Gold has been around its the current level (in US dollar terms) four times since 1971 on an inflation-adjusted basis. Most recently, two years ago, the nominal price was nearly $2,100/oz and we are a little below $2,000/oz now.

 

It looks to me like there will likely be a breakout in the gold price that will gather momentum. Why now? Because the price of gold moves in the opposite direction to real interest rates, or the rate of interest a bond pays after the effects of inflation. Real interest rates are negative right now because inflation is high and interest rates are low. This means that most US government bondholders are being paid a negative real interest rate.

 

People are interested in gold because they are worried about future purchasing power. For now, the market is still considering whether the US Federal Reserve (Fed) will be able to raise interest rates as much as seven times this year and whether or not inflation will materially weaken. In my view, this is why gold hasn’t broken out properly yet — the market is focused on relatively hawkish observations. The trigger for gold may be when inflation surprises to the upside, or the market accepts that seven interest rate hikes in the US is a bit too aggressive. This would lead to the breakout in the gold price, in my opinion.

 

I view gold as ‘risk-free’ money. So do central banks – that’s why they typically have huge gold reserves. They understand what’s risky and what isn’t. I think that gold is measuring the future purchasing power of each individual government-issued currency. That’s why you see them all degrade at different speeds versus gold. People say you can’t value gold, but I think gold values everything else.

 

Demand for physical gold is rising, indeed it has risen very consistently throughout my career, because individuals want to own physical gold as a hedge and central banks are buying more.

 

The market for silver is a tenth the size of gold but the silver price is highly correlated to that of gold. I believe that when gold breaks out, you’ll see participation grow materially in the market, and silver will outperform also — we think very dramatically so. Unlike with gold, where all the gold that has been mined is available to the market, silver is not like that as it’s being consumed by industry and in small amounts by investors. The silver market tends to be more volatile than gold, but in a broad sense where gold goes silver follows.

 

We definitely believe there’s a strong argument for investors to own gold and silver bullion; mining equities offer theoretically more upside but certainly carry more downside risk too. When there is wider participation in the physical gold market, though, we think that the share price valuations of the miners will benefit. 

The value of active minds: independent thinking

A key feature of Jupiter’s investment approach is that we eschew the adoption of a house view, instead preferring to allow our specialist fund managers to formulate their own opinions on their asset class. As a result, it should be noted that any views expressed – including on matters relating to environmental, social and governance considerations – are those of the author(s), and may differ from views held by other Jupiter investment professionals.

Important information

This document is for informational purposes only and is not investment advice. We recommend you discuss any investment decisions with a financial adviser, particularly if you are unsure whether an investment is suitable. Jupiter is unable to provide investment advice. Market and exchange rate movements can cause the value of an investment to fall as well as rise, and you may get back less than originally invested. For definitions, please see the glossary at jupiteram.com. The views expressed are those of the individuals mentioned at the time of writing, are not necessarily those of Jupiter as a whole, and may be subject to change. This is particularly true during periods of rapidly changing market circumstances. Every effort is made to ensure the accuracy of the information, but no assurance or warranties are given. Holding examples are for illustrative purposes only and are not a recommendation to buy or sell. Issued in the UK by Jupiter Asset Management Limited (JAM), registered address: The Zig Zag Building, 70 Victoria Street, London, SW1E 6SQ is authorised and regulated by the Financial Conduct Authority. Issued in the EU by Jupiter Asset Management International S.A. (JAMI), registered address: 5, Rue Heienhaff, Senningerberg L-1736, Luxembourg which is authorised and regulated by the Commission de Surveillance du Secteur Financier. For investors in Hong Kong: Issued by Jupiter Asset Management (Hong Kong) Limited (JAM HK) and has not been reviewed by the Securities and Futures Commission. No part of this document may be reproduced in any manner without the prior permission of JAM/JAMI/JAM HK. 28797