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Ask The Expert

Ask The Expert - Ned Naylor-Leyland - July 2021

Ask the Expert with Ned Naylor-Leyland


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Ned Naylor-Leyland is a Fund Manager and Head of Strategy in the gold and silver team at Jupiter Asset Management in London. Before joining Jupiter, Ned worked at Merian Global Investors as a portfolio manager in the gold and silver team. Prior to this, he worked at Quilter Cheviot, where he founded a dedicated monetary metals fund in 2009. He began his investment career at Smith & Williamson in 2001. 

This month, Ned answers six of your listener-submitted questions, including: 

  • If gold prices are up, why do gold mining shares continue to decline?
  • What’s more important to silver price: industrial or retail physical demand? 
  • Plus: Will the Basel III changes have long-term impact on the price of gold?

For the answers to these questions and more, listen here:

Male Speaker: You're listening to "Ask the Expert" on Sprott Money News.

Craig: Well, greetings once again from Sprott Money News at sprottmoney.com. It is the month of July, 2021. It is time for your Ask the Experts segment. I'm your host, Craig Hemke and joining me this month is Ned Naylor Leyland. Ned is a very well respected voice in the precious metal sector. He is the head of gold and silver for Jupiter Asset Management in London, where he has been stuck now for what, may be a good year and a half, Ned? Hey, welcome. Thanks for joining me again.

Ned: Oh, it's an absolute pleasure, Mr. Hemke. I'm delighted to be here with you. Even though I'm stuck in London, I am still keeping an eye on these markets and keen to offer any sensible thoughts that are available to me.

Craig: I'm not sure what is more maddening at this point, being stuck in London and unable to really go anywhere for 18 months or having to watch the precious metals on a daily basis?

Ned: That's an excellent one. Yes, I'd say that that's about equal. It's a pretty even-steven one there, you know, both are, let's say sub optimal. And I see as we speak right now, they're having a good old crack at pushing the stock price down again. But it's been a funny all 9 months or 10 months, I must say.

Craig: That's for certain. And we'll get into that a little bit. Today I've got six questions that we've picked up over the last couple of weeks once people knew that you were going to be the guest this month. And just a reminder that this content is always sponsored by Sprott Money. They should always be one of your first choices whenever you're in the market for precious metals, or to store your precious metals. And do us a favor, help us get the word out on these podcasts, whether it's the Ask the Expert or weekly wrap ups, the precious metals predictions that I host in the first every month with Christopher Mulan.

If you enjoy that content, please give us a like, maybe subscribe to whichever channel you're listening to. That'll help us get the word out, cast a wider net. And again, if you have any need for precious metals, give us a call at Sprott Money, 888-861-0775. All right, Ned, I have six questions for you. First one is, I would say rather timely, we're recording this on July the 20th. Yesterday, Monday the 19th, was a rather foul day, not only for the mining shares, but for the stock market in general. A lot of people were confounded that by price versus the shares, though. I mean, Gold's holding in there, it's down, admittedly, 3% or 4% year to date, but boy the shares have had a really tough time. So with gold still above $1800, the gold mining shares continue to fall. Why is that, Ned?

Ned: Well, I mean, I think it's a function mainly of momentum, and some leverage as well, Craig. So the way I like to think about these things is that now, markets are driven by L, M, and N, so that's leverage, momentum and narrative. And I think that, you know, well, last year, the gold miners received some of each of those L, M, and N. But back in the, whatever it was, September of last year, the narrative of rates going negative was lost. Indeed, the market started to focus on actually more hawkish narratives, albeit while inflation continues to tick higher. And that meant that we lost momentum. And that leverage that came through, principally came through GDX and GDXJ.

So what I'm talking about there is, your very large hedge funds that effectively don't just go long, the relatively volatile instrument that has gone to the mining stocks, but they do it on margin. Now that created some positive momentum last year, but also sort of constant dribble away. I would say that retail has been very donkeydly [SP] remaining in there. So that big institutional money was a tourist last year, came in and then washed out. But then this year, what we saw was retail remaining there, remaining long. And then I think we've seen capitulation, really, in the last few weeks, that's what you've seen, and why the miners have come off. So that's been less leveraged, but more the final loss of momentum in the retail sleeve of the overall gold and silver mining space.

Craig: I might just follow up for a second too, because I wanted to ask you this anyway, what about just gold in general? You know, we are back to levels of real interest rates that are as sharply negative or more sharply negative compared on, you know, whatever you want to use for your inputs versus last year, but your gold's $300 lower. Is it just simply the market kind of being forward looking to rate hikes in a year and a half, or what do you think the issue is?

Ned: Yeah, I think it's a couple of things. The first is a sort of mildly alarming concept, which is that potentially gold is being predictive rather than real rates. So, you know, they're going to begin to converge again these two things. Now, will it be gold going higher to catch up with real rates or would it be real rates spiking, as in some kind of deflationary problem? So the first thing to say is maybe gold's right. If that's true, then that would infer, we could be heading into some kind of market liquidation event, which none of us want to see, not even the most kind of top of the hill gold buyer really wants to see that. So you could say that that's a sort of negative argument.

But what I would tend to say is, it's more to do with, like, you inferred in your question. The bond market, remembering that it's really not about the wider markets, it's about the bond markets view on real rates. So the bond market is with both sides of real rates being optimistic. So it thinks inflation is transitory, continues to pay for inflation being transitory rather than embedded. And on the rate side is being very optimistic in terms of what it thinks will happen, taper and rates wise. So it thinks that, you know, there will be rate hikes, there'll be a few of them, obviously, not immediately, but that's where it's focus is.

So in other words, it remains hawkish rather than dovish. So look, I think it's a wave, we had a short, sharp wave, lower for real rates last year, and the market was focused on interest rates going negative. And it just seems that the interest rate side of real rates is more powerful, Craig, than the inflation one. Because what we see inflation everywhere, and it frankly, is pretty much out of control now, in my view, in terms of the real economy. The bond market doesn't want to pay any attention to that. It's interested in the rates side of the question.

Craig: All right, let me move on to question number two. This is a...I'll be interested to get your answer on this one, Ned. You know, we've had this kind of crazy year in silver, with the Reddit Wall Street silver crowd and demand for physical silver and the ETF demand and everything else that goes with it. Yet price, as you know, is kind of floundering. In terms of price, though, what's more important, industrial demand or investment demand?

Ned: Well, I think they're both important. I think the industrial demand is probably more of a medium to long term thing. You know, it's not something which we'll see pouring through the gates anytime soon. I will say, though, that, at some point, that could be an extremely powerful short term drive riff, industrial users become motivated to try and buy physical insides.

We haven't seen that. And it's obviously the dog that never barked, the thing we've always thought about. But that's still in play. But I would say investment demand is certainly more powerful, short to medium term, because, you know, you have a very large number of potential fully paid loans in the investment world that would like 1%, 2%, 3% to 5% maybe in physical silver in their portfolios.

So I think, no, I think investment demand is more powerful. It's also more fickle and more of a momentum chaser. So it wants to see my view, it wants to see silver 330. That's when you'll start to see that happen. Of course, totally counterintuitive, and makes no sense at all. And they should be doing it now. But everything is a momentum chaser now, almost everybody is a momentum chaser. So I think that short to medium term's investment demand, and it would be triggered hugely by that $30 number.

Craig: Yeah. Yeah, I think so too. All right, let's move on to question three. This has been getting a lot of press lately, especially that little announcement that your regulator snuck in late on a Friday, earlier this month. And it just simply deals with Basel III. Do you think those Basel III changes will have any long term impact on price?

Ned: Well, I think they're part of a broader, broader concept, which will have something to do with price. I think that what we saw there was the revelation of the true nature of the city of London, and it's sort of independence from both Europe and the UK. So I would sort of give one a nudge in that direction. And so the fact that they can come out with the, "Don't worry about following those rules," was very interesting on that side. But I do think that there is something very powerful in play, which is that the global central banking systems, and that obviously is driven through the G20 and then the BIS, i.e. they were the ones that drove Basel III, that they want gold back as what it appears.

They want gold back to take over from the dollar's risk free instrument. Otherwise, why would they have gone this route? And that plays into why all this, the repatriation requests happened as soon as the NSFR rules were laid down. That's when you saw the central banks started to ask for their gold back. So I think that what we're doing is we're coming full circle and we're ending this cycle. And, yes, I do think this has an important impact on price.

As for the individual analysis, both to do with the end of the year, the plea of the LBMA, the response of the PRA, all of that is, you know, a theater within a grander outcome, which, yes, I do think impacts price. But, you know, I am one of those people that think that gold doesn't have a price, it's just valuing sterling and dollars anyway. So, you know, there's a bigger, you know, conceptual argument or discussion to be had there really.

Craig: Right. Right. Okay. All right, my friend, we are halfway done. So we are making our way rounding the turn, headed for home at this point. The last time I spoke with Eric, and he was able to share with us some thoughts on where he's investing now. He was very interested in Newfoundland, as a potential new gold region. Do you share his excitement about the possibilities there?

Ned: Well, I think it's a very interesting question. And it's a very interesting area. I'm not as excited or as invested as he is in that new, maybe a new district. I think that there are still things that need to be proven in terms of whether or not the capital infrastructure build out that will be needed, will actually end up there. So in other words, in order for that area to become a genuine production center, there's an enormous amount of money that will need to be spent to make it happen.

I think if it does, then it will prove to be very interesting and very important. And I think there are a number of these new districts though, globally. And what I would say is that we've noticed the last 18 months that the exploration for gold has been really very successful, it's been very nice to see that the money that's been gone into the ground has yielded a lot of results. I'm not surprised, because all of that geological know-how and work that has been, sort of, sat on the bench more.

Wow, I mean, it's the best part of 15 years, isn't it really? As it come through in the last 18 months to two years, and just seeing discoveries being made all over the place, and that is one of four or five, I think, new...whether it's camps, districts, regions, that are interesting, and it's certainly one we're keeping an eye on. You know, it's not something that we have had great success in yet. And it's a kind of watch-this-space situation, as far as I'm concerned.

Craig: You mentioned it, you know, the infrastructure has got to go in. I guess the challenge for a lot of investors, you got to take Eric's route, I would think. You've got to be patient, you've got to feel confident that you're right, and then wait. You can't just expect it to move like it's Amazon or Netflix or something.

Ned: Well, I think that's fine and agreed. And I mean, ultimately, if you think about how I Eric invests, although I wouldn't wish to suggest anything on his behalf. But ultimately, he's taking a view on a part of his broader metals portfolio in the region, presumably. He sees it as an additional form of optionality, I would imagine, within an overall portfolio of investments.

And of course, obviously, you know, everybody needs to think about diversification and always people should think about more than one, more than three, more than five, frankly, more than 10 individual names, when you're thinking about this asset class anyway. So, you know, I'm sure that if you, you know, you really pushed him on that, he would agree.

Craig: Yeah. All right, two questions to go, my friend. This is a fun one. I think this is...I'll be interested to get your answer. If we now stay in a trading range for Gold, you know, we're down $100 here today, which now places it about 10% back below 2000. So let's just say we stay in a range between 1800 and 2000. Would royalty companies outperform producing companies? Which would you prefer?

Ned: Oh, so that's very interesting. I think that I would say that royalty companies are going to struggle to grow their portfolios above 1800, would be my view. I think there's sufficient free cash flow, therefore producers, than not to be distressed enough to go and do what are good deals for royalty companies within that $200 band. So broadly, marts would be producers, I think, well selected. Having said that, they're a little bit different in terms of who the marginal buyer of those shares is.

You know, the large generalist investor likes the royalty companies because of the distributed risk profile of them. So you can have a marginal buyer there, within a generalist equity portfolio. You know, large institutional money that might buy those individually. Whereas with the producers, I tend to think that they're more of an observation on the sector. And I think that, you know, we need momentum to drive that back in.

So I'm not seeking to sit on the fence, but I will give you a seat sort of sit on the fence answer and say that I don't think you'll get that much variation in performance between those two, sort, of slots within that $200 range. Above 2000, I think you'll see a lot of momentum and a lot of fresh asset allocation into the general mining equity space, at which point I would expect producers to outperform.

Craig: All right. You just queued up, teed up high and smashed the drive for the final question, because that just leads right into it. What must happen, later this year or next, for gold and silver to get back to the highs that we saw just one year ago?

Ned: Well, I think in terms of individual news item, impossible to say. But it's going to be what, you know, one of those two impulses, whether it's inflation or rates. Now, the evidence that we've seen would suggest it will be the rates side. Because it seems to me that unless we have an energy, you know, absent and energy shock. So an oil price rocket up to, you know, $150 a barrel, which is always again, the dog that never barked, the thing that we've always looked at for 20 years and said at some point that will happen.

You know, assuming that doesn't happen, which would be a blowout for core inflation and would be unavoidably real interest rate negative and therefore gold positive, for me, it has to be the rates side. So it's going to be something that flips the switch from the market's current fascination and obsession with the concept of tapering and rate hikes and, well, I don't know about central bank balance sheet unwinding, but just a relatively hawkish bias. Now, what that would be, I don't know. I think it's difficult to pick an individual catalyst for it. But, you know, I look at the overall market, and you touched on it, you know, looking at the equity market. I mean, obviously, in the past every time we've seen this, it sort of drops, and then on we go again.

But where it's a start to lose momentum, I think that implicitly, the market would just back straight off all of that narrative about tapering, and about rate hikes. So that interestingly would be...so what we've got used to is the concept and the fact that [inaudible 00:18:04] goes down, that's a real interest rate spike. Now, you know, part of me still expects that, but I think you would have to say that a lot of that rates side of it is priced in a way that it would unwound, should equities go lower. So maybe it would be a loss of momentum in equities.

My concern there is when I look at it, you know, it feels a little bit like the equity market loses genuine momentum, it could go down rather a long way. So it'll be interesting to see how it all plays out. And I don't think it's going to take much, you know. We look at all the technicals in the gold and silver in terms of set sentiment, momentum, etc. Obviously looks like an excellent entry point now, no, we've had to become experts in life lessons, which would be patience and riding extreme volatility. But I think that, you know, if we look at the overall setup, it does look very good here. And I would tend to think that something has to come along over the next six to nine months to take the steam out of the bond markets, such a general hawkish forward march.

Craig: Kind of a catch-22, Ned. You know, if the market goes down on like a liquidity event that seems deflationary, that's one thing that could hurt the metals, but that also might set in this mindset that, "Oh, you know what, there aren't going to be...ever going to be any rate hikes. There is no way that that could get out." It's kind of a catch-22, isn't it?

Ned: Yeah, exactly. It's an odd situation because if you'd asked me a year ago, I would have said that, you know, deflationary or run to cache moments. Or equity air pockets are inherently now bad for our sector, due to the correlation with real rates. But of course, you know, like usual, one's assumptions are blown out the water and here we are. And I agree, it's a catch-22 now.

Craig: And we'll just see where we go from here. Where you should go from here, my friendly listener, is to sprottmoney.com, and the sponsor of all of this content. Go to that site, anytime you are in the market for physical, precious metal or a place to store it. Always great deals, sprottmoney.com. You can always just also pick up the phone and give them a call at 888-861-0775. And be sure to give us a share, a like, or a subscribe on your way out as well, so that we can broaden our reach with information like this great stuff from Ned Naylor Leyland to let people know how valuable the precious metals can be in times like this. Again, Ned Naylor Leyland, head of gold and silver for Jupiter Asset Management in London. Ned, thank you so much for spending some time with me today. I very much appreciate it.

Ned: [inaudible 00:20:56] it's an absolute pleasure as always, and I hope we catch up again soon.

Craig: From all of us here at Sprott Money News and sprottmoney.com, thank you for listening. We'll have another "Ask the Experts" segment next month.

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About the Author

Our Ask The Expert interviewer Craig Hemke began his career in financial services in 1990 but retired in 2008 to focus on family and entrepreneurial opportunities.

Since 2010, he has been the editor and publisher of the TF Metals Report found at TFMetalsReport.com, an online community for precious metal investors.

*The author is not affiliated with, endorsed or sponsored by Sprott Money Ltd. The views and opinions expressed in this material are those of the author or guest speaker, are subject to change and may not necessarily reflect the opinions of Sprott Money Ltd. Sprott Money does not guarantee the accuracy, completeness, timeliness and reliability of the information or any results from its use.


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