inflation factors, we estimate the all-time-high gold price at closer to US$3500/oz.
• Against this positive backdrop for the gold market, gold mining stocks have not been exhibiting their typical commodity-producer leverage to the gold price (whereby if the gold price moves by one unit, the gold mining stock price would be expected to move by two units on the basis that its profit margin expands by roughly double the movement in the commodity price). Attributable to this, gold mining stocks are trading at what we estimate is a 25-year low, in terms of valuation. We expect this to prove a temporary phenomenon which creates an asymmetric investment opportunity (more upside than downside) as well as giving gold mining stocks greater than normal leverage to a strengthening gold price (based on what we believe is a high likelihood that they revert to long-term valuation levels relative to gold bullion).