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Gold’s in a bull market - will it last? · On The Money

• 0:03
  Kyle Caldwell: Hello, and welcome to On The Money, a weekly look how to get the best out of your savings and investments. In this episode, we're gonna be focusing on an asset that's been performing very well over the past eighteen months or so. That asset is gold. Now gold does tend to divide opinion and some people regard it as a bit of a Marmite investment. So on the one hand, a lot of commentators would argue that a small weight into gold is beneficial over the long term as a portfolio diversifier due to its ability to act as a safe haven in troubled times.
• 0:36
  Now on the other hand, some commentators argue that gold, it does tend to be volatile, and it also doesn't pay a dividend. Joining me to discuss this topic is George Lequem, a full manager at Amarti Global Investors. George is full manager of the WS Amarti Strategic Metals Fund. George, to start off with, could you explain in more detail what the pros and cons are of gold and why the precious metal tends to do well when other assets are not doing well?
• 1:07
  Georges L: Yes. Certainly. Like you say, it's it's pre Marmite gold. It's it they call it the motive metal. Everyone's got an opinion.
• 1:16
  Probably those listeners, today or listening to to the podcast will you'd have 20% would be very anti gold, 20 would be pro, and probably the other 60% pretty curious because it's done really well. I I I wanted to start today just looking back at, some comments that JPMorgan said in the 1912 testimony. And, he's I I quote him directly, and that's why I brought my card just so I don't get it the quote wrong. Money is gold, nothing else. Gold, unlike credit, is not dependent on a third party coming through.
• 1:56
  Credit is only as good as the character of the borrower. And I brought those quotes because it's pertinent today more than ever, given what's what's going on in in the world right now. So everyone's got an opinion, as you say. I've been doing this thirty one years, and I started listing the pros and cons of gold. And quite interestingly, the list is about the same.
• 2:20
  That probably explains why it's so divisive. So, obviously, on the pro side, it's it's got a very long history of being a beneficial asset, as you mentioned, in times of uncertainty. If you look at how you want to protect your wealth, you can buy stocks, bonds, property or hard assets. So it's it's always a play between those. And, again, gold being highly liquid, it's also got a high value in a small volume.
• 2:49
  So a 400 troy ounce bar of gold, that's about 12.4 kilograms. Last week, it actually hit £1,000,000, the value of one bar of gold. Now one bar or the same weight in copper, the value at the moment is around $100 or 100 pounds for that same weight. So you can see the the amount of value that you can attract. It's also very rare.
• 3:18
  There's only been since the start of mankind that we know about 212,000 tons of gold being dug out of out of the ground. It's in the ground. It's you find it normally in parts per million. Mines are mining at one or two parts per million. So it's it's very difficult to get out of the ground, first of all.
• 3:44
  And the amount of new production is around 1.5% per year. So just think about how much gold since antiquity we've mined out of the ground. It's about 22 meter cube or three Olympic swimming pools. So it's it's actually quite rare and precious. And the other pro is that the government can't really trace it or or tax it.
• 4:11
  Now the World Gold Council did a report in January looking at the performance of gold in one's portfolio relative to other assets. So they looked at cash in U. S. Dollars, treasuries, global stocks, U. S.
• 4:25
  Stocks, emerging market stocks, commodities and gold. And gold actually was the second best performer. So obviously, in one year, it will look very good, but this is on a twenty year annualized return of about 9.4%. So love it or hate it, the only category that actually beat gold was U. S.
• 4:46
  Stocks at 10.4%. But if you held it in U. S. Treasuries, you get about 2.58%, or in U. S.
• 4:54
  Cash, 1.65%. So it actually over a longer period, and it's less volatile as well. So it has a they did a survey of looking at portfolios with 5% gold in it and zero gold. And they found those portfolios with 5% gold actually outperformed and were less volatile. So you can see the argument why portfolio managers in times of uncertainty say, okay, we're gonna put some gold in in there.
• 5:26
  And the the last pro is if you're sitting in countries like Turkey or or China where you've had big currency devaluations, it's actually protected your wealth of being able to buy gold and then sell and get back into one or or any other currencies.
• 5:47
  Kyle Caldwell: And what's your thoughts on the arguments against gold? I mean, the the two most common ones that I hear are that it tends to be volatile over the short term, and the price of gold only reflects what the next buyer will pay for it. And also the fact that gold doesn't have a yield, which again makes it difficult to value.
• 6:03
  Georges L: You you did right, Carl. So I've got a love hate relationship with gold because I look at the cons as well. It's actually a useless asset if you think about it. It's parts per million in the ground. You dig it out, then you find a hole or find a safe place and put it away.
• 6:21
  It doesn't give you a yield, like you say. There's some use of gold for jewelry or some technology, and it can be volatile, Usain. The other big con, I think, is it's it's a bit of a lottery, where gold is being deposited. It prejudice those countries where there's no gold in the ground because it's basically digging money out out of the ground. And in some countries where you do find gold, it can cause quite enormous social upheavals.
• 6:54
  And we saw with the Spanish conquistadors what they did in Latin America and and Central America in search of gold and and silver. And then you've got the issue of storing it. You've got to find a vault. You've got to protect it. There's a cost of storing it and also to move it around the world.
• 7:15
  And also, we saw in The US in the 1930s, gold was actually confiscated. So there's there's a bit of confiscation risk, and I'll get to that if you're looking against holding gold equities as opposed to the physical metal.
• 7:30
  Kyle Caldwell: We've seen over the past eighteen months or so, it's been a very strong period for gold. Could you explain what the catalyst was around eighteen months ago for for gold to go on this strong run?
• 7:41
  Georges L: There's a couple of factors that turned around. I I think for the the the last fourteen years, we've had central banks become net buyers of gold. Now if you look in the once the U. S. Dollar came off the gold standard in 1971, through the 1970s, typically as a percentage of foreign exchange reserves, gold made up 45%, fifty five %.
• 8:06
  Until the peak in 1980, 'eighty one. And then other asset classes did very well. And as a percentage, that dwindled all the way down until about ten, fifteen years ago to around about below 15% of of foreign exchange reserves. What we what's been happening now is post COVID, we had a a reduction in interest rates, which, again, it's not sorry, the increase in interest rates that came after COVID meant that you got a real yield while inflation was coming down. So gold not offering you a yield actually performs badly in that period.
• 8:48
  So you had a lot of ETF selling. And that sort of terminated around about eighteen months ago. But all the while, the structural support for gold was there from central banks. And then you had a a third dimension that came came in in place about eighteen months ago, where you had heightened geopolitical risk, and there was talk of maybe confiscating treasuries held by by the Russians in in, Brussels, for example, and for central banks around the world saying, okay. We're now holding.
• 9:22
  They got up to 35% of US Treasuries were held by foreign central banks, and that started to turn down quite quite aggressively. So you've you've had countries like China saying, we don't like the way you're weaponizing the US dollar and getting a a more even balance on their foreign exchange reserves. So so that that's really what's been taking place, sir. And then at the same time, you've you've had interest rates start coming down, so you've had investors coming back into into gold.
• 9:57
  Kyle Caldwell: So the the increase in geopolitical tensions that has caused central banks to act by increasing their exposure to gold?
• 10:05
  Georges L: Definitely. If you if you look at where the the big growth markets are, India, China, The Middle East, there's definitely been a concern that maybe awaiting in US treasuries is quite large. We've seen global debt, especially debt in The US increasing at a phenomenal rate. And central bankers, they've been acting on that for for a while now and saying that and the the real turning point was the 02/2008, the the great financial crisis. Then we saw Central Bank being a bit more prudent in saying, let's hold a little bit more gold in in our portfolio.
• 10:42
  Kyle Caldwell: And we've seen so far in 2025 that the gold price has continued to rise. How much of a catalyst has it been, the uncertainty that we've seen in stock markets since around mid February due to US president Donald Trump's tariff policies?
• 10:58
  Georges L: It's a good question, Carl, because that that's why I mentioned about should you be buying stocks or bonds or or property or holding some some gold or commodities in your portfolio? And the rollout of the tariffs really shook the financial outlook and the economic outlook for a number of countries. So the markets hate uncertainty. So gold is a safe haven, attracts some some buying there. But I think there's been a bit more than that where especially the tariff war with China, which is headlined, has almost morphed into an economic war, taking place between the Trump administration and and China.
• 11:42
  And we've seen reports of China more aggressively trying to buy gold. They hold the March figures came out. They hold 6.5% of the foreign exchange in in gold. So it's still a small fraction from 2% a few years ago. So they've been building up.
• 12:01
  But I hear from the gold traders that China's got a problem trying to access enough gold to to make it more 30 or 40%, which is the norm in Europe. So they've been aggressively buying gold and selling treasuries and buying, euros as well. So so you've you've had that trade taking place, and that's what's accelerated this this move that you've you've had in gold.
• 12:24
  Kyle Caldwell: And the gold price typically has an inverse relationship with The US Dollar. So when the US dollar's weak, it tends to benefit gold. Yeah. So has that been a factor then to play over the past couple of months?
• 12:36
  Georges L: It it has. The the US dollar's only started to to weaken in the past month, but you see it on a day by day, the days where the dollar is slightly strong, the gold price is is off a bit as you saw on Friday and today. But those are smaller moves, but I think in the in the long run, it's definitely you you see these these longer term patterns. A weaker dollar usually translates to a high gold price. But the problem we have today is a number of investors are sitting and saying, we got 3,300 on our screens.
• 13:09
  There's a lot of tailwinds. But are we are we peaking here? And and that's that's another question as well.
• 13:17
  Kyle Caldwell: And how would you answer that question then? You mentioned, you know, in in US dollar terms, the gold price around 3,003 hundreds. It was around 2,000 at the end of twenty twenty three. So how much higher could the gold price go, and is it potentially already in a bubble?
• 13:33
  Georges L: After doing this for so long, I'm it's a bit of a mug's game to try and predict the and I but I I think it works two ways as well because nobody wants to venture out and try to predict where the gold price is going. So when we look at our investments and the way we look at, we look at the companies and say, what what are they discounting in the valuation of the companies? Because the brokers who write the research report and advise clients on the valuations of gold mining companies, they tend to be very conservative. I I had a report out this morning from Peel Hunt, for example, and they were predicting a gold price of 2,181 in 2028. That's 35 percent lower than we are today.
• 14:21
  And in that research report, they said this gold silver company is at fair value. So I think if you look at on a chart and you say, discounted for inflation, the gold price is almost as high as we were in 1980. But then if you use money monetary base as your denominator, then we've still got another % to move to to to get up to to that that level. So I think it it does feel like there's a little bit of froth in the in the gold price right now. We're vulnerable to maybe some good news on a deal with with China or a resolution to the conflict in in Ukraine that could take some of the hot money out of out of gold.
• 15:14
  But I I do see that there's a structural trend upwards with a lot of tailwinds for gold that are not going away in the near term. So I'm I'm hesitant to I'll never put a a figure on it, but I'm hesitant to be too bearers. I point to to and it's not only, Peel Hunt, but a number of the brokers have got the same. I think on on on average, about 2,200 is is the gold price that they use in in their models. So they they're basically saying, we think the price is gonna fall 30% from from here, which is as dangerous, I think, as trying to predict it a bit higher.
• 15:54
  So it looks quite interesting. I think everybody's sitting on the sidelines waiting for a bit of a pullback to see where things settle before they look at it seriously as an investment. It just feels to me it moved too fast too quickly.
• 16:10
  Kyle Caldwell: And as you've mentioned, the big buyers of gold has been central banks. Retail investors have been buying, but I don't seem to get the impression that they've been piling into the market. Would you be more concerned of a potential bubble if it if that was the case, if a lot of retail investors were buying?
• 16:26
  Georges L: Definitely. I I've I've been through three bubbles now, or three peaks in in, in the gold price in in my career. And if I look at the red flags, one has always been the retail buying aggressively. And then when you look at the stocks, the underlying stocks, they become really expensive. So the brokers move from predicting a big drop to predicting higher prices going forward.
• 16:53
  And right now, you have stock valuations at thirty seven year lows. It's under owned. In 2011, in the portfolio, there was on average about 14% gold as an ETF portfolio of global ETFs. Gold made up about 14%. Right now, we're at about 1% to 2%, which is an all time low.
• 17:18
  So we don't have the investor positioning in gold that we had in 2011 when we peaked and we came back. And that's why I think you saw the other day when the stock markets came down, gold actually went up. Usually, that would be an asset class that would be sold in in that same same period. So it doesn't have all the ticks of this is bubble yet. I think we usually, what happens is you get that last wave when the retail investors come into physical gold.
• 17:52
  As an anecdote, a friend of mine in an office in New York, more technology office, and he's he's my age, and he's he's with a number of 30, 40, 30 five year old professionals in the office. And they called him a week ago, oh, we're starting to buy gold now. He said, what? I've been telling you for years. And he said, no.
• 18:17
  But it wasn't right yet. And and I think, you know, we we live in a bit of a bubble ourselves looking at gold every day. But there are so many investors out there who've never looked at gold before, and they're starting to see the tailwinds and saying, you know what? I need to protect my portfolio. So I think once we get that that buying coming in, let let's see.
• 18:38
  Kyle Caldwell: I next wanted to ask you about gold's relationship with inflation. So gold, as well as being seen as a hedge against economic uncertainty, it's also widely viewed as an inflation hedge. Now given the fact that some commentators think that inflation will be higher than what central bankers forecast at the start of this year, what are your views on inflation, its relationship with gold? And if inflation is higher than anticipated, that's surely a positive for gold?
• 19:09
  Georges L: The key relationship, I think, is really with the expansion in the monetary base rather than inflation. So, yes, the two even expansion in monetary base and inflation are tied because if not handled properly with increased money supply, that can debase your monetary system causing inflation. That's basically you pumping too many dollars into into a system so prices go up, but you've just debased it. So we've looked so many very, very closely at the the short and medium term relationship between the inflation figures that you get released and the actual gold price. And it the correlation is not as close as you think.
• 19:59
  But over time, definitely is because inflation is tied again to the monetary base. So that's more important for us to look at and saying we've gone through a period now of quantitative tightening. That's slowing down. Quantitative easing, obviously, increases the the monetary base and increase the monetary supply, which then leads to, as we saw during the COVID period, leads to to high inflation. And and that's just tied to the debasement of currency.
• 20:29
  But, ultimately, gold is a currency, and you're you're looking at the value of this currency against the dollar or the yen or the the euro.
• 20:38
  Kyle Caldwell: The fund that you manage, WS and Marty's strategic metals funds, you have around 40% in gold. You invest in gold mining companies, which some commentators say are a leverage play on the bullion price. Firstly, I wanted to ask, is that fair? I've I have heard that said a couple of times over the years. Is it fair to say that gold mining companies do offer a leverage play?
• 21:02
  Georges L: Yeah. We we we have 40% exposed to gold mining companies. We don't have physical bullion at the moment. Actually, bullion has done very well against the gold mining companies since 2011 for a number of reasons. But we're starting to see that relationship turn.
• 21:19
  Historically, for every 1% move in the gold price, we'd get a 3% move in the gold equities. That's the leverage that you're talking about. Now the average cost of production right now, if you really load it properly, is probably around $1,700 an ounce to produce an ounce of gold. And you're selling it for $3,300 today. But even if you're selling it at $2,500 you can see that margin.
• 21:49
  So the margin expansion from 2,500 to 3,300 is a doubling in the profit margin of the mining companies. That's why you buy the mining companies because what's been happening now with this move in the last eighteen months is a lot of mining companies are generating significant cash flow and paying down their debt and also spending more on exploration. So so then if they can find in the vicinity of their mining operations more ounces at a cost of 50 or a hundred dollars an ounce, bring them to account at $3,300 that's where the value add. That's why you're buying the mining companies. Unfortunately, 2011, the run up to 2011, a lot of the mining companies destroyed a lot of companies, a lot of value in in that run up.
• 22:40
  And investors just sat back and said, we don't wanna be buying gold mining companies. Their costs got too high, but I think this time around, we've got a lot greater cost discipline. We've seen the oil price come down. That's giving them a boost on the cost. So wait and see.
• 22:58
  I think the more as we find a level on the gold price that the market can start trusting to be sustainable and we need a few more quarters, I think then they will start looking at the gold mining companies again. And as I said, historically, the gold mining companies used to trade in about 15x cash flow at the bottom of the market and 25x at the top of the market. You look around today, companies are trading at 2x to 5x cash flow. Yes. The the gold miners have made have performed well year to date, about 45%, but they're coming off a very low base.
• 23:41
  And looking at the the profitability, it's not reflected at at all in in the valuation of the companies. That's why we we're holding that 40% in the portfolio right now.
• 23:51
  Kyle Caldwell: And that 40% exposure, is that near a record high for the funds? What what is your typical exposure?
• 23:57
  Georges L: Yeah. We we we grip the gold and silver exposure because most of the silver miners are 50% gold anyway, and that together is about 68, 60 nine percent, and that's the limit where we're going to. So we have a fund to invest across all the metals. You started by asking about the global uncertainty with the tariffs. That could lead to a recession in The US and Europe, which is typically negative for commodity prices like copper, zinc, aluminium.
• 24:33
  So we're a bit cautious that we could get a slowdown in demand just because of of the the impact of the tariffs. But then we've spoken about the the positivities on on the precious metal side, and that's why we're holding about 70%. So over the the period, as we get that catch up on the valuations on the the gold miners and the silver miners, we then pivot the fund more into the industrial metals rather than the precious metals.
• 25:02
  Kyle Caldwell: And could you talk us through the benefits of having a diversified portfolio of several metals rather than focusing on just gold or silver?
• 25:10
  Georges L: Man, that's something really occupied my my mind, Kyle Pickers. I used to run gold funds in the past, and this fund really intrigued me setting up a fund like this because you would have a a good run maybe for two or three years in the in the gold. And then, typically, you have the industrial metals follow through in the next wave. So you it's very cyclical, and then you have the specialty metals with lithiums, the graphites, uranium as well. Those become really interesting.
• 25:47
  So it gives us the whole suite of metals to look at, especially in in a in a period where the global economy is becoming more metals intensive moving forward with the decarbonization trade taking place, with the infrastructure spend that needs to be spent. So all these factors are leading it. For example, we got a a great gold mining a company with a great gold project in Idaho, which has a large component of antimony. Antimony is used in the weapons section, and it's controlled by China. This would give The US a greater autonomy or a greater control on the supply of antimony, which is critical for for the defense needs.
• 26:34
  So there, again, we're able to look at these companies, and that's done very well for us. We've we've made almost a % return on on that investment.
• 26:43
  Kyle Caldwell: You, of course, are an active full manager. You invest in companies rather than the spot commodity price. Some investors prefer to own an index fund or an ETF, particularly an ETF tracking the price of gold. What are your thoughts on investors going down that route, and could you make the case for active management over picking an ETF?
• 27:06
  Georges L: Over time, it's it's always shown that active managers outperform the the the passive for the the ETFs. The first move is always to to go into the big liquid ETFs, the the passive funds. I'm looking at them now, and I'm looking at the the the components of that that ETF. Some of those companies are pretty rich valuations. It's always the first stage going into the ETFs.
• 27:35
  The specialist gold funds, I think there's two problems here. One is that there's been a shift, global shift, into ETFs rather than actively managed portfolios in all the sectors. So especially in our sector where I think being a specialist and being able to pick out the winners and losers can actually make you perform significantly better than the ETFs. But those active managers are not getting any inflows. So the companies that we look at, and we see fantastic valuations here, until we get the generalist money coming into active funds or they start moving down the food chain from the very large companies down to the medium cap and smaller cap because that's where the really good value is.
• 28:25
  We've got a lot of companies trading at 0.1x, 0.2x net asset value, we've never seen before. So it comes back to your question. I don't think we're in a bull market until that sector really pushes up. But it really you can look at the numbers. Actively managed funds do, over time, way outperform passive funds.
• 28:46
  It may be not in the last four years, which has been quite disruptive while we've been at the at the bottom of the market.
• 28:51
  Kyle Caldwell: And as you mentioned earlier, if you focus on one commodity, such as gold, then the performance, it goes in cycles. There are strong periods followed by more subdued periods. What would you say to try and convince an investor to think long term and stick by a commodity such as gold rather than try and time the market?
• 29:12
  Georges L: The only way to do that is, bizarrely, you've you've gotta look at that sector when it's out of favor and the valuations are as attractive as they are now. And then when it becomes in favor, then reduce that that holding. But because each subset of the commodities has its own cycle, we're able to look across those cycles and say, Okay, look at the copper. The valuations are very rich at the moment. It's a crowded trade.
• 29:44
  We're not going to invest in that sector right now, but we'll invest in the precious metals. That will turn in a year's time. It will be vice versa. Copper, nobody wants because we've gone into a recession. Supply is exceeding demand.
• 29:58
  Prices are lower. And that's where you want to invest. And we've done that with uranium. We were in uranium a couple of years ago. The uranium equities have come back a long way.
• 30:08
  We're now starting to get interested in uranium. So that's how, rather than stick by that one commodity up and down, you look and you look at the valuations and where the best value is, and that will dictate the makeup of the portfolio.
• 30:23
  Kyle Caldwell: My thanks to George, and thank you for listening to this episode of On the Money. If you enjoyed it, please follow the show in your podcast app and do tell a friend about it. And if you get a chance, leave us a review or a rating in your podcast app too. You can join the conversation, ask questions, tell us what you'd like to talk about via email on 0tm@ii.co.uk. And in the meantime, you can find more information and practical pointers on how to get the most out of your investments on our website, which is ii.co.uk, and I'll see you next week.