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Ask The Expert

Gold Price Predictions for Summer 2024

Ask the expert Ned and Craig

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In the latest episode of "Ask the Expert" on Sprott Money News, Craig Hemke hosts Ned Naylor-Leyland, a portfolio manager at Jupiter Asset Management. They discuss the surprising rally in gold despite economic predictions, emphasizing the bond market's impact on gold prices. 

Watch the full video below:

Announcer: You're listening to "Ask the Expert," on Sprott Money news.

Craig: Greetings from Sprott Money, sprottmoney.com. We are now well into the month of June. It is time for your "Ask the Expert" segment. As usual, I'm your host, Craig Hemke. And joining us this month, for a discussion of the precious metals and the mining shares, my old friend Ned Naylor-Leyland. Ned is a portfolio manager with Jupiter Asset Management in London, where he manages their gold and silver fund, and what a perfect guest here in the month of June to have on for this segment. Ned, always good to see you, my friend.

Ned: And you. Thank you for the invitation.

Craig: Before we get started, we always gotta thank Sprott Money for funding all of this great content. You wanna visit sprottmoney.com anytime you are in the market for physical precious metal, and do so right now. Right on the home page, you will see, you refer a friend. Ned, if I refer you, and then you buy something from sprottmoney.com, I can save as much as 500 big ones the next time I place an order. So, if I'm an existing customer, and I refer Ned, and Ned buys something, I, they, I mean, well, 500 bucks gets you, not quite a tube of Eagles anymore, but it's still, you know, nothing to shake a stick at. So, that's a pretty good deal. Again, go to sprottmoney.com, or call them up at 888-861-0775 for more details. And of course, thank them for all this great content.

Okay, Ned. It's June. It has been a year. Man, if you'd have told me back in January that we'd go from seven rate cut expectations in the U.S. to one, you know, the dollar index would go from 101 to 105, the yield on the 10-year note would go up by 50 basis points, I would not have expected gold to rally by 15%, but it has. What do you make of all this?

Ned: Well, if you'd asked me about the rate cuts back then, I would have probably said to you I'm a bit worried about that. I remember putting a frowning smiley faces, or, not smiley faces in my diary throughout December, when I realized that there were six...I think at the time, there were six cuts priced in. And I didn't like that. You know, I thought that's not good. Because of course, it suggested that the Dollar/gold price was pricing in that outcome, and being fairly confident that wasn't gonna happen, that wasn't a good situation.

But I think that, obviously, you would agree with me that we learn more and more as we go on and the grayer we get, about the macro machinations of gold. And I think that what's happened is just that the bond market has become less confident holding dollars long, or Treasurys long. And that's in parallel, but not... It's still attached to the conversation about rates, but it's not, principally, for me, it's not exactly what's changed the game. I feel like the bond market has sniffed out, and did sniff out when the Dollar/gold price broke out, the coming monetization of all this treasury issuance, through the domestic banking system, pensions, the money markets. And they were just, I think it was that ending of the lending facilities, the regional banks in the U.S. That rolled off.

Remember, there was a letter written by the ISDA about regional bank solvency, and how accounting rules could be changed with respect to their treasury holdings, to improve liquidity and solvency within the regional banking system. And that was the moment where the Dollar/gold price broke out. And I just see that as a shift in the way that people think about holding dollars long. Now, the reason I emphasize that is because, the reason why the Sterling/gold price just goes up, and the Yen/gold price just goes up, is because people don't wanna hold those currencies long. But the market has been willing to hold dollars and Treasurys long, for several years now, or rather, decades. But especially, you know, relative to other currencies, for the last few years. And it feels like now we're just in, we're in a different environment, where no one wants to hold anything long, quite rightly. And for me, that's what changed. But I do agree that it does seem like a strange sequence of events which have taken us to where we are.

Craig: So, Ned, let me ask you this, because I've been dying to ask you this. We have also seen this continuation of central bank gold demand here this year. I mean, after two record years, back to back, '22 and '23, here we are in '24 at the same pace. Silver offtake, you know, the Silver Institute puts out the thing about the, what... And once we're done with this year, it'll be 700 million ounces of accumulated supply deficit over the last four years. Lot of talk here recently about silver demand in the East, you know, the vaults being emptied in Shanghai, all the rest. You, my friend, are famous, at least in my mind, for coining the term that the precious metals markets, at present, have the futures tail wagging the spot dog. I think I first heard you mention that about 12 or 13 years ago. Is the dog starting to strike back in 2024?

Ned: No. But there are things that are happening that are interesting. And when I say no, I would say, in fact, I would say the evidence in the moment is kind of the opposite, actually. So, for me, the reason the U.S. dollar/gold price went up to where it went to, so, this is whatever it was, $300, $400 move that we had, that was driven purely by futures. So, that was nothing to do with physical. That was absolutely CTAs and trend-following. What happened was we had that trigger, that change that took the dollar price through $2150, for me, was the key level. And then what you saw was the long-only world, the investment world, go, "I don't know what's happening here. I'm not participating." And we can see that, very clearly, that there hasn't been any participation at all by investment.

But what did happen is those investors, if you wanna call them that, which is a bit of a stretch, that don't care about narrative, they just started to buy, because they see the breakout, and they just bought. And they just continually bought. And that's very much the tail, not the body. I mean, you are right, of course, which is, there's some very interesting things happening within the physical market, and particularly in silver. And I think that the clear move towards sound money that we're seeing in China is something that can't be stopped, and has massive implications medium-term. But in terms of price action and what we see every day, I don't think that I'm afraid that that is the case. And not even in silver, because in silver, really, you know, you look at what's going on with India, where every ounce mined by mines has gone into India this year. And, I mean, bar a single ounce. All of it... If you equate imports to mine supply, the whole [crosstalk 00:07:26] gone there. And meanwhile, stockpiles that we can see are dissipating, you know, quickly. The price should be ramping, but it's not.

So, again, I feel that, no, the... It's still that, if we wanna call it unbacked, or the paper gold market, which is driving the outcome on the screen. But yes, there are definitely some very interesting things happening in physical. Although, again, you will know very well that bullion dealers are fine. I mean, there's no, there's been no accompaniment of investment demand, either in the long-only institutional world, or even in the retail world in the West.

Craig: Right.

Ned: All of that lies ahead of us. And for me, this is all to do with other things doing well. So, what I think it is, is what we've seen is we've seen a big change in the last, I'm gonna say, five years, probably since the world got very weird about five years ago. And what I've noticed is that everybody likes volatility more. So, before then, people were very reluctant to accept high volatility in their investing. And now, you see, even in the institutional world, they're much more open to it, and certainly in the retail world, they demand it. They need that. They're not gonna do it unless they feel like there's a really, potentially, high vol, obviously, hopefully with an upward bias, outcome available. And people are still stuck on the NVIDIA train. They're sat there, going, "I'm doing so well." And, you know, and how it feels for me at the moment is, people are kind of patting me on the head and saying, "Oh, I'm so pleased for you. Your nice thing is doing well for you." You know, "Good for you."

Craig: Oh, how cute.

Ned: Yeah, yeah. Exactly. Exactly like that. And I'm like, "Hold on. Wait a minute." And the answer is, yeah, you know, all that derivative mainframe, the flow of the market remains, I'm afraid, in place. But yes, the physical market looks a lot more interesting alongside that.

Craig: Well, then you led me right into the second part of our discussion, which is your daily specialty, which is the precious metals and the mining shares. To the, as we go in the direction of the mining shares here, let's talk about how, you know, our sector is unloved, and continues to be unloved. In some regards, I kind of, you know, I know what you're saying about the momentum and the, everybody just wants growth, you know, and if your portfolio, you're not in something that doubles in 90 days, then you're a loser, and, you know, "Why are you even doing this?" You know, and when, you know, I remember it used to be the rule of 72, right? If you could double your money in eight years, making 9% a year, that was pretty good, but now you gotta do it in, you know, nine weeks. So, is that one part that could drive interest into the sector in general, a shift from, I don't wanna call it growth to value, but I think you get what I'm driving at.

Ned: Well, I think there's a...

Craig: Or is it gonna take more rising prices of the metals to get people more interested in the sector?

Ned: So, I could see a situation where, I don't know that this will happen, and I think it probably won't happen, but I can see the Dollar/gold price at $2800, and still no one doing it.

Craig: Yeah. Feels that way.

Ned: So, the reason why I say that is because the way I think about this now is that we've been in a bear market for gold versus dollars since 1980. And the strong phases for the mining equities have been during bear market rallies for gold versus Dollars. If you look at the inflation-adjusted chart, particularly one that Ronnie has been producing now for many, many years, you can see that we're basically now at that level. We're at or around the level where we were in 1980, on a CPI-adjusted basis. And I do think it's changed. I think we're now in a bear market for Dollars versus gold. It feels very strongly to me that that's the case. You can see it from the price action. You can see it from the behavior of the non-U.S. world towards Treasurys. Interestingly, I think that's really the key indicator here, which is, no one wants those now. And people do want gold. And that wasn't the case before. So, we, in my view, we have flipped from bear for gold versus Dollars to bull for gold versus Dollars, after 44 years.

And of course, I'm afraid what that means is we're now in the stealth phase. And, you know, it's gonna take a bit of time to get people to recognize this very, very, very, very important fundamental shift in risk-free. What is risk-free? Now, you know, you know it. I know it. A few other people know, but most people, they're just still staring at the screen, going, "There's something weird going on here, but I'm not...I certainly don't feel the need to participate." Now, I do think we're facing an interesting moment, which is the end of Q2, and reporting season for mining stocks at the end of Q2. Because one quarter does not, is never gonna be enough to make generalists move across towards the large gold miners. They're not gonna do that. But I do think that two sequential quarters with margin expansion, free cash flow growth... Obviously, the valuation metrics are very, very low relative to the rest of the broader market. Although we do use different valuation metrics, which is one of the problems. You know, there's no PE [inaudible 00:13:01] for example, for a gold miner versus the rest of the market.

But, you know, if NVIDIA trading 40 times sales, you know, it's safe to say that the major gold producers are not expensive on a relative basis. But I do, I'm afraid, think that we need a little more time for this problem with Treasurys to embed. And I think that what we really need is we need these other things to go down, I'm afraid. I think what will drive the re-rating, and drive people to come in and buy these equities, is other things doing poorly. Because that's where the rotation comes from. It's not from, "Oh, look. That's doing so well. I must move across." It's, "This isn't doing very well. That is doing well. I now need to move." So, I'm afraid I am, at the moment, of the view that we do need... I'm not saying we need a 2000-style top-out for, Cisco-style for NVIDIA, although I do think that's definitely a possibility. But I do think we do need some of the air to come out of tech, principally, to then make people look at their portfolio and go, "Well, wait a minute. What's doing well?" And then at that point, I think you'll get the waves of FOMO, and then the self phase will be over because people will be interested, and they'll wanna understand the narrative, and you and I will be asked to explain it more frequently. But yeah, I think Q2 reporting's important, and it will help. But I think the most important driver is other things doing badly, sadly.

Craig: So, I would imagine, at Jupiter, you're in an office. In a tower there, right? City of London or someplace. And in that office, maybe even on the same floor, you've got guys that run, you know, more generalist funds, tech funds and the like. For now, though, like you said, they're just coming up to you and going, "Aww, Ned. Good for you. You're having a good year so far." Nobody's coming up and going, "Uh, Ned, tell me a little bit about how...where can I get something..." That's not happening yet.

Ned: Well, I mean, there is a little bit of that.

Craig: Good.

Ned: So, it would be disingenuous for me to say that's not the case, because a couple of the fund managers are able to see ahead, and go, "You know what? I think now is the moment for me to add a gold name to the portfolio. What do you suggest? What should I have a look at?" And so, there are a couple of those. But it's, you know, people who are running large pools of investor capital are the sophisticated end of the market. So, you would expect a few of them to be a little bit kind of aware that something has changed. Also, they do have me in their ear, quite noisily. So, it's not like it's an entirely [crosstalk 00:15:40] relationship, Craig. You know, they have to listen to me kind of ranting. So, you know, there is a bit of communication this way. But I think more and more relevant are the customers, and the potential customers, of this concept. And they definitely aren't any more interested than they were before.

Craig: Yeah.

Ned: Albeit, you know, people notice performance. I mean, of course, your benchmark gold mining indices haven't been great. There have been pockets of good performance. There's a bit of M&A as well, which, you know, always moves the needle a little bit at the margin, where people are sort of noticing deals, and some of the stocks that are being bid for have done quite well. So, there's a little bit of positive momentum. But like I said, I could see the Dollar/gold price do another two or three hundred, and it will still be just all of us doing it, until something fundamentally changes. I mean, of course, what's going on with respect to Russian Treasury reserves at the moment is absolutely amazing. And no one wants to think about it. You know, yesterday, Euros, more importantly, actually, by the way, and Dollars, were banned from use on the Moscow Exchange...

Craig: Yeah. Mm=hmm. Saw that.

Ned: ...ahead of today's G7 meeting, where they're obviously now handing lumps of U.S. Treasurys owned by Russia to Ukraine, to continue the war, which the public evidently aren't keen on. So there's a lot going on in that sphere, which makes one think that they're really playing with fire, respect of the market's confidence in U.S. Treasurys. But I will say, the market professionals that invest in these things don't see any issue whatsoever. I can promise you that's definitely not a problem in their heads. At the margin, it is with the people investing with them, but not with the people deploying the capital, you know, broadly, and that's not just my firm. Across the board, the fixed interest space, they don't see a problem. But they see the world in a very inverted way, fixed-interest investors. You know, it's a bit like they'll tell you that a nice bit of Western intervention in an emerging market country is a good thing for investing in bonds issued by that sovereign, when in fact, actually, often, that's causing terrible problems domestically with the public. So, you know, the bond market's a funny beast. The way it thinks isn't really reflective of anything that's actually going on on the ground. And it's definitely true that when I speak to people now, whether they are investors in institutional pools of capital or people thinking of deploying, you know, client money, they are worried about these themes. You know, they do look at this and think, ooh, you know, I'm not sure that I feel comfortable with this over the, let's say, two to five-year time frame. But there's little movement short-term, so far as I can see.

Craig: So, lastly, Ned, and just to, again, utilize your expertise in the mining sector, and where to allocate capital, when someone comes and asks you, or for someone watching us, that says, "Yeah, you know, I can see the value of, you know, owning a few mining shares..."

Ned: Yep.

Craig: You know, a guy like Stanley Druckenmiller is, you know, 1000 times smarter than I am, and his net worth is about 1000 times higher than mine, but even he just reports that he owns the GLD, and buys Newmont. You gotta be a little..

Ned: Yeah.

Craig: ...it's a little more nuanced than that. Within the sector, you know, you've got Newmont, which is the same price it was 20 years ago, even though price is five and a half times higher for gold. What's the sweet spot at present? Is it the producing mid-major? Where should people be focusing their attention?

Ned: Well, it depends on your time frame, of course, and your risk profile and everything [inaudible 00:19:44] But what I would, couple of things I would say. Firstly, usually when people do turn up, and I would say, this is pretty reliable. Usually when people first turn up, although our experience has only been bear market rallies, by the way, so we haven't seen a bull market, so we don't really know. But usually, what I've noticed, and other people have too, is that your larger gold miners, they go first. You know, they do benefit first. [inaudible 00:20:08] to do with the capital stack, it's the way that capital flows. It will hit them first. And they tend to outperform initially. But I think the opportunity's far greater in a bit further down, and principally, for me, in the development assets.

But you've gotta have a very, you gotta have a pretty cultured view as to how investable they are, because obviously, there's a very widespread of valuation there within that development space. You know, you can buy development assets at 0.1 times NAV, or 10% of their NAV, up to 0.8 times, so, 80% of their NAV. So, there's a very wide spread there within that. But your natural producer multiple would be 1.2 up to 2.5, with some silver miners, some producers. So, you're naturally buying instruments which are valued at a fraction, when you're looking at the development space. Now, if your time frame is long enough, and you have enough of them, then, for me, the opportunity in silver development assets is extremely obvious, because we do have a very big and obvious and growing fundamental problem with mine supply versus the demand for silver in solar, in all of the industrial applications, as we all know, you know, are growing very, very quickly. And then, obviously, additionally, you have that potential for investment demand to turn up, which would blow the doors off.

So, for me, being able to buy silver development assets for 0.2 to 0.6 times an asset value, and understanding that not all of them will work. Some of them will hit permitting problems, or, I don't know what kind of operational issue. But as a group... And that's true in gold as well. I think that the development assets represent the best value. You have to be a bit more patient. They are longer-duration, which is why they did that much worse over the last four years, because when rates are going up, that means you're getting hurt by the duration. Now, it's also true they do start cutting. Assets which are not in production now, but are in production 2, 5, or 10 years time, that natural discount the duration has brought into the valuation should come back for you in the other direction.

So, I like those the most, but, you know, in the job that I do, I can afford to be quite patient, and sort of sit there and garden my portfolio carefully. But I do think that's the right way to think about it, because they have the most optionality, they have the most upside, and frankly, this silver is needed, and, in a lot of cases, will be mined. By whom and when, I'm not sure, but I see it a little bit like everybody should see everything in their portfolio, which is, you know, you've got your cash, you've got your near cash, you've got your large caps, and then you've got your fun. You know, the things that you think you can derive extra return from. And I always think you should always invest in that way, whether it's me doing it, you doing it, anybody doing it, always try and think like that. So, just layering the way you go into it. Rather than just piling in on one part of that opportunity set, try and layer it sensibly.

Craig: So, Ned, if someone wanted you to manage part of their money at Jupiter, it's not available everywhere in the world. In what countries do they need to live to be able to check out you and what you do?

Ned: Well, sadly, it's not really gonna be appropriate for most of your listeners. It's not... We're what's called a UCITS fund over in Europe. So, it's not something that I'm afraid is available. But, you know, you've got lots of good funds over there, including ones that are close to home with respect to this particular interview. And there are lots of very, very experienced people who look at the space the same way I do, really, which is, distribute your risk. Don't be all in one mining company. This is the most important thing I can communicate, which is whatever you do, don't do that. If you do get it right, and you do do it, well done. But for me, that's not the sensible way to think about the asset class. And I slightly cringe, what I'm gonna say, because we've all heard this, and you think, "Oh, yeah. Here we go." But, you know, the more longer I do it, the less I realize I know, despite investing in these things for 25 years. So, you know, that expertise that can be brought into it is valuable to most people. And you shouldn't turn your nose up at experts when it comes to the valuation of mining projects, because it is a very, very specialist world.

Craig: Yes.

Ned: But distribute. And I think, over the next however long, it can come good, although, bearing in mind that you and I have been repeating ourselves like Woody Woodpecker for way too long.

Craig: One day... Who was I just talking to last night? Andy Schectman, who said, it reminded me, of course, of the great Hemingway quote about gradually and then all at once, and our sector will gain prominence gradually, and then probably all at once. In the meantime, of course, if you wanna check out Ned's portfolios, and you live in the UK or in the EU, you can employ his expertise to your benefit. Of course, in Canada and the U.S., there are the Sprott funds and others. But this is the time to, and I've said this often. You're out there trying to read the drill results on your own. That, as Ned says, that takes a level of expertise. Get some help. You know, find some people to help you do this, so that you're not just wandering aimlessly through all the different earnings results and drill results and all that kind of stuff.

Ned, it's always so much fun to visit with you, and you always got such great insights. Of course, very much appreciate visiting with you. And I wanna remind everybody, this is the kind of stuff you get from Sprott Money and sprottmoney.com. If you're watching this on YouTube, or listening to it on your favorite audio platform, hit the subscribe button so you don't miss any of it. Just last week, we had the "Precious Metal Projections," with Chris Vermeulen. That was extraordinarily helpful. David Brady writes a weekly post, as do I, at sprottmoney.com. You can find that. It's, you just check that every week, under the Insights tab. You'll find that there. And then we've got more content. We'll wrap up the month in a couple of weeks. And then we'll just start over and do it all again in July. So, thank Sprott Money by liking, subscribing, checking the sprottmoney.com site, so that you don't fall behind, and you get some of that objective information that we're talking about.

Ned, you're the best, my good man. It's always good to visit with you. Thank you for sharing some time. And hopefully, we'll do this again soon.

Ned: I look forward to it.

Craig: And from all of us at Sprott Money, sprottmoney.com, thank you for watching. Have more content for you still later on in this month.

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