The current landscape for gold shares reveals a critical juncture, as the market grapples with volatility and changing dynamics.
What drives the gold price is a widely debated topic. While those drivers have varied in importance throughout its rich history, the linkage to the value of the US dollar has carried through since the start of the Gold Standard Era.
Historical context of gold pricing
In the Gold Standard Era, pre-1933, the price was not market driven. It was effectively fixed, because most currencies, including the US dollar, were pegged to gold. Central banks held gold reserves and issued currency in proportion to those reserves. In the Interwar and Bretton Woods Period (1933-1971) this changed. The US revalued gold to $35/oz and effectively devalued the dollar. Under the Bretton Woods agreement, other currencies were pegged to the dollar, and the dollar was pegged to gold.
The US, however, could not maintain gold convertibility later in the period amid growing deficits. As confidence in the dollar faltered, speculation and arbitrage became rife and gold demand increased, unlocking the door to unofficial markets, which priced gold above $35/oz.
This development kicked the world into the Floating Gold Era (1971-present) which introduced market determined gold pricing. Since then, there have been various drivers of the price:
- 1970s-1980s: inflation (oil shock), crisis and real interest rates
- 1990s-early 2000s: disinflation and US dollar (growth and interest rates), central bank selling
- 2000s-2010s: US dollar, Global Financial Crisis, Quantitative Easing (QE) era and debt concerns
- 2020-2025: pandemic, inflation and geopolitical risk, central bank buying
- 2025–present: US dollar (Trump tariffs/US policy), government deficits.
Recent developments and market reactions
The Trump administration’s plan to drive the US dollar weaker to help dial back the US trade deficit has generated demand for a gold hedge against the reserve currency. This demand, coupled with the aggressive tariffs initiated by the White House in a desperate attempt to reorganise global trade, has resulted in investors fleeing dollar-based assets, particularly US Treasuries. The rapid unwinding of leveraged positions, change in the shape of the US Treasuries yield curve and the break in traditional asset correlations (dollar value vs US yields) have all raised concerns and fuelled the rush to gold.
Outlook for gold investments
It is not uncommon to see a strong price rally in gold while the US dollar weakens, especially when US policies have affected confidence about the health of the US and its reserve currency status. At the same time, the relationship between gold and US real rates has not been clear and has varied since the turn of the century. The last time (since 2001) that the US experienced the current high level of real rates was when the government ended QE after the Global Financial Crisis. At that time, the gold price displayed a negatively correlated relationship with US real bond yields (in line with a strong US dollar).
The way that financial markets have expressed dissatisfaction with US tariff escalation has been to dump US Treasuries. This pushed yields higher and pulled down the value of the dollar. Janet Yellen’s comment on 10 April 2025 that “it pointed to a loss of confidence in American policymaking rather than a dysfunction in the bond market” has summed it up. If President Trump continues to backtrack on the level of tariffs initially announced, the dollar could arrest its weakening trend and potentially gain back some of the lost ground. This in turn could cause an ebbing of the unwavering support for the gold price lately evident, which has pushed the yellow metal to the second most overbought level since the late 1960s.
Although there are likely to be short to medium term headwinds for the gold price as Trump dials down on the intensity of tariffs, it does not take away the benefits of including gold in a well-diversified portfolio over the longer term. History has shown that it remains an excellent store of value over longer periods and, from a strategic perspective, we include gold in our asset mixes for the funds we manage.
South African gold shares, however, are currently showing the highest spread relative to the volume and margin adjusted spot gold price in the last 10 years, which makes them vulnerable to any sign of a pullback in the gold price.
The spectacular rise in the price of gold shares listed on the JSE from the lows of 2015 has not been without volatility, as we have learnt. However, the end result has been that, over the last decade, the contribution of gold shares to the FTSE/JSE All-Share Index has increased by more than 11 times and is now at the highest level seen since data became available for the index.
The relatively high level of concentration in one of the most volatile sub-segments of the South African equity market has obviously increased the risk proxy in the headline index substantially. This risk should be considered when assessing the underlying risk of what is generally seen as an inexpensive market. We are cognisant of these specific risks when we invest in the South African headline index and are considering hedging out or excluding these specific risks in our underlying strategies.