Being Short Your Government: The Real Case for Gold & Silver

0:00This is about being short the behaviour of your government. I mean, if you think they're going to be disciplined, and they're going to look after you, and they're going to raise rates above inflation, and give you a real return on your cash, then don't do it. But if you, like me, are less confident that that's the case, that the history of money tends to suggest one thing, which is you're better off owning gold and or silver versus your local currency. And by the way, the producers have never been cheaper than they are today ever. So while they have gone up, there has actually been negative flow to the space over that time frame, as amazing as that may seem to you.

0:38So these are the most profitable companies in the world. 50 % free cash flow margins, making probably double, and in some cases triple, the free cash that tech is making. I think the Trump-Fort Knox thing is related. So expand on that for me. Well, I mean, those of us in the gold community think that quite a long time ago, the gold was moved elsewhere anyway, and that Fort Knox is a bit of a shell game. There's not much going on there, hasn't been for a long time. So should he go there and open it up and be proven right, which I'm sure President Trump would quite like to be proven right, seems to be one of his favourite things, then you would have the condition that the ECB warned about in their research note.

1:20And I've been inferring, which is people go, but wait a minute, where's my gold? And if you're a rich oligarch and you ring up your Swiss banker and go, where's my gold? And they go, what do you mean? You know, you have a sequence of events there which results in a much higher gold price. Welcome to the Master Investor Podcast with me, Wilfred Frost, where we celebrate and learn from the success of the greatest investors, business leaders and politicians in the world, giving you, our listeners, the edge. The Master Investor Podcast is sponsored by LSEG, Interactive Brokers, the World Gold Council and BNY Investments.

1:58Please do remember the views expressed in this podcast are for general information purposes only. Nothing in the podcast constitutes a financial promotion, investment advice or a personal recommendation. More on that in the show notes. my guest today ned naleland is the manager of the jupiter gold and silver strategy which sits with nearly three billion dollars of assets under management and just last week he won the investment week fund manager of the year award for precious metals funds ned has been consistently bullish on both gold and silver for a long time not just popping his head up now as both metals shine bright.

2:42Ned, it is a delight to welcome you to the podcast and congrats on the award last week. Well, thank you very much. It's always nice to be recognised, but moving on swiftly from the award, thank you for having me on. Very convenient timing. This has been set up for ages. I didn't know the awards were last week, so it's really worked out well that we have this manager of the year with us freshly crowned. Let's get into the very simple specifics, first of all. What is the long-term case for gold. So the unfortunate thing, Will, is this topic is not well explained to investors. Gold is the risk-free of the system, always has been, but things changed dramatically in the 70s and 80s.

3:27But I would tend to say more importantly, when Volcker took rates to 20%, we entered a system where US treasuries became the risk-free of the financial system formerly while gold operates in parallel alongside that but the but the the true answer to your question is it's going to maintain your purchasing power so the case for gold is you want to save and not lose purchasing power you own physical gold that's what that's for that's why central banks have huge amounts of it is intuitively the public recognize what gold is they don't necessarily know how to explain it but the central banks know exactly what it is which is the true risk-free of the of the system has that always been the case for gold or i guess put another way has that particular case to protect your purchasing power gotten a lot stronger in the last couple of decades i know it's always been it's always been that's why there's that's why there's that phrase an ounce of gold buys you a handmade suit and a handmade pair of shoes it always has done it's it's the thing that's measuring everything else now of course what that also means is that if you're thinking about the gold price and you're watching it going up and by the way i still do that on my screen but that's that's just not how it works gold is measuring the loss of purchasing power of your your local currency i know that's not something new i mean that's that's always been the case so almost you're saying we should the reverse of that is you should watch it against every single paper currency not just against the dollar well you should so this is one of the difficulties here is that you you should be thinking about your local currency in gold terms and yes you can you can sort of have gold at zero and watch all the different currencies going down the the problem with it is if you're let's say you're a Turkish barber in Istanbul you don't have much knowledge of the financial system and no interest in it so you only think in in Turkish lira terms so you're you're owning gold because you're worrying about the the loss of purchasing power of of the lira but there's a secondary component here which of course is that the dollar is the local currency of the financial system.

5:30So people talk about the gold price. They're just talking about the cross rate between dollars and gold, but it's because the dollar is the local currency of the financial system that people think about it that way. But yes, I mean, gold just is measuring the speed at which you lose purchasing power. The first gold that I ever bought was 2001. And on the basis of coming to see you, I had an updated Look, and I think it's up 17 times since I bought it. And considering the FTSE has doubled over that time frame, almost all of which is in the last three years, to give you an idea of where I'm going with this topic.

6:08I wonder what the S &P 500 has done in that period. Well, it's done more, but nothing like gold. Nothing like that, no. What's the long-term case for silver?

6:20so look gold and silver are both foreign exchange so they trade together they'll move together the directional correlation is perfect uh silver has high beta so if you if you like if you want to be short governments short politicians short um their ability to defend your purchasing power silver is a way to do this with more more beta but the way i like to describe it is silver is like gold so you're short politicians um but you're also long future because it's it's in very very short supply there's a big problem with the supply demand uh structure of silver so you're long green tech tech the military everything really that's running the modern economy but you're also short politicians so silver has a nice dual feel to it why do you stop at those two precious metals and not the others because the precious metals uh nomenclature on its own is completely unhelpful.

7:14It's a really completely unhelpful terminology because you have monetary metals which are gold and silver. They trade in the foreign exchange market. They're money. They are foreign exchange. These other things are not. The idea that platinum and political, they have no relationship whatsoever to the monetary system. Gold and silver are money. They are foreign exchange, whereas these other things are industrial, expensive industrial metals. With silver, obviously you were alluding to it being a metal of the future. It has a use. So why not other non-precious metals? Because the bullion banking system is very short gold and silver.

7:58So in other words, there's a fractional reserve structure to the gold market and the silver market the same way there is for your cash, which is reinforcing this point that they're money. I'm not saying that these other things aren't interesting, and I'm sure that there's lots of bull cases, and some metals in particular look very interesting, nickel being one of them. But these things are tied to the economic cycle. So if you're long any kind of raw material or commodity, the price you're paying today assumes an optimistic and linear outcome for the global economy. And in fact, growth. You're paying for that already.

8:33Whereas with gold and silver, it's not like that. you're kind of the other way around, particularly as the price of gold and silver are principally driven by real interest rates, that when things start to go wrong, generally the market gets more dovish. So that's your driver. It's not the same as being... Really, you're kind of short rather than long, whereas you're long with commodities. And obviously your strategy focuses on both gold and silver, and not the others. And it owns the underlying plus equities. And we'll come to that strategy in a moment.

9:14This episode is sponsored by BNY Investments. BNY Investments is part of BNY, a global financial services company supporting investors and institutions around the world. This sponsorship does not constitute investment advice.

9:57What drove, and you mentioned real interest rates there as a driver behind the scenes for all of this, but what drove the enormous gains of 2025? Yeah, so not what people think. So what people will say to you is central banks and or some kind of geopolitical premium. This is just not how it works at all. It literally has nothing to do with that. And we can go into depth into that if you want. It was trend following. It was absolutely trend following. the dollar gold price broke out to an all-time high in april two years ago and it just entered a massive trend following move so this is a leveraged capital this is traders ctas hedge funds all jumping in and and going long the number one way to play debasement so so you know it's been a year and a half or two years where your macro trader has been being focused on debasement of Of course, they ended up getting quite badly wrong in Q1 because we entered a strange tightening in real rates environments through the Iranian crisis.

10:58But yeah, it's been trend following and not investors. In fact, long only investment capital has been entirely absent the entire way through the rally. It's just been parked in tech, double tech and triple tech, as I like to call it, and has not participated. And you can see that in lots of ways. it's it's yet to join in i think that will change at some point um probably when your traditional portfolio doesn't look quite as rosy as it does at the moment there'll be more incentive to want to switch but yes it was a trend following move that's really interesting so does that in any way undermine the argument that these two assets are there to protect your long-term purchasing power if it ends up being more of a trading volatile asset in that regard?

11:51No, I would push you back to think about your Turkish friend. What would he say? You're thinking about, again, you're thinking about a return in dollars, whereas for the average person around the world, they're thinking about local currency times. There's no trend following there. It's the US dollar gold price that's caught up with gold in sterling and yen and Turkish lira. And yes, that was accelerated using using leverage but no that doesn't undermine the case at all and and the bigger picture here of course as well is and there's a quite interesting ecb research note about this actually last year that there is a um a point to be made with regard to where is the gold who has the gold i'm super interested in that topic i think that that People don't spend enough time thinking about unpriced risk.

12:45And frankly, if you become a gold bug, that's kind of where you park yourself anyway. But all of that still lays undiscovered by the investing public. So no, I don't think the trend following point is a problem. And by the way, it's all come out. So now you don't have either in. You don't have either cohort actually in at the moment, neither the trend follower nor the investor. I want to come to that, where is the gold in a moment. But just dwelling again on this big surge that we saw last year, you know, 5 ,400 or so that we got to in the US dollar price of gold, as you'd put it. Fair to say then that that was a short term exaggeration to the upside.

13:26We've obviously pulled back significantly to the low 4 ,000s from it. So, look, I go back and say, remember, what you're doing really is we're talking about what happened to the dollar versus gold. So was it an overreaction to the downside for the dollar versus the risk-free? I'd say no, but I would say that the leverage wasn't the overarching driver in both directions. This is also why you had a 10 % sell-off for the US dollar gold price in one day. You know, people still talk about it being something to do with central banks. And my comment is, so that was central banks selling 10 % in a day?

14:04You know, what we have to accept is that almost everything in the financial system now is financialized in one way or another. And derivatives and leverage are a very important part of price discovery. So did the dollar get a bit oversold? Maybe. I'm not sure, though. I mean, I think that one of the things to accept why hedge funds and why macro investors are thinking about debasement is because while the curve is giving you an idea of what the bond market feels about the Fed's behavior and guidance, they also know that there's extra weaponry. Think about it like an American football team with a whole bunch of very large linebackers still on the bench and they haven't come off yet.

14:50They're all dovish. And the market knows that. So sure, you could say it was a bit overextended, but it's this additional dovish weaponry which is available to policymakers, which makes the sort of the thoughtful macro investors go, guys, you know, this is coming at some point. So whether that's more QE, whether it's yield curve control, whether it's intervention at the Fed, all of this is not in the price, just like this problem of where is the gold is not in the price. So it's a layered topic. But just, we'll talk about the Fed in a second, but in terms of it not being in the price, I guess you've acknowledged that the institutional investor is priced in the fear of debasement already, if that's what was driving it last year.

15:34But you're saying that the retail investor or the average portfolio hasn't yet done so? Is that fair? Yeah, I'm not sure how we pick up our institutional. But I think that the leveraged investor, whether it's a hedge fund or an individual trader, they like to have a run at thematics. Now, yes, for a period there, it was in the price. And then through a process of deleveraging, and there were two deleveraging events in late January and March, they're out now. so like I said to you earlier what the interesting point now is there was no long only capital in at all and there really hasn't been in fact the total amount of physical gold held by the exchange traded bullion products is below where we were at$1 ,900 an hour six years ago there's just no participation at all from long only they're not doing it they're off doing other things and yes it was your trader that ran that But they've been thrown out of that due to the fact that obviously we have this rather odd situation where the cuts, I mean, it's not that long ago that maybe nine months ago that we had seven cuts priced in.

16:48And now we're at a hike. And meanwhile, one year forward inflation expectations have barely moved at all. I mean, they're almost exactly the same. So you've deleted seven cuts now to the hike. And yet forward inflation expectations haven't moved. And this explains how and why those leveraged positions got blown out, because they were very much on the cutting, the dovish view of the world. And now they're not. Let's talk a little bit then about central bank action and start with the Fed for others reasons. What did you make of Kevin Walsh's first press conference last week and how much of a change are we looking at?

17:28Look, I'm not an expert on that. I did watch it. I thought that he did a good job of speaking out of both sides of his mouth, which is the job of the Fed chair. I tend to think that he is more dovish than the market has accepted so far or is positing. I think that he already discussed how the inflation metrics are constructed. And there was an inference of potentially that the neutral rate is higher than where we are now. All of that is structurally dovish. so look I think one presser probably isn't enough to tie oneself onto that I think he's an interesting character but you know the Fed chair's job is to keep people in the water maintain a nice bath temperature.

18:17What do you watch more in terms of say the next year of his actions is it the interest rate is it the balance sheet and how big a swing factor do you think either could make to gold? I don't think that the balance sheet is something that the wider investment market looks at or cares about very much. People like me do, but I don't think that's really something which the average investor pays that much attention to. I think rates obviously is extremely important. You've got this problem of this monumental interest bill, which would tend to require a lot of cuts, which I think is why your macro investor was positioning for that, for so long.

18:57So look, I think it's about the rates side. But on the balance sheet, if we listen to what he said, you know, clearly had to say what he needed to say to get nominated. And that might imply more rate cuts than hikes. But it's pretty clear throughout on the balance sheet, him and Scott Besson, that long term, structurally, they want to reduce the balance sheet. Sure. I mean, I suppose then you can ask yourself, is the Treasury Secretary and the Fed chair, Are they politicians? I mean, in my view, absolutely. I mean, the idea of independence, in my view, is rather fanciful. These people say one thing and do another.

19:34I mean, I think the history of the monetary system tells you that when you get to where we are now, the idea that you're contracting anything is, I mean, it could happen, but I think it would be strange and an improbable outcome. You know, we are very, very late stage of this monetary cycle and the central bank's balance sheets are the thing that are not priced into anything. So when I look at, when I talk about academic studies about gold, because of course investors love looking at backward looking data, ooh, you know, this period, this and whatever. There are lots of studies that suggest you have 25 % in gold in your portfolio for the best adjusted return over backward looking periods.

20:18But of course, central bank balance sheet expansion is not in there. And that's the whole thing you're trying to hedge through this function. So, look, I think that let's wait and see. Let's wait and see. But the idea that there'll be a genuine pullback in the scale of central bank balance sheets is, in my view, unlikely. Hi, guys, it's Wilf. I hope you're enjoying this episode. Just a quick reminder to please hit follow or subscribe on your podcast or video app so that you never miss an episode. And if you've got time, please do give us a five-star rating and leave us a comment. It really helps other people find the podcast too.

20:59Now, back to the episode. Let's talk a little bit about its correlations with other assets. What correlations do you watch? What matters to you about how gold is trading? I don't look at gold in that way. um i think it's it's it like i said to you it's the risk free it's the thing that's measuring other things so i i don't really look at it in terms of that kind of correlation i think it's clear that people get overly um focused on the concept of risk on risk off or what's a risk asset what isn't um and then they sort of say oh gold's not behaving the way and it's because they're not understanding that it's real rates and the changes in real rates expectations that's driving the change in price in your local currency so i'm not that focused on correlation the other thing of course remember is well if i'm long only so while i love all the macro stuff and i spend lots of time thinking and talking about it it's not really driving my behavior on a day-to-day basis so just dwell on on real rates then in the start of this year because based on that sort of risk on risk off sentiment some people thought oh a war's broken out why is gold falling back talk us talk us through well it's it's what i said to you which is that um one year forward inflation expectations which is half of your real rates picture didn't move yet we lost the cuts and trended into a hiking environment so that is a dramatic change in real interest rate expectations in a negative sense for gold really though what that is is a kind of bouncing a breather for the dollar relative to the risk-free.

22:41That's really what it is. It's just a pullback in an air pocket. Now look, it should that continue. So it's all over in the Middle East, whether it is or it isn't is a totally different point. But if it is all over in the Middle East and then the market continues to price in more hikes, that would tend to infer further weakness for the US dollar gold price short term. But of course, for lots of structural reasons, And this is very difficult to keep that position, not least of which that interest bill that we discussed. In terms of the comparisons, and it's interesting you don't look at this, but at the start of the year, a lot of people were pointing to the relationship between gold and Bitcoin and the ratio between the two, which can indicate buy moments or sell moments, got very stretched.

23:29Do you think gold and Bitcoin can be compared as alternatives for each other or not? No. Bitcoin is now a sort of part of the leveraged tech sphere. It's a traded asset. It's very full of speculative capital. The gold and silver market is completely empty of that. And while you know you'll see some correlations here and there, there's no causation within it whatsoever. It's not a foreign exchange instrument in a practical way. It's not used as money. I think that Bitcoin is extremely helpful at the margin of getting people to think about what money is, how we use money and where it's going to go, which is, again, a sort of separate topic.

24:16And indeed, I kind of see it that way. I think it's your training wheels for the central bank digital currency system, which lies ahead of us. So I just don't think there's any relationship really at all in terms of price action. Have you ever owned any crypto yourself? A long time ago. and you sold it yes why because i don't like to be my personal investment style is i want to be early uh and i don't want to be there for the last two months of the pregnancy i'd rather be there right at the beginning um and then once once i reach the point where other people are starting to get excited and jump in there's a kind of critical mass deal that doesn't make me feel comfortable this is a genuine contrarian thing where i don't want to be but that's really interesting i mean Is that not where we're not late staging gold?

25:02I mean, again, the very fact that everyone has... Or late stage from several thousand years ago? Or what do we mean by that? Okay, well, on a decade time horizon, for example, haven't we just had a phenomenal surge? Or more to the point, haven't we just had a phenomenal four years where a lot of people, they might not have got to 25 % of their portfolio in gold, but a lot of people are now aware of the need to have hard assets. They're aware of the debasement conversation. so much so they've driven crypto assets much higher. But your rights use the word aware. So there is a change in awareness about gold and silver price action.

25:40I have seen that. There is definitely that. But there's been no FOMO. No one has been dragged in or anything like that. In fact, while other assets have been going up, there's been a sort of look across from a pat on the shoulder and good for you that that's going up. But crypto is used as a speculative instrument. and to make short-term gains. Whereas gold, you know, talking about late cycle, I mean, gold is simply there to protect your purchasing power. Now, unless we're suggesting that the Turkish government, sorry to keep going on about the Turks, or ours, more salient in light of where we are today, or that the Americans, they are going to protect your purchasing power on a one, two, five, and ten-year basis looking forwards.

26:24There's no cyclical components to that. Governments always do that. they debase your purchasing power. It's the nature of the state and the way it grows and the way it wants more involvement that really your local currency goes down. There are breathers on the way, but the direction is always the same. So what is your argument to a young person who is aware of the debasement argument and inclined to buy Bitcoin? what would be my argument to stop them doing that and make them buy gold and silver? Look, I think it's just a trader versus an investor mentality. I mean, you own gold and silver because you're thinking about this over the long term, whereas you might want to trade Bitcoin as a way to fund your holiday.

27:12I mean, I just don't think they're the same. Let's touch a little bit more then on how you position your strategies, because we touched on this at the top. you have physical and you have equities and obviously you have gold and you have silver is the balance between those always the same does it change with the moment in time and how are you thinking between the two at the moment yeah no so um look i think that uh the first thing to say is that you i don't like being style fixed so i think there's always moments where you want more of something and less of something else which isn't necessarily always the way that people in in my industry think they tend a lot of people are quite style fixed so i think there's moments for more physical that's generally when real interest rates are trending higher and your local currency is doing well and having a bounce you don't want as much beta that necessarily need to own mining stocks and likewise silver because that's a higher beta version of it but the way i think about this is de-risk think about the risks and think about the non-obvious risks deal with those and then start to add in to the portfolio what you think got optimal instruments so for me when i think about mining companies you've got a whole suite of different options but where are the where are the non-obvious risks and the first one is geography it's not really to do with geopolitics by the way this is much more to do with operating risks you know do they have good roads services logistics equipment trained labor are you know are the regulations clear can one operate having one's arms around the risks um so so my first thing is i really only want to be in tier one and tier two mining jurisdictions but i do want to add return using silver and i particularly like silver development assets because we have a very big structural problem with silver if you want more tv screens and green tech and all the stuff that's assumed to be coming we need a lot more silver not a bit when you've heard about copper the problem is way bigger in silver is a much much bigger problem than in copper it's not spoken about as much but it's a bigger problem so if i can invest in a silver development asset so non not making any money at the moment have a large stake in a good jurisdiction where i feel confident that this will become a mine i'm able to invest in that on a heavy discount to a producer and by the way the producers have never been cheaper than they are today ever so we're already talking about the the cheapest entry point on a valuation basis and then with the development company people really don't want to own those because they're not making money yet so just explain that to me because obviously the the producers had a great run-up over the last 18 months as did the underlying gold price and silver price they are so cheap on a pb basis simply because the price of the underlying has risen much further than their share prices.

30:09Exactly right. So while they have gone up, there has actually been negative flow to the space over that timeframe, as amazing as that may seem to you. So these are the most profitable companies in the world. 50 % free cash flow margin is making probably double and in some cases triple the free cash that tech is making. But not only are people not investing, they're divesting. So what happens is your valuation message just goes down. And while they're going up nominally and the stocks are doing well, what we haven't had is that participation, that flow from the wider market. So just how tied are they to the price of the underlying?

30:44So if you're wrong. Oh, completely. They're completely tied to it. So look, so let's say we go into a deflationary bust for three months. That's real interest rate positive. That's bad for golden dollars. That will lead to a sell-off. Even though these things are as cheap as they've ever been and more profitable than they've ever been, they're still going to go straight down. because ultimately your marginal user of those instruments at the moment is a leveraged player, not log only. So if I'm a hedge fund and I'm thinking, right, we've gone into a short-term deflationary bust, am I going to short GDX?

31:19Maybe. I mean, I wouldn't, but would they do that? Yes, probably, because you're going to get a beta version of that trade. And just give me a blended average of the producers in your portfolio. What is the PE multiple or whichever multiple you care about most? So yeah, net asset value metrics are the ones that matter most. And gold producers are trading at 0.7 times NAV. Now, eight years ago, with free cash flow margins of 10%, 15%, they were already cheap and trading 1.5 times. They're now 50 % cheaper with triple the free cash flow margin that they had back then. and and how quickly does that change if prices are 20 percent lower than you expect well i mean again it depends it depends on flow i mean it depends on flow dynamics but it's just been a very slow grind and a lot of this is to do with how long only investors use the the extra budget in their portfolio that lives outside of benchmarking because of course you You know, most portfolios are the same and then you've got your extra.

32:26And this is so trending. You know, it's all about what is the hot thing at the moment. And it is still AI tech, double tech, triple tech. That's where that capital sits. You know, it makes me excited because I think that at some point that will want a new home, particularly if that starts to not do as well, at which point I think the fundamental case and the fundamental story for gold and silver miners becomes, you know, very compelling very quickly because it's very likely that if the equity market does go lower then that creates a more dovish background which is the fuel for the space i invest in so you see a very big decoupling then of performance between the wider equity market and this particular part of it um just dwell for me then on rough splits of the underlying commodity the producers as you say the sort of safer equity and the sort of more well look well the way i like to think about it is broadly you you you have your cash bucket which is for me is bullion is cash um and and and sort of 15 20 there other end of the portfolio a similar amount in what you would call development and maybe even a little bit of exploration and then the body of the portfolio should be these these heavy free cash flow producing um companies but for me always a split between gold and silver because i think that silver has kind of open-ended optionality to the upside.

33:52Now, while I have seen periods of sell-offs where silver has a beta of sort of two, two and a half to gold, I've never seen it more than that on the way down. But on the way up, it can really open up and go to four and five. So I like that spread.