Ask the analyst: Are there signs of a top in gold?
Gold has suddenly become the hottest asset on Earth. Our global mining analyst isn’t quite so bullish.
Welcome to Ask the analyst, where members of Morningstar Australia’s equity research team answer questions from myself and Morningstar readers. If you have a question about an ASX company or industry in our coverage, please send it to [email protected].
Today’s topic
Every period of time has its hot asset. During the Covid lockdown era, it was e-com stocks. For much of the past two or three years, it has been anything with exposure to AI. And right now, what with all of the ‘tariff turbulence’, it appears to be gold’s turn.
I thought this made it a good time to check in with our global mining analyst Jon Mills. Because, as far as I can see anyway, most of Jon’s work on gold recently– be it his gold price forecast or his Fair Value and star ratings for most gold stocks in his coverage – casts a rather contrarian tone.
Keep reading to hear Jon’s answers to my questions on what goes into his gold price forecast, where we are in the sentiment cycle, and why his Fair Value estimates on many gold mining firms are significantly below the market. First, though, let’s set some context.
One heck of a run
There are three major types of gold asset. You can own physical gold, either by buying and storing it yourself, or by buying an ETF that holds the bullion for you or tracks physical prices in some other way. You can own gold mining shares. Or you can own royalty and streaming companies that finance mines in return for a share of future revenue or production.
No matter which route an investor has taken recently, the returns have likely been pretty good. Gold’s spot price – the price that physical gold trades for on metal exchanges – has risen from around USD 1800 per ounce on December 20, 2022 to over USD 3200 as of April 14.
That has translated into an 85% increase in the net asset value of Van Eck’s Gold Bullion ETF (ASX: NUGG), including a 20% gain since January 1. The VanEck Gold Miners ETF (ASX: GDX) is also up by around 85% since the end of 2022 and is up 44% since the start of the 2025.
As for why gold and gold-related assets have performed so well, Jon points to several tailwinds: a flight to safety from falling stock markets, geopolitical and economic uncertainty, resurfacing inflation fears, a weaker US dollar, and strong central bank buying. If that wasn’t enough, ETF inflows in developed markets have also turned positive recently. But could gold eventually trade a lot lower? He thinks it could.
What’s in a price forecast?
Jon’s mid-cycle price forecast for gold is USD 2000 per ounce. That is obviously a long way below the current price of over USD 3200 and is a level not seen since early 2024.
My first question for Jon, then, was what goes into his gold price forecasts. As with every other commodity, Jon says, his forecast for midcycle gold prices is based on the long-run marginal cost of getting it out of the ground.
“The marginal cost is the price at which supply and demand for gold are balanced” says Jon. “If market prices are higher than the marginal cost, this sooner or later incentivises more supply to come online which, in theory at least, should see prices fall back to the marginal cost as the market balances. And vice versa if prices are below the marginal cost.”
The marginal cost of gold has increased markedly in recent years due to inflation. But Jon’s estimate of mining costs still only gets him to a mid-cycle gold price forecast of USD 2000/oz. What accounts for the USD 1000-plus difference between this and current prices, then?
Sentiment drives price (and vice-versa)
Jon says that this is largely a function of investor sentiment, something that has the potential to impact the price of gold more than any other commodity.
Around 25% of demand for gold comes from the investment sector – a percentage that dwarfs that of most other commodities. Then you have the fact that gold has been the asset most synonymous with ‘safety’ for decades. In a panic, people don’t tend to hoard copper.
If sentiment can have such an impact on gold prices then, why doesn’t Jon add a sentiment component to his pricing forecast? In short, Jon feels that doing so would involve taking on the role of a speculator rather than an investor.
To explain why, he calls on Benjamin Graham’s timeless description of markets labelled them as “voting machines” in the short-term and “weighing machines” in the long run. Speculators tend to try and game the short-term nature of markets, while investors seek information that can point them towards long-term value.
Jon also pointed out that sentiment towards gold has always been rather fleeting. People tend to care a lot about owning it for short bursts of time, only to care a lot less once things calm down. A classic example of this, he says, was the fall in gold prices after they rose in response to the Covid pandemic.
In less worried times, Jon says, gold prices usually trend back towards the marginal cost of production. “Like with any other commodity” he says, “if existing producers are making excess returns, high gold prices will eventually incentivise new production to come online, whether its mined or recycled gold. This inevitably sees returns (and prices) fall closer to the cost of capital.”
Seeing as marginal costs are easier to have a confident handle on than sentiment, this is where Jon focuses his attention.
Most gold miners look expensive
When it comes to forecasting the earnings of gold miners, Jon uses futures curve pricing to guide his forecasts in years one to four. This makes sure that his estimates line up fairly closely with current gold price reality.
What Jon does next, though, is at odds with many gold analysts. In the ‘outer years’ of his model, he reverts to his mid-cycle forecast for the gold price.
“Others argue that gold is different to other commodities because of its additional status as a store of value, and that you shouldn’t estimate a longer-term price based on marginal costs. They instead may just project current spot prices or use the appropriate futures price in the final year in their forecast period” says Jon. “I disagree”.
This has led to a situation where of the seven gold miners in Jon’s coverage list, five have Morningstar Ratings of two stars or below. This means they trade at a significant premium to his estimate of Fair Value. In turn, this suggests that investors are betting that USD 3000-plus gold is here for good.
Figure 1: Gold mining stocks versus Fair Value estimate as of April 14th. Source: Morningstar
What is notable here, too, are the two outliers: Barrick and Newmont. Why don’t investors seem to be getting as carried away with the two biggest and best-known gold miners?
Jon says the issue here has been pretty simple: both companies have failed to produce at the levels they should be and haven’t kept enough of a lid on costs. As a result, they haven’t yet taken full advantage of the move in gold prices.
After the new-year surge in miners, both Barrick and Newmont are coming a lot closer to looking fully valued. But at least they look less reliant on gold prices remaining above USD 3000 for the long haul to justify their current share prices.
Is sentiment near a top?
As well as being fleeting, Jon says that sentiment towards gold has historically been pro-cyclical. Which is to say that sentiment towards gold prices generally moves higher with prices and vice-versa. So where are we now?
At the miner level, a sure-fire sign of bullish sentiment is an uptick in dealmaking. Over 2024, S&P Global pointed to USD 19 billion in gold merger and acquisition deals. A 1% increase on 2023 might sound underwhelming, but don’t forget that 2023 featured the $16 billion Newmont-Newcrest megadeal.
At the investor level, there has been a marked up-tick in gold ETF inflows. As you can see from the World Gold Council’s chart below, inflows during the first three months of 2025 touched levels seen during early 2020 (peak Covid uncertainty) and the first quarter of 2022 (around the time that Russia invaded Ukraine).
Figure 2: Gold ETF flows between 2018 and Q1 2025. Source: World Gold Council, ICE gold pricing data.
Unfortunately, Jon says that gold miners and investors have a fairly good track record of upping their activity just before a short-term peak in gold prices. So perhaps these signs of ‘toppy’ sentiment are best taken as potential warning signs rather than a cue to ‘get involved’.
As Jon has explained to me before, the bigger picture for investors in the mining space should be trying to buy high quality assets linked to commodities that are currently heavily out of favour. And whatever way you slice it, gold and gold miners are not out of favour right now.
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