The structural forces supporting gold prices remain firmly in place. Recent US interventions in the yen and long-end Treasuries strengthen our conviction that the “debasement trade” is coming rapidly out of hibernation. Meanwhile gold mining equities continue to offer a compelling combination of strong margins, healthy balance sheets, capital returns and attractive valuations.
Gold has faced several headwinds in recent months, starting with the hawkish initial messaging of Fed Chair Keith Warsh in February, and then compounded by the Iran war which intensified expectations of interest rate hikes and pressured net buying of gold by emerging-market central banks. Despite these pressures, that from peak to trough caused a 30% correction in gold, the twin structural gold bull market drivers we have often talked about, debasement and de-dollarisation, remain very much in play.
Direct intervention in the yen for the first time since 1998 can be seen as bullish gold from several angles. Most obviously, and as US Treasury Secretary Scott Bessent himself has proclaimed, it suggests the yen is too cheap and thus the dollar too expensive.
A weaker dollar from here is bullish gold prices, all else equal. More important is market belief that what the US was really doing was protecting its own Treasury debt market. After all, one way for Japan to fund currency intervention would have been to sell US dollar reserve assets, including US Treasuries, and use the proceeds to buy yen. At a time when the US is already asking markets to absorb enormous fiscal deficits and substantial refinancing requirements, additional selling from a major overseas creditor is hardly desirable.
In this intervention, that came via the selling of euros just as long-dated US Treasury yields were pushing towards increasingly uncomfortable levels, markets saw not only a hint of future more aggressive attempts to pin long-end rates, but also evidence of US reluctance to see allies utilise their dollar reserves. We would argue that reluctance itself accelerates a dimming global perception of the dollar as a reserve asset.
Most recently, and again in apparent response to the climb in US 30-year bond yields, Treasury Secretary Bessent unexpectedly announced a doubling (or more) of buybacks in longer-dated government debt, from US$2 billion to at least US$4 billion per operation for maturities of 10 years and beyond.
Officially the rationale for this scaled up intervention is simply to provide additional market liquidity. Unofficially the market sees another step taken along the path to outright yield curve control (where the Treasury – most likely in coordination with the Fed – would commit to buying as much government debt as needed to maintain yields at a set level). It is that market instinct that is driving the resurgence in the debasement trade.
Of course, what ultimately drives “debasement” is fiscal stress – debt and deficits – and policymakers who are unwilling (or unable) to address the underlying issues. It is easy to be critical of current fiscal largesse, but the reality is many of these fiscal fault lines are long cycle in nature. A good example is the social security system in the US.
The Old-Age and Survivors Insurance (OASI) trust fund supports social security payments to some 71 million Americans. In the early 1980s it had 60 years left until depletion. In the early 2000s, 40 years. Out of sight out of mind from a macro perspective. No longer. On current projections it is expected to deplete in six years’ time, a deadline that has edged closer primarily through the passing of time but also as demographics have worsened and deficits widened
OASI fund depletion would leave social security benefits facing a 22% funding shortfall equal to about US$450 billion (or 1.1% of US GDP in projected 2032 terms) and political suicide for whoever resides in the White House at the time. This is not a one-off fiscal hole but an annual deficit that is projected to widen. The immediacy of these long cycle fiscal issues are a large part of the reason we are so firmly of the view that while the debasement thematic can have periods of temporary hibernation, they will stay just that, temporary.
Gold equities remain very compelling
With gold breaking out, we’ve seen gold equities rally sharply. Despite this strength, gold equity valuations remain very low relative to bullion and in many cases, producer share prices are discounting gold prices far below spot.
Investors have rightfully had concerns around energy-led cost inflation, particularly given what we saw following the 2022 energy crisis. However, the key takeaways so far from Q2 reporting are that if anything cost performance has been better than expected and worries about energy inflation spilling over into broader guidance misses has not occurred, though clearly, we must remain on watch into the second half of 2026.
With gold breaking out, we’ve seen gold equities rally sharply. Despite this strength, gold equity valuations remain very low relative to bullion and in many cases, producer share prices are discounting gold prices far below spot.
Buybacks have become particularly important. Several producers are returning substantial proportions of free cash flow through a combination of dividends and share repurchases. As share counts are reduced, equities will look even more attractive across per-share metrics.
From a gold industry perspective, we conceptualise buybacks more as embedded production per share growth through time. In a depletive industry where (particularly greenfield) growth can be both expensive and risky, the optionality to generate per share production growth either via buybacks or via actual production growth is a significant benefit.
Overall, we continue to see the greatest potential among businesses where valuations fail to reflect strong cash generation, where free cash flow is approaching an inflection point, or where company-specific catalysts have the potential to unlock value.
For investors looking beyond the recent consolidation, we believe gold equities could generate outsized returns as the next phase of the gold bull market unfolds.
James Luke, Senior Portfolio Manager, Gold and Commodities, Schroders
