307. The complexity of gold and its all-time high price

Manager of Jupiter Gold & Silver, Ned Naylor-Leyland, looks into the current dynamics affecting the gold market amidst conflicting factors like geopolitical tensions and interest rates. He provides insights into the intricate nature of gold pricing across different currencies, the recent breakout in the gold price including the flow dynamics in the market. Throughout the episode, Ned offers nuanced perspectives on investment strategies and market behaviour, underlining the importance of diversification and strategic positioning in precious metals portfolios.

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A truly unique fund, Jupiter Gold & Silver invests in both physical gold and silver bullion, as well as gold and silver mining companies. Manager Ned Naylor-Leyland is a passionate advocate for his asset class and believes investors should strongly consider some gold and silver exposure for their portfolios.

What’s covered in this episode:

  • What’s the current positioning for gold?
  • How does geopolitics influence the price of gold?
  • Can the price of gold go higher?
  • How rate cuts influence the price of gold
  • The case for owning physical gold in a portfolio
  • Increased buying in China
  • The implications of seizing Russian FX reserves
  • How the Chinese New Year impacted gold
  • The importance of the breakthrough price of $2,150/oz
  • The importance of gold miners
  • An update on silver and how it relates to gold
  • Will the price of silver be more consistent in the future?

28 March 2024 (pre-recorded 20 March 2024)

Below is a transcript of the episode, modified for your reading pleasure. Please check the corresponding audio before quoting in print, as it may contain small errors. Please remember we’ve been discussing individual companies to bring investing to life for you. It’s not a recommendation to buy or sell. The fund may or may not still hold these companies at your time of listening. For more information on the people and ideas in the episode, see the links at the bottom of the post.


Staci West (SW): Welcome back to the Investing on the go podcast brought to you by FundCalibre. This week we have a nuanced perspective on the precious metals market with insights into the intricate nature of gold pricing, the growing interest among Chinese investors and the potential for silver.

Chris Salih (CS): I’m Chris Salih, and today we’re joined by Ned Naylor-Leyland, manager of the Elite Rated Jupiter Gold & Silver fund. Ned, once again, thank you for joining us today.

Ned Naylor-Leyland (NNL): Absolute pleasure.


CS: Good thing on timing I think, on this podcast in particular, because gold has become quite topical all of a sudden. I mean, it’s often viewed as a sort of guide or a pulse for where the global economy is, but there’s sort of conflicting factors at the moment for gold. You’ve got sort of things like geopolitical and economic tensions supporting it, yet people would also say that higher interest rates tend to be a negative for the asset class. I mean, maybe just talk us through the position for gold at the moment and why is at such high levels amid that sort of conflicting backdrop?

NNL: Sure. I mean, I would hope to be somewhat cultured and [have a] slightly different view on what moves the gold price. I mean, I’m not going to argue with the idea that geopolitical tension or even central bank buying are helpful to the performance of gold. But the truth of gold is that gold is …the first thing is, there’s no gold price.

So, gold is priced in all different currencies. It’s a foreign exchange rate. So, the sterling gold price is different to the US dollar gold price. But generally when people talk about gold, they’re talking about the US dollar gold price. And what it really is, it’s the opposite of your local currency. So if we say in this case, dollars are held long. In other words, held under the mattress, is a nice way of thinking about it. So for several years, dollars held under the mattress or, in inverted commas ‘held under the mattress’, have looked reasonably strong due to the very hawkish guidance and chat of the Federal Reserve. So, what that has led to is people have wanted to own dollars compared to other currencies and even compared to gold, [and] what we’ve seen is a softening of that.

So people have become more worried about the direction of travel for the real economy and also the direction of travel for policy, whether it’s rates or other supportive measures that can be put in place. The market’s becoming more dovish, more accommodative, and that’s really what moves gold versus your local currency again, whether it’s sterling or dollars or anything else.

CS: You and many others have made it clear, I mean, when it comes to valuation, people often look at gold at a high and think – whether it be in dollar terms – and think, oh, is that a record high? Perhaps I should consider pulling back. You and many other commentators have made it clear you believe that it could go higher from here. Could you maybe just explain why and some of the contributory factors to that?

NNL: Well, it’s an unfortunate consequence of being a foreign exchange instrument that gold, you know, is looked at by technical traders. So, the dollar/sterling rate or any other kind of foreign exchange rate, people are very much driven by the charts. And we have two things in play in the dollar gold price, which is that there’s been a – depending on how long you want to go back – either a 14 year or a four year resistance level around $2,100 an ounce, which has been capping a momentum and interest in investors owning gold and gold miners and all sorts of things related to the subject. And that level has been taken out. So, what we’re now into is an environment where momentum traders and people who are sensitive to short and medium-term direction can get on board in the knowledge that we’ve got past that point, and we can trade higher than that.

But I would also go back and look at the much longer-term situation, which is that gold has been in a bear market against dollars since 1980. And that’s, of course, what has supported the US dollar hegemony. The fact that the treasuries and dollars are held as the risk-free form of money in the financial system is due to the fact that dollars have sort of had it on gold for 43 years, 44 [years] – that, in my view, has just changed. Now, I don’t think the market’s fully aware of that fact. In fact, the market’s definitely not fully aware of that. But, at the margin, what has changed is we’ve now flipped, in my view, from very long-term bear market conditions for gold versus dollars, to something very important, which is a conversation about whether US treasuries are risk-free, what else is, which of course is only gold – you’re not going to convince anyone that sterling is risk free or a barrel of oil or even other things that people are looking at. So, I think that that’s what informs this idea that the dollar gold price can trade substantially higher now that it’s cleared this level.

CS: I just want to sort of follow up on that because does that mean you feel there’s a sort of predefined or shortened window of opportunity here because you’ve got things like the ETFs that perhaps people aren’t investing in physical gold and also, while we accept that there’s this move towards a dovish side of things, that the rate cuts and when they’re coming in is not cemented yet. Do you think those two catalysts might start to sway that opinion or do you feel that there’s a short window or perhaps even longer window to take advantage of that opportunity?

NNL: Well, I think both in as much as I think that once we start to cut and we start to become obviously accommodative in terms of systemic risk and the issues that are being created, then I think we’re in a long-term bull market and there’s plenty of opportunity for people to invest. But I think shorter-term, you are right, which is there’s an opportunity to come into the asset class before the rest of the market does. And that would in most cases lead to a better return profile if you’re in early versus being in the middle or the back end of a trend. But I do think this is a secular trend, so I don’t think there’s, you know, there’s not this sort of crazy rush to do it.

But I’d also make the point that physical gold, you could – and probably should – be saving in all the time anyway. So, rather than holding your local currencies as a savings vehicle, there’s a great case that one would own physical goal. I mean, obviously what I try and do is add attribution, add return, add a bit more optionality to it. But I think that yes, there’s a short-term opportunity, yes, there’s a long-term opportunity and also, probably it’s something that people should be diversifying into all the time anyway at the margin.

CS: Okay. A couple of other factors that I believe you talked about in your update recently was the idea that we’re seeing more buying from China and also the black swan implications of seizing Russian FX reserves. Could you maybe just go into a bit more detail on both of those for our listeners please.

NNL: Well, I think these two are very, very interesting. I mean, they don’t drive the behaviour of the US dollar gold price short-term because the physical gold market is a small part of the overall turnover in gold on a daily basis. Now, most of it is what we call paper gold. But within the physical gold market, we’ve got several things that are interesting that are happening, which is the ETF physical held in the West has been drained away over the period of two years in very large volumes – up to 30% of overall ETF, physical ETF, holdings have disappeared – and it’s all gone to Asia. And principally it’s gone to China and inside China it’s been withdrawn from the Shanghai Gold Exchange which is the big Chinese gold exchange and is going into the hands of young people interestingly, who are buying what are called ‘gold beans’. I mean, they’re more like large lentils than beans in my view, but I think the Chinese will have a different idea of what a bean is than maybe we do. And they’re being held in little glass bottles by young people and accumulated on a kind of monthly basis rather [similar to] what I was saying to you just a minute ago, actually. So, rather than it being a kind of pile in now, they recognise the monetary status of physical gold, the risk-free status of physical gold, which is why they’re choosing to accumulate within their salary, small amounts of gold all the time.

Now, of course, it’s a lot of people, therefore it’s a lot of gold. And the recent lunar New Year festival in China saw massive gold buying, huge queues outside bullion dealers. I mean, let’s be clear, we don’t see that here. And frankly, if we do, that’ll be a bad sign because it will be a sign that things have gone rather wrong for financial instruments in the UK economy if we start seeing queues outside bullion dealers. But this is a powerful shift, you know, the Chinese are no longer buying treasuries, they’re selling treasuries; and they’re buying physical gold, and they’ve obviously got problems in their local property sector. So, I see this as a sort of portent of lots of things and a very powerful medium-term influence.

As for the Russian situation, you know, that’s not so much to do with gold, it’s more to do with treasuries. Now, of course, as I said earlier, really this is always a conversation about what’s risk-free: gold or treasuries?

Now central banks know that gold is risk-free, not treasuries, and the financial system don’t realise that gold is risk-free. They think treasuries are. So, this is a non-priced in problem for the financial system, which is that when the US decides that it can arbitrarily freeze and then potentially give Russian treasury holdings to the Ukraine, it very much undermines the nature of a treasury bond as risk-free, outside of the US. Short-term, that means that they’re having to replace international demand for US treasury bonds with domestic demand, but medium to long-term, this is very bad news for the dollar system and for the things that people think are embedded in the long-term. You know, we are in a very important change in terms of the risk-free form of money and how treasuries are bought and held in the global financial system.

CS: Okay. I just want to quickly go back to the China point. I mean, is that essentially their take on cash under the mattress with those gold beans? Because that’s a huge store of wealth that sort of is being moved into a different sort of part of the, not part of the economy, but sort of how it’s used really.

NNL: Well, remember it’s a function of the fact that, in Asia, people understand the difference between real money and local currency. You know, they understand that government-issued money isn’t really money, that it’s credit issued by the government. Whereas in the West, and particularly in the UK, we’ve forgotten that. So yes, you are right, it is cash under the mattress, but again, this is not something new. I mean, this has always gone on in Thailand, Vietnam, India of course, obviously where people don’t own the rupee under the mattress because it just gets inflated away. So, it is a very important powerful, structural point.

I think it’s more relevant because of the age group. That’s why I think it’s particularly interesting. You know, it’s an insight into the way the young in China are thinking, which is they’re looking at the problems domestically with property, which are obviously very, very big and very obvious. And they’re probably looking at their parents’ generation thinking, oh dear, what’s going to happen here? This doesn’t look very good! So, it leads them to become more risk-off, more cautious. And because within their culture, they understand that gold is money – and to a lesser extent, silver as well – they’re acting accordingly, behaving a bit more like, you know, maybe Indians or other previous generations have.

And it’s not likely to come back to the market that gold, because what happens, of course, when people buy gold in savings form is they don’t really sell it, you know, it’s held as savings. So it’s not like it will easily return and repopulate the now, relatively empty, big gold ETFs in the West.

CS: Okay okay. Obviously, physical gold is only part of the portfolio. You also have gold equities in there. Another one of your updates was talking about the importance of the breakthrough for the gold price of $2,150. Subsequently, I believe we’ve gone through that. Maybe just talk us through the importance of that and what you think is going to happen/is happening now.

NNL: Well, I mean, so pertaining to gold equities, the thing to understand is this technical level that I discussed earlier has broken. Now, we would like to see it close above $2,130/$2,150 at the end of the quarter which is close now – that would be very, very strong. Because that would be the ultimate form of technical breakout. You know, you have daily, weekly, monthly, quarterly charts. They’re all different with variance of a chart. Now, we’ve got breakout here in the dollar goal price on pretty much every chart pattern except for monthly and quarterly. It doesn’t absolutely have to happen, I think we’re in a bull market anyway, but that would help.

And then what happens to do with gold equities is then we need to see flow because the dollar gold price is just a foreign exchange rate as the sterling gold price is. It’s not really about how many people are doing it, it’s a real interest rate observation. So, it’s not about the collection of lots of masses of capital, it’s about looking forward into dollars and sterling, [and saying] oh, we’re not sure about that.

Now, the mining equities are all about flow and they’ve had very, very little flow for a very, very long time. And as a result, they’re very sensitive to new flow. I’m not expecting much new flow until Q2 because the way this really works is you’ve got two forms of participation in gold mining. One is the one that’s been more consistent over the 20 years – I’ve been investing in the space for 25 years] – which is retail. Retail investors kind of get the gold story, they know what it’s about and they quite like the volatility or have done. So, at the margin, you’ve always had a few retail investors interested and involved in the gold equity story, but actually they’ve all gone, they’ve all left, they’ve all gone off to go and do Lithium and Nvidia and crypto and all sorts of different things that are not gold or gold miners. So, despite this breakout, we haven’t really seen much change to participation in the equities yet.

And the second slot, of course, is the long-only asset allocator, which is much more powerful, much more important. And in my career, I’ve really only seen a few brief periods where they’ve been involved, but they are aware of this technical breakout. These professional investors see these charts, they see what’s happened. And I’m very confident at the end of the quarter, when people sit down in investment committees, that they’re going to look at that and go, okay, ooh, this has happened now, this breakout’s important, it’s meaningful. At a minimum, we should be looking at owning the gold ETFs again, the physical ones. And some people will say, actually, this is the time to buy the gold mines. They’re super cheap –  which they are, on a real and relative basis, they’re very, very cheap – therefore, the return profile is quite obvious, there’s a lot more, again, attribution potential in the mining equities.

So, at the margin, I’m expecting some asset allocators will start to allocate in Q2 and that we should start to see those mining equities perform much better as Q2 develops due to a change in flow dynamics where more money will be coming in and then therefore they should be bid up.

CS: You’ve preempted my next question, because obviously we’ve talked about commodities in general, sort of being overlooked in favour of the likes of investment grade and government bonds. Maybe you’ve talked about the importance of those miners, maybe give us an example on the gold side of one that particularly stands out as you’re looking at going, there’s so much in favour of this at the moment, that you’re particularly keen on.

NNL: Well, look, I mean, I’m always a bit cautious about identifying individual mining equities. I don’t mind mentioning a few, but the reality of a mining equity, whether it’s in gold or silver, is they’re quite high risk. You know, they have high idiosyncratic or specific operating risks. So you know, we’ve had a couple of our gold mining stocks that have performed quite well in the last few quarters. One in particular that comes to mind would be Lundin Gold [Lundin Gold Fruta Del Norte Campamento]. It’s in Ecuador, it’s a very high grade mine there, but you know, as I say, they are complicated and the important thing is to always hold a whole bunch of them rather than just one.

And it does happen to me occasionally that I’m out and about. Occasionally I leave the house and meet people and they go, oh, you’re gold mining, I love gold mining, I own this one – what do you think? And my heart sinks because no matter how good it is, the specific idiosyncratic risk of that equity is very, very high. And owning only one is really not a good idea. So whether it’s a passive index, a basket, or a mining equity fund like ours, you know, I always would push one to own a whole bunch of them.

But what I would say in terms of gold equities is the development assets are the cheapest part of the space. So, we like to own stocks which are holding very large projects, which are going to be in production at some point in the next two to five years, are going through all their hurdles of permitting and going into production. They’re much, much cheaper even than the producing gold miners are. And they’re likely to be bought for premiums in a better market when people are pushing the major producers to replace reserves which have been mined over the last 30 years.

So, in general, when I think about gold miners, what I’m thinking is Tier One jurisdictions; Australia, Canada, they’re the two best. And the development assets which are heavily discounted, that will be mined and therefore have more upside. So there are a bunch of these names, Reunion Gold in Guyana we own a fair slug of, I think that’s quite interesting. Guyana isn’t on obvious Tier One jurisdiction, actually very good for natural resources production because there’s a small population and it has good relations with the US government. So they’re opening up to natural resources development, particularly oil & gas as well. These kinds of names are the ones that we like, but I would reiterate: one on their own is never a good idea.

CS: Yeah. Okay. I want to finish with silver, because obviously you can hold that as well [and] we haven’t really talked about that in too much detail. Obviously it forms a part of the portfolio as well, but it’s kind of seen as a sort of leverage play on gold and there’s some connotations with it that it tends to follow the gold price upwards and also seen as, ‘if you hold gold into a recession, silver’s the thing to hold out of a recession.’ Could you maybe just give us a two-minute snapshot on how you see silver as an asset class at the moment and just a bit of sort of an update for investors on that as well, please.

NNL: Sure. I mean, silver is a bit like the gold miners, which is it’s more sensitive to flow than gold is. However, directionally, it moves with gold. So, gold’s going up, or dollar gold price is going up, then the dollar silver price will be going up. What’s interesting about it is because it’s smaller – and it’s about a tenth of the size on an overall daily basis (paper silver, physical silver, futures, etc) – it’s about a tenth of the size. We don’t know exactly, we don’t get much data – thankfully or annoyingly from the banks – but it’s about a tenth of the size, which means it’s much more sensitive to flow in and flow out. And that means that it can do 80% of the move of gold when it’s very, very weak and there’s no one really interested, or we’ve seen it do four times what the gold price does.

The obvious period would be to go back to the turn from a very deflationary environment after 2008 into the start of QE. And there was a kind of two-year period there where silver went up, I think 6x and gold went up once, to give you an idea that it’s just very, very powerful in terms of the, again, the performance potential of it. Now, it hasn’t been obvious – with the exception of a couple of periods, there was one in 2020 where the silver in our portfolio did very well for us – but what it’s there to do, is to deliver a more powerful outcome for holders of units in the fund when people turn up to do this as a meaningful part of their overall portfolio.

It’s more been potential than obvious outcome so far, but there is a very, very important point to make here, which is unlike gold, which all the gold ever mined is available, it’s all in vaults on your finger, et cetera. silver is in chronically short supply versus physical and industrial demand. So, imagine huge stockpiles of physical gold in the world and absolutely none in silver. Now the price is driven by the same thing, which is your local currency forward, but there’s this squeeze potential for silver. And it’s driven by things like solar, electronics, EV. Silver’s used in almost everything in the modern economy, and particularly in the new green economy, in small quantities. And according to sell-side analysis, by 2030, the market will be in absolutely chronic imbalance in terms of the demand patterns for physical silver versus the mine supply.

So, it’s another reason why we like these, again, development assets; super cheap, big development assets in silver that we can own large chunks of within the fund, in the knowledge that this supply/demand problem will show up at some point, but in the meantime, it’s beta, it’s additional return over and above the gold price in both directions. And that’s why we like it and why we hold it.

CS: And just a quick follow up does that mean that perhaps in the future that when we see those spikes in the silver price, that perhaps, you know, people might not see them as much as a sell signal and perhaps the price of silver might be a bit more consistent going forward, particularly with that EV story powering it?

NNL: That’s an excellent question, a very interesting question and the answer is I would say, we will see the silver market in its current format fail at some point in the next five to 10 years. It could be five months. I don’t know when it will happen. It’s been obvious for a long time to people like me that it will happen at some point. And then what you’ll find is you’ll get price discoveries, so then you’ll find, yes, more of a sideways price environment whereby the market is clearing in a sensible way versus at the moment where it’s extremely structurally imbalanced.

So yes, we would expect a very large move higher – I’m not going to come out with a price prediction – but at some point after a period of volatility, because it will be volatile initially, then it should find a level and trade more like a commodity and lose the currency market component of the current price discovery. You might think that’s bad, but in due course it’ll be very good because the silver price will be a much higher levels.

CS: Does that mean it’ll be less correlated to gold in the future then?

NNL: Yeah, I think that’s a good point too. I think probably when that happens, yes. But again, you know, you’re talking about a big change in market environment and a big change in pricing and implied in that a big change in our unit price once that happens. So, I don’t think it’d be a problem, it’ll be a good thing. But yes, I do think that that’s the case because when the market understands that only paper silver really is a fool’s game because there’s no ability to deliver against it then yes, you’ll find a new regime and they should decouple a bit in terms of direction as well, agreed.

CS: Okay. On that point, I’m going to finish it there, but Ned, thank you very much for your time once again.

NNL: An absolute pleasure.

SW: A truly unique fund, Jupiter Gold & Silver invests in both physical gold and silver bullion, as well as gold and silver mining companies. For more information on the Jupiter Gold and Silver fund visit fundcalibre.com – and don’t forget to subscribe to the Investing on the go podcast, available wherever you get your podcasts.

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