Can we still be optimistic about gold?

In our previous blog in August, we mentioned expectations of rate cuts in the US and their impact on gold prices via the inverse relationship between the metal and the US dollar. The first cut materialised on 18 September, with the dollar retreating by -3.36% from the end of July until the date of the cut, and gold moving in the opposite direction, as expected, with a gain of +4.55% in the same period.

Since then, the US dollar has recovered, but gold kept rallying, reaching all-time highs, supported by persisting geopolitical risks especially in the Middle East and continued political uncertainty in the US.

In previous cycles, gold has frequently provided positive performance after the first rate cut, often outperforming US large caps and delivering performance, especially over a longer holding period.

Future curves have been pointing to higher gold prices, and markets are pricing in an average price of $2,806/oz for 2025, from a current spot price of $2,748 for gold. Indeed, further rate cuts are expected in the US – where at least one more cut by the end of the year is priced in – as well as other developed economies, from which investors could be adding exposure to the precious metal.

Central banks strategies on gold and geopolitical influence

This time around gold has not only been supported by the expectation of lower rates, but also buying from China and other central banks, where it has been considered a safe haven in a challenged economic context.

Globally, central banks have kept buying gold and in 2023 they added over 1,000 tonnes of the metal – the second-highest annual purchase in history.

While no one can predict how much more gold they will continue to add to their reserves, the World Gold Council is optimistic that central banks should continue with their accumulation plans. This may apply especially to those in emerging markets to protect from inflation, currency fluctuations and economic crises.

Additional concerns around US debt and debt sustainability, particularly with a potential Trump administration, and geopolitical shocks including tariffs, could reinforce the rationale for building up reserves.

The inverse relationship between volatility and geopolitical risk is well known and there is no sign, especially ahead of the US election, of such risks diminishing any time soon.

Obtaining exposure to gold leveraging gold miners

With the current situation in mind, gold miners can provide an opportunity to get beta exposure to gold. Miners are strongly correlated with gold (>80% monthly correlation in the past 10 years) and offer a beta play on gold, so investors can benefit during periods of rising prices.

So far in 2024, gold miners have exhibited strong operational performance, which could be further boosted if inflation slows. These companies tend to have strong balance sheets and free cash flows that they have consolidated with high gold prices.

From a gold mining perspective, we believe earnings are expected to turn positive for those companies that reported negative earnings in the latest cycle, and revenues are expected to expand. The end of October and the start of November will be a cornerstone moment with a wave of companies reporting on the last quarter.

Overall, forecasted sales growth for next year is +12.0% and forecasted EPS growth is +17.9%.

As well as obviously adding diversification to a very concentrated broad equity exposure characterised by tech inflated multiples, gold miners are generally profitable companies that today are displaying valuations in line with broad miners and cheaper than history*.

Of course, there are also risks on downside. Purchases from China and other central banks buying may slow, rate cuts by the Fed may end up being slower than anticipated and high gold prices could actually deter more buying.

That said, we believe gold remains a meaningful hedge at times such as this when inflation is still high, geopolitical risks remain and potentially a weaker dollar/real yields emerge on the horizon.

 

*It should be noted that diversification is no guarantee against a loss in a declining market.

 
[1] Source: Bloomberg, Gold Current Forward Prices 2025, Gold Spot, as of 25 October 2024