Gold is back in the spotlight

Gold hit 53 all-time highs in 2025 and had its best calendar year since 1979, rising 65%. In late January 2026 it touched US$5,589/oz. Since then it has fallen 25% to around US$4,200/oz, still elevated against historical averages.

For South African equity investors the move was amplified by a rerating of the gold miners. At the peak the sector made up just under 20% of the FTSE/JSE Capped SWIX, reflecting a benchmark highly concentrated in a single commodity.

WHAT DROVE THE RALLY

Gold has been driven higher in recent years by a large increase in central bank and investor demand, against a backdrop of rising geopolitical risk, fiscal deterioration and continued expansion of central bank balance sheets.

Central bank demand stepped up in 2022, after Western governments froze almost half of Russia’s US$630bn foreign exchange reserves. The message to central banks everywhere was clear: their euros and dollars can be immobilised overnight. For those wanting more control over their reserves, gold is the only real alternative. Central bank purchases went from US$29bn in 2021 to US$103bn in 2025 and remain elevated in 2026.

Investors piled in too. A US$90bn inflow into ETFs in 2025 turbocharged the gold price and introduced an element of speculative mania, with large retail investor participation in precious metals more broadly.

Global geopolitics are likely to dominate in the coming years, with a widening split between East and West. Central bank demand is likely to be structurally higher going forward. ETF demand tends to be more fickle and is likely to cause additional volatility.

WE HAVE SEEN THIS CYCLE BEFORE

In the last 50 years gold has had three identifiable ‘mega rallies’: the 1970s rally which peaked in 1978, the 2000s rally which peaked in 2011, and the rally over the last decade, which looks to have peaked in January this year. These multi-year rallies tended to go parabolic in their final years, then gave way to sharp drawdowns and several years of price consolidation. Here gold is showing its cyclical, commodity-like side.

Listed gold equities tend to outperform the gold price in bull markets and underperform in bear markets, because of operating leverage. The table below illustrates this, using AngloGold as our example.

The cyclical nature of commodity markets is very dependable through time, although the length and magnitude of the cycles always differ. From an equity point of view, a key similarity in this cycle has been increased M&A activity, and a key difference has been improved capital returns in the form of dividends and buybacks.

Part of that improvement is simple arithmetic. Gold rose so fast that even double-digit cost increases have barely impacted margins. Cash flows expanded so dramatically that management teams have been unable to spend the windfall quickly enough, with some companies even running net cash on their balance sheets.

THINKING ABOUT THE FUTURE

Historically gold has been uncorrelated with risk assets and has performed well in the wake of geopolitical and other shocks. With rising investor participation, this has changed, as the double-digit decline in the aftermath of the Iran war showed. Correlations with global equity markets have been rising and are well above long-term averages.

We believe this price action reflects elevated price levels and extreme investor positioning. For now, gold seems to have lost some of its ‘hedge’ qualities and is behaving more like a risk asset.

Physical demand has been under pressure in response to high prices with jewellery falling 33% over the last two years in tonnes. Interestingly, consumers are spending more in US dollars on jewellery than they were before, which highlights the strong attraction of gold at the moment. Jewellery’s importance in the gold market has declined and in 2026 it is likely to only make up 33% of demand compared to 55% just five years ago. Continued high prices are likely to keep weighing on physical demand.

For South African equity investors, the gold bull rally over the last few years has been a key driver of returns, with the sector’s weight going from below 2% ten years ago to ~20% at the peak in January 2026. Margins have expanded as the gold price has risen well above the cost of production, balance sheets have been repaired, and cash returns are flowing strongly.

This presents an interesting conundrum. Even if you were bullish on the sector, could you responsibly own more than 20% of a retirement equity portfolio in one single commodity? Let alone a commodity that does not follow the ‘rules’ of other commodities when thinking about its long-term price vs. cost of production and return on capital. The unknowns are very high, as is the risk inherent in benchmarks that are so dominated by one sector.

There is a knock-on effect. Investors trying to catch up with index weightings have put pressure on the valuations of other domestic businesses in South Africa, leaving many quality companies attractively priced.

LONG-TERM INVESTING IN THIS ENVIRONMENT

We have written about gold several times over the last five years, revisiting our assessments as market conditions and valuations evolved. Initially bullish in 2021, supported by many of the positive drivers that persist today, we moderated our exposure two years later as gold and gold equities performed well and valuation gaps narrowed.

With hindsight, the full extent of the rally was still to come. We were not meaningful participants in the gains that followed, and our gold underweight has been the primary driver of underperformance over the last two years. Our initial thesis was right, but we underestimated how far the gold price could run, as the 53 all-time highs in 2025 show.

We always aim to approach investing with humility, but commodity markets, particularly gold, call for an extra dose. The sell-off from January’s high has improved the relative valuation of the sector and taken some of the froth out of the physical gold markets. We believe that the JSE-listed gold miners are pricing in long-term gold prices more than 10% below spot levels, while offering compelling dividend yields. Encouragingly, they are returning cash to shareholders in this period of strong profitability.

On a balance of probabilities, we believe that maintaining some exposure to gold is appropriate. Stock picking matters because the outlooks differ meaningfully at individual company level. Over the last year the bulk of our gold exposure was through AngloGold. After their relative underperformance over that period, Harmony and Gold Fields now offer better value, so we have broadened out to include them.

As long-term, valuation-driven investors, we often diverge dramatically from the market at these extremes, where momentum and speculative behaviour push market prices well beyond any long-term anchor. We aim to build diversified portfolios that are not overly exposed to any single outcome. Standing apart can hurt in the short term, but it has allowed us to deliver compelling alpha through many cycles over multiple decades.

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