By Hamlin Lovell, NordicInvestor

After the Covid crash in March 2020 every broad asset class participated in the “everything rally”, which halted in 2021, when developed market government bonds delivered the worst start to a year in decades. This leaves traditional equity and bonds portfolio construction in disarray and investors wondering where they may find diversification and decorrelation. Precious metals could provide a safe haven under some probable scenarios. The Jupiter Gold and Silver strategy offers a way to express macro-economic views through two types of exposure gold and silver, including a differentiated approach to picking stocks.

Macro-economic drivers and views

Though precious metals may rally on political or geopolitical risk, the most important political risk factor is central banks. “Monetary risk is extraordinarily mispriced, and investors need to own something to hedge against that mispricing,” says Ned Naylor-Leyland, Head of Strategy, Gold & Silver, at Jupiter

Inflation is already apparent in many industrial metals, raw materials and food prices, and it surprisingly has not yet shown up in gold and silver prices as of May 2021. Precious metals and equities of their miners offer portfolio diversification and are widely perceived as inflation hedges. “More precisely they are plays on the level of real interest rates – nominal rates less inflation. Inflation per se does not guarantee higher precious metals prices: in 1980 inflation was 15% but when Federal Reserve Chairman, Paul Volcker, raised interest rates to 20%, this resulted in real rates of 5%, which caused a collapse in gold prices. You will not see precious metal prices rise with stronger real rates,” explains Naylor-Leyland.

In May 2021, real rates are negative (around -2% at the short end and slightly negative even all the way out to 30 years in terms of US Government bonds), but what is most important is the path that real rates follow relative to consensus expectations factored into forward and futures markets. There are two sources of potentially positive surprises for precious metal prices: “The Federal Reserve argument that inflation will prove transitory is reflected in inflation linked bond curves and two Federal Reserve rate hikes are priced in. If inflation lasts longer than consensus forecasts imply, or if rate rises do not occur, or both, then real interest rates will turn out lower than the market expects. Today the market is overbought on real rates and last year it was oversold on real rates. When investors lose confidence in central bank promises, gold and silver could really run,” argues Naylor-Leyland. 

The base case is that real rates fall further into negative territory, and undershoot expectations, but Naylor-Leyland also entertains some more radical scenarios: “politicians and policymakers are talking about the great reset, and we could easily see either a reset or a debt jubilee. This may not be as far away as people imagine”. A debt jubilee could entail at least the monetization or cancellation of the growing proportion of government debt that resides on central bank balance sheets, while faster inflation would reduce the real value of all government debt.

Physical and financial demand

Though they are commodities, gold and silver are also ancient and modern currencies: they trade with currency tickers XAG and XAU for dollar-denominated gold and silver, and it is their financial guise that matters most. “Physical demand for gold is a marginal driver since it only makes up 2-3% of the market. Therefore, any impact on gold demand from India’s covid surge or Turkey’s currency crisis is a tiny part of the story. Central banks in creditor nations such as Russia buying gold are also not a big factor. Some 97% of the market is currencies and futures, which also creates potential for mismatches between physical and financial,” says Naylor-Leyland.

Green industrial revolution

“Silver has more industrial uses than gold, and offers more potential for a physical squeeze as there is competition between industrial and investment buyers for a small supply,” he suggests. The green industrial revolution, encouraged by governments in the US, EU, China and elsewhere, along with other technological advances, is increasing demand for silver. “Key drivers include electrification, 5G, the internet of things, medical equipment, fabrics and materials,” he points out. Meanwhile, “investment demand via ETFs is only just starting to grow”.

Geared exposure

It is possible to apply balance sheet leverage to gold and silver futures, traded on margin, but Naylor-Leyland’s unleveraged strategy prefers to gear up through silver and equities: “silver is a higher beta version of gold, and gold and silver equities are nearly always a geared version of the physical metals. The beta of mining equities to the metals can range between 0.8 and 5, depending on flows, participation, the cost of money and input costs. Mining equities provide more bang for your buck. Therefore, when it is in bullish mode, the Gold and Silver strategy has more exposure to equities versus bullion, and more exposure to silver versus gold”.

Selective stock-picking and ESG

The strategy invests in stocks operating in North America, Latin America and Australia (which might be listed on other markets including the UK, though the UK’s junior AIM market is not the obvious place to look). This excludes major mining provinces including South Africa and Russia. “This is not really about political risk but more about avoiding areas with operating risks around logistics, labour and legal frameworks. This also means that we naturally invest in jurisdictions where ESG is handled better, often based on hundreds of years of experience in mining. ESG is very important: if you lose a social license for a silver mine in Guatemala, you lose your entire investment”.

Operational leverage

Naylor-Leyland expects mining input costs will continue to rise over time, so investors need to be confident in rising gold and silver prices. “If metal prices flatline or go lower, there is not much chance of a positive real return. Inflation is higher than 2% in the real world”. In a climate of stagnant metals prices, the portfolio could rotate from operating companies into royalty and streaming companies, which can grow their portfolios because the operating companies need working capital.

But that is not the scenario envisaged in May 2021, when Naylor-Leyland is invested about 50% in mid-cap producers and 25% in exploration and development stocks, a sleeve that has grown over the past year. This part of the strategy’s portfolio is mainly in development rather than appraisal or exploration plays. In early 2021 he took advantage of the pullback in gold equities and acquired some Australian mid-cap names 50% below their September 2020 peak. The portfolio’s stocks can sometimes also have marginal exposure to copper, lead and zinc, but are mainly wagers on gold and silver prices.

“We avoid the largest listed miners, which will need to acquire the mid-caps we own in order to replace reserves, and tend to trade more in line with bullion prices. We already have bullion exposure”.

Accessing physical bullion vehicles

Though Naylor-Leyland expects that ETFs could be an increasingly important source of demand for precious metals, his fund does not invest in these vehicles. “We avoid ETFs because they are structured so that the physical bullion can only be accessed by the authorized participants, banks, who can create and redeem units. We access bullion through bullion vehicles that hold actual physical bullion, in order to have confidence in the assets being there. We want to invest as closely as possible to holding a sovereign coin in your pocket”. One example is PSLV (Sprott Physical Silver Trust).

The bullion vehicles have the added advantage of sometimes trading at a discount to NAV, which has recently been around 1.5% but was as high as 10% three years ago. Some precious metal investors argue that vehicles with the security of direct physical ownership could at some stage trade at a premium to NAV, just as sovereign coins can change hands at prices above the value of their gold or silver content.

Some of the equities pay dividends but their main return driver is capital growth and the bullion does not generate any income. “Though bullion can be lent out to generate lease rates, that would turn a risk free asset into a credit instrument,” points out Naylor-Leyland.


Whether cryptocurrencies compete with, or complement, gold and silver is open to debate. Bitcoin is described as “digital gold” and has certainly attracted more media attention than gold or silver this year. “This might divert some “off the rails” Millennial investors away from gold.  But crypto valuations could even be a positive for previous metal investors. The fact that Dogecoin at one stage had a market capitalization as high as the largest listed miners, Barrick and Newmont, helps the narrative. What you see in crypto could come to precious metals at some point. There is very low sentiment and participation now,” says Naylor-Leyland.