Unpacking a disappointing few months for the Jupiter Gold & Silver fund, silver has been weaker than gold since July (as one would expect in a market where flows continue to dribble to a near standstill) and the fund’s positioning (around 50:50 gold/silver) has led to relative underperformance, much in the same way that periods of relatively strong performance tend to be seen with a falling gold/silver ratio.
Q2 reporting from mining companies was stronger than in Q1 (which was a tough quarter) and we expect relatively robust reporting in Q3. Operating performance at mining company level is in contrast to the wider sentiment towards the precious metals, which remains weak after a period of retail capitulation that has gone on since the spring. Institutional and trend-following investors (hedge funds and long-only) left more or less as a group in late 2020 after a brief visit to the sector, but retail and strategic longs stayed in until around April/May this year when retail too started to throw the towel in. All of this has left mining equity valuations depressed, but also ready to move strongly higher given low trading volume.
The monetary metals themselves, as well as the fund, are and continue to be driven by the movement of real interest rate expectations. In the bond market the further emphasis on tightening measures (both tapering and market assumptions regarding future rate hikes) at Fed meetings and Jackson Hole have kept investors in a marginally hawkish mindset. In addition to that, the bond market continues to price inflation as ‘transitory’.
The assumptions necessary to justify the recent performance (of both gold/silver and the fund) are:
1. inflation is just transitory
2. tapering is coming soon, and
3. rate hikes are also coming.
If just one of these assumptions falls away, then the fund and sector should rally. Personally, my view is that it is more likely that all 3 assumptions are wrong than all 3 are right. The fund remains positioned mainly in FCF-positive gold and silver producers in better quality jurisdictions alongside some well-funded developers and explorers.
It has been a frustrating year – inflation seemingly everywhere, growing central bank balance sheets and geopolitical stress all making it look like the sector should benefit from a macro tailwind that has yet to be reflected in markets. While the global cash and bond market holds the above assumptions about policy and inflation to be true we will struggle to capture momentum. It is possible, of course, that inflation disappears rapidly, tapering is bigger and faster than expected, with larger and sooner rate hikes. My guess, however, is that these central bank promises of hawkishness and unwinding – and their protest that inflation is ‘just a blip’ – will end up being just ‘guidance’ that fell away in the face of the huge systemic issues that remain unresolved.
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