Gold Shines Again Through The Eyes Of Investors

Russia's invasion of Ukraine has put the global economy between a rock and a hard place, causing investors to see the geopolitical cosmos through a magnifying glass. Many of them now care less about the Federal Reserve's rate hike schedule and more about soaring inflation and energy prices. 

In this outlook, for Ned Naylor-Leyland, manager of the Jupiter Gold & Silver Fund, gold has woken up from its slumber after following a consolidation pattern for the last 18 months—and has once again shone through investors’ eyes.

Geopolitical Game

The most pressing question at present is the consequences the current geopolitical situation could have for gold and silver mining companies in upcoming quarters. Overall investor participation in the metal mining sector remains at a record low, and funds’ performance relative to the underlying metal is determined by these flows.

Mining companies have been dealing with a year-and-a-half decline in gold prices  —between the end of 2020 and February 2021— and operating margins have decreased due to the surge in production costs.

The environment has affected silver mining companies more than gold, as the former already have lower operating margins and is, therefore, more sensitive to price fluctuations. In Naylor-Leyland's view, that should benefit funds’ performance as things improve, as silver miners are heavily influenced by rising prices. 

Gold Behavior

At present, the gold/silver ratio remains at around 80:1, but as investor participation broadens, Jupiter Gold & Silver Fund believes this ratio should come down, boosting investments’ relative performance.

“Investors should take into account the risk of sector concentration. Investments are concentrated in companies dedicated to the exploitation of natural resources and may be subject to a higher degree of risk and volatility than those of a fund that applies a strategy more diversified,” Naylor-Leyland said. 

“Silver tends to outperform gold in a rising yellow metal environment and tends to underperform when sentiment moves against the sector.”

In fact, gold funds have had periods when they have lagged the price and then have clawed back to compensate for the difference.

Positive Outlook

At the beginning of a new period of rising gold prices, gold ETFs tend to lag movements in gold mining products —including bullion for short periods where they lag. There were two periods in 2020 when ETFs wipe out the gap, and the current environment facilitates a reoccurrence. 

Initially, investment capitals tend to flow into the largest gold mining companies before trickling down to mid-cap gold miners and then, in due course, to silver and mining companies. 

For Jupiter Gold & Silver Fund the current situation is positive for gold ETFs, since the Federal Reserve is showing how restrictive it can be. Second, the market’s expectations of halving inflation in the second half of 2022 are tremendously optimistic.

According to a Barron’s analysis, “Investors could also put their bets on gold mining stocks, which typically move in tandem with the price of the bullion, despite higher volatilities.” 

Year to date, the $276 million Sprott Gold Miners ETF (SDGM) has gained 13.7% as of March 1, and the $14.4 billion VanEck Gold Miners ETF (GDX) jumped by 12%, as Barron’s reported.