Jupiter: What's behind the rise in gold and silver?

Ned Naylor-Leyland and Daniel March discuss the macro, market and technical factors behind the bullish moves in gold and silver.

With the gold price in dollars approaching its all-time high of $2,100 per ounce, we would like to highlight the important tailwinds that are supporting the asset class.

Firstly, central banks continued to buy gold at a record pace in Q1 (a trend we highlighted in a previous commentary). Central banks purchased 125 tonnes in the first two months of 2023, with China and Singapore showing significant increases. The decision to freeze Russia’s foreign exchange reserves appears to have accelerated this trend, as central banks continue to diversify their holdings into the system’s neutral reserve asset and gradually reduce their reliance on the US dollar.

Secondly, the fallout from Silicon Valley Bank and Credit Suisse has forced Western investors to reconsider their allocation to the monetary metals. Concerns over counterparty risk, and systemic contagion, have sparked renewed interest in gold, as evidenced by the World Gold Council’s March ETF statistics, which showed the first inflow in ten months¹. Nonetheless, investors remain underweight the asset class, with gold ETFs accounting for approximately 2% of all exchange-traded securities (see below).

Gold ETF Allocation (as a % of Total ETFs)

*Source: World Gold Council, Statista, Jupiter, as at 31.03.2023

Gold is also benefiting from the prospect of a dovish tilt from the US Federal Reserve (Fed) in the not-too-distant future. Moreover, gold is beginning to anticipate an end to the current interest rate hike cycle, with the bond market already pricing in cuts by the end of 2023. A more dovish Fed means US real interest rates have likely peaked, providing less incentive for investors to hold cash and cash-based instruments.

The gold and silver equities are beginning to reflect favourable underlying factors, with all-in sustaining costs (AISC) for the gold producers declining in Q4 2022 after reaching a peak of $1,276/oz in Q3 2022[1]. Lower costs are a windfall for the producers as it increases their operating margins, especially at a time when the $ gold price has risen $200/oz since the beginning of the year.

There has been an uptick in M&A activity for gold and silver producers so far this year as major producers seek to replenish their reserves through acquisition, a topic we also discussed recently. So far this year, the world’s largest gold producer, Newmont Gold, placed a $19.5bn bid for Newcrest, and B2 Gold has completed its acquisition of Sabina Gold & Silver. And finally, the monetary metals are benefiting from positive multi-year technical chart structures that look set to break out to the upside. We believe that the longer the gold price stays above $2,000/oz, the more likely that there will be a sustained breakout across the sector. Silver has the same technical structure as gold but comes from a lower base as evidenced by the still elevated gold/silver ratio at 80:1.

¹ The banking crisis fuelled gold ETF inflows in March | World Gold Council

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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