Where previously gold was a quirky ‘alternative’ asset class, potential flow is approaching the sector from all quarters. Global bond and cash holders are looking at gold as a way of diversifying and protecting purchasing power. In this sense, the scope for pension funds to participate lurks like an elephant in the room. Meanwhile, global equity investors are surveying an environment that is negative for many equity subsets but that is positive – and still improving – for gold and silver mining equities. Global alternatives investors are also now being driven to consider a move into the best performing area of alternatives.
A monetary perfect storm has been brewing for a long time; now it is firmly upon us. At the margin, global capital is losing faith in the money issued by governments, and the long monetary cycle is reaching its culmination. This is no surprise to us as we have long believed physical gold to be the only truly sound money within the financial system. We are indeed living through the apocalypse, but the original Greek word ‘apokalypsis’ means ‘revelation’ or ‘unveiling’. What is being revealed, among other things, is that credit money is just that: credit. Even the US dollar is simply credit. The world is remembering what risk-free is, and what sound money is – as is always the case at the end of the long monetary cycle.
Sail on, silver
Silver is also showing how closely it is tied to the hip of gold. Silver is gold’s unruly and badly behaved younger brother. Super sensitive to capital flows, silver has recently traded in a mid-US$20s per ounce range, but it is worth remembering that in 2011 when markets were also in ‘do whatever it takes’ mode, silver reached US$50 per ounce. Now, central bank balance sheets are vastly bigger than they were back in 2011. In the monetary metals spike of 1980, which saw the petrodollar system in genuine peril, silver also ran higher with gold and briefly hit US$50 per ounce. Adjusted for inflation and loss of purchasing power since 1980, US$50 per ounce is a great deal higher than where the spot silver price is right now. Indeed, looking back 40 years ago suggests a real high of several hundred dollars an ounce in silver.
Since the early 1980s, we have also seen physical silver inventories depleted, many new uses found for silver (solar, medical, electronics) and yet simultaneously more and more silver ‘obligations’ or ‘paper silver’ have also been issued by the big banks in the West and Asia. All of this sets silver up for an uncontrolled move to the upside at some point in the next few years, in our view. It has been a long road for silver investors, but the signs are good that the best moves lie ahead of us.
Gold and silver miners: a precious opportunity
Gold and silver mining companies are also attracting increased interest among investors. The miners have been unpopular with asset managers and investors alike, which is fair enough as they have been disappointing investments for decades. The reason for their previous ongoing underperformance was the high input cost inflation in mining. Energy, equipment, services have all been rising at a similar and sometimes faster speed than global gold spot prices. As such, mining companies had been unable to deliver sustainable or increasing operating margins.
The current deflating input cost environment is one reason why miners look attractive again. But another important reason mentioned earlier is the strong case for portfolio rotation – away from overpriced and/or constrained business models and towards a sector that is benefiting from Covid-19. Oil has become cheap relative to gold, mining services and equipment are deflating, and due to fiscal and monetary looseness we can expect spot gold and silver prices to continue to move sustainably higher. This is a powerful call option-like set up for gold and silver mining equities, one I’ve not seen before in my career and, with the exception of that brief late 1970s window, indeed is a set up unlike any seen before.
Author: Ned Naylor-Leyland, gold and silver portfolio manager at Jupiter Asset Management. To find out more contact your financial adviser.
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