![]() ![]() This may not be as far away as people imagine”. 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. When investors lose confidence in central bank promises, gold and silver could really run ,” argues Naylor-Leyland. Today the market is overbought on real rates and last year it was oversold on real rates. 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. 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. 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. You will not see precious metal prices rise with stronger real rates,” explains Naylor-Leyland. ![]() 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. “ More precisely they are plays on the level of real interest rates – nominal rates less inflation. Precious metals and equities of their miners offer portfolio diversification and are widely perceived as inflation hedges. 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. ![]() “ 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 Though precious metals may rally on political or geopolitical risk, the most important political risk factor is central banks. 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. Precious metals could provide a safe haven under some probable scenarios. This leaves traditional equity and bonds portfolio construction in disarray and investors wondering where they may find diversification and decorrelation. 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. ![]()
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