Gold and silver prices have corrected back to technical support levels over recent weeks. Nevertheless, the longer-term macro case for monetary debasement and a next pulse higher for both metals and miners remains very much in place, in my opinion.
What would be needed for the next wave higher is a reduction in the now extremely elevated front-end US real interest rates, in my view. If this were to happen, I would expect it to be an important change to the hawkish/dovish market narrative, and I would anticipate anything above the previous gold price high of $5,500/oz would be an environment where long-only investors could start to join speculators in driving major investment flows towards the sector. Long-only investors have been mostly absent from the gold and silver market over the last few years, chasing momentum and tech stocks.
The result of this year’s macro switch to rising real rates is an interesting combination: monetary metals are testing key technical price support; meanwhile mining companies continue to generate exceptionally strong cash flows and also trading on historic low valuation metrics (see charts below).
What happened?
The catalyst for the recent pullback in monetary metal prices, as ever, has been a further rally in front-end real interest rates (the rate of interest after accounting for inflation). As markets priced a more hawkish path for policy, forward inflation expectations continue to remain unmoved, driving speculators (hedge funds, traders and commodities trading advisors, or CTAs) to unwind/deleverage their debasement bets (long XAU/USD).
We would expect any move by US Treasury Secretary Bessent or Fed Chair Warsh to regain control of the spiking yields to cause the speculators to return to the fray and go long the monetary metals space once again, as they briefly did in August when Bessent declared himself ‘The House’.1 This declaration hasn’t gone well for him so far, but it’s fair to say he is yet to reach into that toolbox and begin what I expect to be the coming era of Treasury yield curve control.
$Silver & $Gold back at technical support once again
Silver priced in dollars
Gold priced in dollars
Why we believe the longer-term case remains intact
It is worth remembering that what has happened recently is just a bounce for government-issued paper due to the change in rates expectations. The long-term story of debasement2, central bank balance sheet expansion and de-dollarisation is, in my opinion, embedded and irresistible. I see gold as a risk-free monetary unit, rather than a productive asset, preserving purchasing power as currencies depreciate over time, as shown in the chart below:
Debasement refers to investors moving capital out of fiat currencies such as the dollar and into uncorrelated assets such as monetary metals and real estate, to hedge against the currency’s reduced purchasing power.
Devaluation of dollar, euro, yen, pound vs gold
Compelling opportunity in the miners
While metal prices have lost some momentum with this change to the rates complex, mining-company fundamentals remain remarkably strong. Free cash flow margins for both gold and silver miners remain near cycle highs, with equity valuations on the floor. Margins have trebled over eight years, and valuation metrics have halved as that has happened. Dividends are growing, buybacks are happening, M&A and exploration are ongoing, all signs of an equity market subset in rude fundamental health, as the charts below show.
Valuations modest despite record gold price
Participation from equity markets absent
Free Cash Flow Margin for Gold Miners
Free Cash Flow Margin for Silver Miners
Price to Net Asset Value for Gold Miners
Price to Net Asset Value for Silver Miners
Gold miners cash rising
Dividends, buybacks, M&A
Cash and cash equivalents on gold miners’ balance sheets
Dividends paid by the gold miners
Implementation matters
For investors expressing a long-term monetary metals view, implementation is important. All year pure gold producer indices such as GDX have been driven up and down by speculative/tourist flows from the hedge fund community, while long-only investors remain absent despite the fundamentals of these companies. Last year the benefits of good mining company stock selection were evident, and I do expect that to return once momentum is regained. The beta of the fund to $Gold remains low, at around 1.5-2x due to investor attention being elsewhere, but we would expect that number to rise.
Jupiter Gold & Silver Fund vs $Gold
Two bear market rallies followed by a sustained bull market
The Jupiter Gold & Silver Fund deploys a highly qualitative approach, only investing in Tier 1 jurisdictions (Americas and Australia), while also blending these aforementioned producers with bullion and around 20% of the portfolio in the even more discounted development companies that are taking new gold & silver projects into production. The team see this part of the portfolio as a particularly compelling opportunity moving ahead, as we enter a new phase of an ongoing global raw materials/critical minerals cycle where the lack of investment in new mines over multiple decades comes home to roost. This is especially true in respect of silver, which has powerful demand cases in the real digital and electronic economy.
Of course, we think it’s important to be selective if choosing to invest in silver or gold miners as they can be risky and operationally complex businesses. Similarly, the market dynamics of gold and silver can be volatile and, as we have noted, are affected by macroeconomic and geopolitical events. The paths of interest rates, inflation and fiscal and monetary policy are difficult to forecast, yet important for gold and silver prices.
We believe an active investment approach is valuable in managing the risks around monetary metals. We are staying patient and positive about the outlook for these assets. We believe that silver and gold and gold and silver mining equities can play an important role in a well-diversified investment portfolio.
Conclusion
The recent pullback to structural support should be viewed primarily through a macro lens rather than as evidence of deteriorating fundamentals. The coming weeks may still be driven by real-yield expectations, but the combination of attractive mining valuations and a structural long-term case for debasement and ownership of monetary metals creates, in our view, a really compelling entry point for those who have no exposure or having been waiting to add. Bring on Secretary Bessent and his strategic toolbox.
Fund risks
- Currency (FX) Risk - The Fund can be exposed to different currencies and movements in foreign exchange rates can cause the value of investments to fall as well as rise.
- Pricing risk - Price movements in financial assets mean the value of assets can fall as well as rise, with this risk typically amplified in more volatile market conditions.
- Commodity prices risk - The fund's investments are concentrated in natural resource companies, and may be subject to a greater degree of risk and volatility than a fund following a more diversified strategy. Silver tends to outperform gold in a rising gold price environment and it tends to underperform gold when sentiment moves against the sector.
- Market Concentration Risk (Sector) - The fund's mining company investments may be exposed to jurisdictions where it is possible that regulation and other government action may negatively impact the value of the investments in the fund. For example, a local government may increase taxes or royalty payments, impose stricter environmental standards and even in some more extreme cases take a stake in or even control of mines.
- Derivative risk - The Fund may use derivatives to generate returns as well as to reduce costs and/or the overall risk of the Fund. Using derivatives can involve a higher level of risk. A small movement in the price of an underlying investment may result in a disproportionately large movement in the price of the derivative investment.
- Liquidity risk - Some investments may be hard to value or sell at a desired time and price. In extreme circumstances this may affect the Fund's ability to meet redemption requests upon demand.
- Counterparty Default Risk - The risk of losses due to the default of a counterparty on a derivatives contract or a custodian that is safeguarding the fund's assets.
- Smaller Companies risk - The Fund invests in smaller companies, which can be less liquid than investments in larger companies and can have fewer resources than larger companies to cope with unexpected adverse events. In less favourable market conditions these companies may therefore underperform larger companies and the fund may under-perform funds that invest predominantly in larger companies.
For a more detailed explanation of risks, please refer to the "Risk Factors" section of the prospectus.
Footnotes
1See Bessent comments via Bloomberg TV, YouTube https://www.youtube.com/watch?v=GE5jOaGhrFI. 9.9.26
2Debasement refers to investors moving capital out of fiat currencies such as the dollar and into uncorrelated assets such as monetary metals and real estate, to hedge against the currency’s reduced purchasing power.
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.
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