Gold’s in a bull market - will it last?

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For this week’s episode, the focus is on gold, an asset that’s been performing very well over the past 18 months or so. Kyle is joined by Georges Lequime, a fund manager at Amati Global Investors, to discuss the pros and cons of owning gold, why the precious metal’s been in a rich vein of form, whether gold’s in a bubble, and the outlook for the commodity.

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Kyle Caldwell, funds and investment education editor at interactive investor: Hello, and welcome to On The Money, a weekly look at how to get the best out of your savings and investments. In this episode, we're going to be focusing on an asset that's been performing very well over the past 18 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 weighting to gold is beneficial over the long term as a portfolio diversifier due to its ability to act as a safe haven in troubled times.

While, on the other hand, some commentators argue that gold does tend to be volatile, and it also doesn't pay a dividend. Joining me to discuss this topic is Georges Lequime, a fund manager at Amati Global Investors. Georges is fund manager of the WS Amati Strategic Metals fund.

George, to start off with, could you explain in more detail the pros and cons of gold, and why the precious metal tends to do well when other assets are not doing well?

Georges Lequime, fund manager of the WS Amati Strategic Metals fund: Yes, certainly. Like you say, it's pretty Marmite, gold. They call it the emotive metal. Everyone's got an opinion. Those listening to the podcast, 20% would [probably] be very anti-gold, 20% would be pro, and probably the other 60% would be pretty curious because it's done really well.

I wanted to start today just looking back at some comments that JPMorgan made in the 1912 testimony. I quote him directly, and that's why I brought this card along, just so I don't get the quote wrong.

'Money is gold, nothing else. Gold, unlike credit, is not dependent on a third party coming through. Credit is only as good as the character of the borrower.'

I brought those quotes because it's pertinent today more than ever, given what's going on in the world right now. So, everyone's got an opinion, as you say. I've been doing this 31 years, and I started listing the pros and cons of gold, and quite interestingly, the list is about the same. That probably explains why it's so divisive.

So, obviously, on the pro side, 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 always a play between those. And, again, gold being highly liquid, it's also got a high value in a small volume.

So, a 400 troy ounce bar of gold, that's about 12.4 kilograms. Last week, it actually hit £1 million, 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 for that same weight. So, you can see the amount of value that you can attract.

It's also very rare. There's only been, since the start of mankind that we know about, 212,000 tons of gold being dug out of the ground. You find it normally in parts per million. Mines are mining at one or two parts per million. So, it's very difficult to get out of the ground, first of all, 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 metre cube or three Olympic swimming pools. So, it's actually quite rare and precious.

The other pro is that the government can't really trace it or tax it. The World Gold Council did a report in January looking at the performance of gold in one's portfolio relative to other assets. They looked at cash in US dollars, Treasuries, global stocks, US stocks, emerging market stocks, commodities and gold. Gold was the second-best performer. So, obviously, in one year, it will look very good, but this is on a 20-year annualised return of about 9.4%.

So, love it or hate it, the only category that beat gold was US stocks at 10.4%. But if you held it in US Treasuries, you get about 2.58%, or in US cash, 1.65%. So, over a longer period, it's less volatile as well. They did a survey looking at portfolios with 5% gold in it and 0% 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, OK, we're going to put some gold in there.

The last pro is if you're sitting in countries such as Turkey 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 any other currencies.

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Kyle Caldwell: And what are your thoughts on the arguments against gold? 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. Also the fact that gold doesn't have a yield, which, again, makes it difficult to value.

Georges Lequime: You're dead right, Kyle. 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.

It doesn't give you a yield, like you say. There's some use of gold for jewellery or some technology, and it can be volatile. The other big con, I think, is it's a bit of a lottery where gold has been deposited. It prejudices those countries where there's no gold in the ground because it's basically digging money out of the ground. In some countries where you do find gold, it can cause quite enormous social upheavals.

We saw with the Spanish conquistadors what they did in Latin America and Central America in search of gold and silver. 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.

Also, we saw in the US in the 1930s, that gold was actually confiscated. So, there's a bit of confiscation risk, and I'll get to that if you're looking at holding gold equities as opposed to the physical metal.

Kyle Caldwell: We've seen over the past 18 months or so, it's been a very strong period for gold. Could you explain what the catalyst was around 18 months ago for gold to go on this strong run?

Georges Lequime: There's a couple of factors that turned around. I think for the last 14 years, we've had central banks become net buyers of gold. Once the US dollar came off the gold standard in 1971, throughout the 1970s, typically as a percentage of foreign exchange reserves, gold made up 45%, 55% until the peak in 1980-81, then other asset classes did very well. And as a percentage, that dwindled all the way down until about 10, 15 years ago to around about below 15% of foreign exchange reserves.

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. So, you had a lot of exchange-traded fund (ETF) selling and that sort of terminated around about 18 months ago. But all the while, the structural support for gold was there from central banks.

Then you had a a third dimension that came in place about 18 months ago, where you had heightened geopolitical risk, and there was talk of maybe confiscating treasuries held by the Russians in Brussels, for example, and central banks around the world saying, OK, we're now holding.

Up to 35% of US Treasuries were held by foreign central banks, and that started to turn down quite aggressively. So, you've had countries like China saying, we don't like the way you're weaponizing the US dollar and getting a more even balance on their foreign exchange reserves. So, that's really what's been taking place.

At the same time, you've had interest rates start coming down, so you've had investors coming back into gold.

Kyle Caldwell: So, the increase in geopolitical tensions caused central banks to act by increasing their exposure to gold?

Georges Lequime: Definitely. If you look at where the big growth markets are, India, China, the Middle East, there's definitely been a concern that maybe a weighting 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 a while now and saying that.

The real turning point was the 2008 great financial crisis. Then we saw central banks being a bit more prudent in saying, let's hold a little bit more gold in our portfolio.

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Kyle Caldwell: So far in 2025, 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?

Georges Lequime: It's a good question, Kyle, because that's why I [questioned whether you] should be buying stocks or bonds or property or holding some gold or commodities in your portfolio? The roll-out of the tariffs really shook the financial outlook and the economic outlook for a number of countries.

The markets hate uncertainty, so gold is a safe haven, and attracts some buying there. But I think there's been a bit more than that, especially the tariff war with China, which it's headlined, has almost morphed into an economic war, taking place between the Trump administration and China.

We've seen reports of China more aggressively trying to buy gold. The March figures came out and they hold 6.5% of the foreign exchange in gold. It's still a small fraction from 2% a few years ago, so they've been building up.

But I hear from the gold traders that China's got a problem trying to access enough gold 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, you've had that trade taking place, and that's what's accelerated this move that you've had in gold.

Kyle Caldwell: The gold price typically has an inverse relationship with the US dollar. So, when the US dollar's weak, it tends to benefit gold. Has that been a factor at play over the past couple of months?

Georges Lequime: It has. The US dollar's only started 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 off a bit as you saw on Friday and today. But those are smaller moves, but I think in the long run, you see 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. There's a lot of tailwinds. But are we peaking here? And that's another question as well.

Kyle Caldwell:And how would you answer that question then? You mentioned, in US dollar terms, the gold price around 3,300. It was around 2,000 at the end of 2023. How much higher could the gold price go, and is it potentially already in a bubble?

Georges Lequime: After doing this for so long, it's a bit of a mug's game to try and predict, but 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, we look at the companies and say, 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 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% lower than we are today.

In that research report, they said this gold/silver company is at fair value. So, I think if you look 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 monetary base as your denominator, then we've still got another 100% to move to get up to that level.

So, it does feel like there's a little bit of froth in the gold price right now. We're vulnerable to maybe some good news on a deal with China or a resolution to the conflict in Ukraine that could take some of the hot money out of gold.

But 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'll never put a figure on it, but I'm hesitant to be too bearish.

It's not only Peel Hunt, but a number of the brokers have got the same. I think on average, about 2,200 is the gold price that they use in their models. So, they're basically saying, we think the price is going to fall 30% from here, which is as dangerous, I think, as trying to predict it a bit higher.

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.

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Kyle Caldwell: As you've mentioned, the big buyers of gold have 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 about a potential bubble if that was the case, if a lot of retail investors were buying?

Georges Lequime: Definitely. I've been through three bubbles now, or three peaks, in the gold price in my career. If I look at the red flags, one has always been the retail buying aggressively. 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.

Right now, you have stock valuations at 37-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.

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 that same period. So, it doesn't have all the ticks of ‘this is bubble’ yet. Usually what happens is that you get that last wave when the retail investors come into physical gold.

As an anecdote, a friend of mine in an office in New York, more a technology office, and he's my age, is [working] with a number of 30, 40, 35-year-old professionals. They called him a week ago and said they were starting to buy gold now. He said, What? I've been telling you for years. And he said, no. But it wasn't right yet.

I think 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 buying coming in, let's see.

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, is 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? If inflation is higher than anticipated, that's surely a positive for gold?

Georges Lequime: The key relationship, I think, is really with the expansion in the monetary base rather than inflation. 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 a system, so prices go up, but you've just debased it.

We've looked very closely at the short and medium-term relationship between the inflation figures that you get released and the actual gold price. And the correlation is not as close as you think.

But over time, it definitely is because inflation is tied again to the monetary base. So, that's more important for us to look at. We've gone through a period now of quantitative tightening. That's slowing down. Quantitative easing, obviously, increases the monetary base and increases the monetary supply, which then leads to, as we saw during the Covid period, high inflation. And that's just tied to the debasement of currency.

Ultimately, gold is currency, and you're looking at the value of this currency against the dollar or the yen or the euro.

Kyle Caldwell: The fund that you manage, WS Amati Strategic Metals fund, has around 40% in gold. You invest in gold mining companies, which some commentators say are a leveraged play on the bullion price. First, I wanted to ask, is that fair? I've heard that said a couple of times over the years. Is it fair to say that gold mining companies do offer a leveraged play?

Georges Lequime: 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.

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.

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 18 months is a lot of mining companies are generating significant cash flow and paying down their debt and also spending more on exploration.

So then if they can find in the vicinity of their mining operations more ounces at a cost of $50 or $100 an ounce, and bring them to account at $3,300, that's where the value add. That's why you're buying the mining companies. Unfortunately, in 2011, the run-up to 2011, a lot of the mining companies destroyed a lot of companies, a lot of value in that run-up.

Investors just sat back and said, we don't want 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.

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 gold miners have performed well year to date, about 45%, but they're coming off a very low base.

And looking at the profitability, it's not reflected at all in the valuation of the companies. That's why we're holding that 40% in the portfolio right now.

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Kyle Caldwell: That 40% exposure, is that near a record high for the fund? What is your typical exposure?

Georges Lequime: We grip the gold and silver exposure because most of the silver miners are 50% gold anyway, and that together is about 68%, 69%, 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.

So, we're a bit cautious that we could get a slowdown in demand just because of the impact of the tariffs. But then we've spoken about the positivities on the precious metal side, and that's why we're holding about 70%.

So, over the period, as we get that catch up on the valuations on the gold miners and the silver miners, we then pivot the fund more into the industrial metals rather than the precious metals.

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?

Georges Lequime: Man, that's something that really occupied my mind, Kyle, because 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 good run maybe for two or three years in gold. Then, typically, you have the industrial metals follow through in the next wave. So, it's very cyclical, and then you have the specialty metals with lithiums, the graphites, uranium as well. Those become really interesting.

So, it gives us the whole suite of metals to look at, especially in a period where the global economy is becoming more metals intensive, moving forward with the decarbonisation trade taking place, with the infrastructure spend that needs to be spent. So, all these factors are leading it.

For example, we’ve got a great 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 defence needs.

So there, again, we're able to look at these companies, and that's done very well for us. We've made almost a 100% return on that investment.

Kyle Caldwell: You, of course, are an active fund 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?

Georges Lequime: Over time, it's always shown that active managers outperform the passive for the ETFs. The first move is always to go into the big liquid ETFs, the passive funds. I'm looking at them now, and I'm looking at the components of that ETF. Some of those companies are pretty rich valuations. It's always the first stage going into the ETFs.

The specialist gold funds, I think there's two problems here. One is that there's been a 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.

We've got a lot of companies trading at 0.1x, 0.2x net asset value, which 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, really, you can look at the numbers. Actively managed funds do, over time, way outperform passive funds. Maybe not in the last four years, which has been quite disruptive while we've been at the bottom of the market.

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Kyle Caldwell: As you mentioned earlier, if you focus on one commodity, such as gold, then the performance 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?

Georges Lequime: The only way to do that is, bizarrely, you've got to look at that sector when it's out of favor and the valuations are as attractive as they are now. Then, when it becomes in favor, reduce that holding. But because each subset of the commodities has its own cycle, we're able to look across those cycles and say, OK, look at copper. The valuations are very rich at the moment, it's a crowded trade. 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. 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. 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 at the valuations and where the best value is, and that will dictate the make-up of the portfolio.

Kyle Caldwell: My thanks to Georges, 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 OTM@ii.co.uk. 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. I'll see you next week.

On The Money is an interactive investor (ii) podcast.