Leverage, momentum, and narrative

Gold prices have been wobbly lately, which is potentially good news for those thinking of increasing their allocation to the monetary metal. It seems that gold temporarily lost the three things that are needed for good performance in modern markets: leverage, momentum and narrative. Longer term however, I see a number of factors that should combine to create an environment for sustainably rising prices. Falling ‘real’ interest rates (the return that bond investors can expect to earn after compensating for inflation) and the strong operational performance of mining companies are at the heart of this outlook.


Silver, interestingly, has fared materially better than gold of late because, despite losing some momentum, it still carries a narrative. Silver is used in solar panels, batteries, a variety of electronics, and as an antimicrobial element in medicine and that has helped support silver. It’s the modern economy metal and a key enabler of the green economy. The infrastructure spending plans announced in the US and Europe, for example, have therefore been a boost for the metal.

Inflation, not rates, dominates the current market narrative

For so long it has been the direction of interest rates that has dominated the conversation in markets – now it’s the direction of inflation.


Guidance from the Federal Reserve has been pretty consistent since the pandemic began, while the bond markets’ reaction to that guidance has swung from overly dovish to overly hawkish. But while the bond market drives interest rates, generalist investors mostly think about gold as inflation hedge.


It’s interesting to note that we’re seeing very strong food price inflation in many parts of the world, including the US. Given the behaviour of generalist investors, food price inflation has unsurprisingly correlated quite closely to the prices of gold and silver in the past, and so is a trend worth closely monitoring.

The end of the ‘monetary super-cycle’?

In the gold and silver strategy at Jupiter, we actively allocate to the shares of gold and silver mining companies alongside physical gold and silver bullion. We believe this offers the potential to generate superior returns when gold and silver prices are rising, as mining company shares tend to rise (and fall) more than the prices of the metals themselves.


There has been a big decoupling in the performance of underlying equities in the monetary metals space, between those have done well over the past six months and those that have been hit due to little more than the unwinding of (mostly leveraged) positions from big index holders. The gold and silver strategy at Jupiter has little crossover with index positions, which has benefited performance over this year. 


A final point of interest to gold and silver investors is the concept of a ‘commodity supercycle’ which has been doing the rounds for years.


In my view, the way that commodities are behaving does imply a supercycle, but it feels more like a ‘monetary supercycle’, which could be coming to an end with implications for all asset classes. In the strategy, we have sought to take advantage of that over the past few months through buying high quality index constituent stocks that have fallen substantially for no good reason.


A monetary perfect storm has been brewing for a long time. In the US, the Federal Reserve have confirmed that any adjustments to monetary policy will be made with plenty of advance warning. At the same time, yield curve control remains likely, unmentioned but lurking in the background. Falling real interest rates therefore seem inevitable. We see further stimulus, supportive fiscal and monetary packages, and accommodative central banks as the reality of what remains a highly stressed macroeconomic environment.  Once real interest rates resume their secular trend lower, the monetary metals market should get ‘leverage, momentum, and narrative’ back; an optimistic prospect for gold and silver investors.

Please note: 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.


This communication is intended for investment professionals and is not for the use or benefit of other persons, including retail investors. This document is for informational purposes only and is not investment advice.


The views expressed are those of the Fund Manager 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 any information provided but no assurances or warranties are given. Issued in the UK by Jupiter Asset Management Limited, 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, the Management Company), registered address: 5, Rue Heienhaff, Senningerberg L-1736, Luxembourg which is authorised and regulated by the Commission de Surveillance du Secteur Financier. No part of this document may be reproduced in any manner without the prior permission of JAM. For investors in Hong Kong: Issued by Jupiter Asset Management (Hong Kong) Limited and has not been reviewed by the Securities and Futures Commission. No part of this content may be reproduced in any manner without the prior permission of Jupiter Asset Management Limited. 27261