“gold shining through the darkening recession clouds” of the igwtreport... · • the steady...
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“Gold Shining Through the Darkening Recession Clouds”
Chartbook of the
In Gold We Trust report 2019
Ronald-Peter Stoeferle
Mark J. Valek
October 2019
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incrementum AG | Im alten Riet 102, 9494 – Schaan/Liechtenstein | +423 237 26 66 | [email protected]
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3Executive Summary of the In Gold We Trust Chartbook
1. Eroding Trust in Monetary Policy and the International Monetary System
• As we have forecasted, due to growing recession risks, central banks are about to conduct a big “monetary U-turn”:
Expect more QE, lower rates and MMT-style policies like “QE for the people”.
• The erosion of trust in many areas plays into gold’s hands. An end to these crises of trust is not in sight.
• The steady buying of gold and the repatriation of central bank gold indicates rising mutual distrust among central banks.
2. Status Quo of Gold
• 2019 ytd, gold is up in every major currency.
• In many currencies (EUR, AUD, CAD) gold trades at or close to new all-time highs!
3. Gold Mining Stocks
• Mining stocks are in the beginning of a new bull market. Creative destruction has taken place, and leverage on a rising
gold price is higher than ever.
• Gold & silver mining stocks are still one of the most hated asset classes these days. The capitulation selling of the last
couple of years now offers investors a very skewed risk/reward-profile.
4. Quo Vadis, Aurum?
• Gold has entered a new bull market cycle and might become a core asset for generalists again!
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1. The Eroding Trust in Monetary Policy andthe International Monetary System
“Put not your trust in money, but putyour money in trust.”
Oliver Wendell Holmes
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5
Monetary Policy Tide Turn: From QE to QT and back?Quarterly CB Flows in USD bn. (lhs) & S&P 500 (YoY%, rhs)
• Last year we pointed out that moving from QE to QT poses
severe risks. The normalization of monetary policy was abruptly
halted by the stock market slump in Q4/2018.
• Gold reaffirmed its portfolio position as a diversifier, as trust in the
“Everything Bubble” was tested in Q4/2018. While equity
markets suffered double-digit percentage losses, gold gained 8.1% and
gold mining stocks 13.7%.
• Monetary policy was massively asymmetric: While in previous years
the Fed had expanded its balance sheet by USD 3.7trn, the Fed has
reduced its balance sheet by only 0.7trn in total. Starting in September
the Fed has increased its balance sheet by a staggering 200 bn again.
“The time is coming (when) global financial markets stop focusing on
how much more medicine they will get (QEs) and instead focus on the
fact that it does not work.”
Russell Napier
-0.5
-0.3
-0.1
0.1
0.3
0.5
-1 000
-500
0
500
1 000
1 500
2 000
2 500
3 000
3 500
2003 2005 2007 2009 2011 2013 2015 2017 2019
FED PBOC BoJ ECB Total S&P 500
QE turns
to QT
Sources: Bloomberg, Incrementum AG
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6The Everything Bubble
• In the years following the financial crisis, global central
banks flooded the economy with exorbitant monetary
stimulus. Nearly USD 20 trn. of central bank money
was created ex nihilo.
• Global stock markets were deliberately driven up in order to
accelerate the so-called “wealth effect”. However, this did
not seem to be having any effect in 2015, and stock markets
began to stagger in the wake of fears of low growth.
• Alas, commodities remain the exception to the rule and still
do not participate in the Everything Bubble.
Sources: Federal Reserve St. Louis, Incrementum AG
3.0
3.5
4.0
4.5
5.0
5.5
6.0
1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014 2018
Financial assets of households/Disposable personal income
Dot-Com
Bubble
Everything
Bubble?
Real Estate
Bubble
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7Monetary Expansion Decouples from Annual World Gold Production, 1900=100
• The gap between monetary expansion and annual world
gold production increased further in recent years.
• Since 1900, the monetary aggregate M2 has risen
almost 180x faster than annual world gold
production!
“It's all about relative supply curves – the supply curve for
bullion is far more inelastic than is the case for paper money.
It really is that simple.”
Dave Rosenberg
Sources: US Geological Survey, Bloomberg, Incrementum AG
10
100
1 000
10 000
100 000
1 000 000
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
M2 Annual world gold production
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8Effective Federal Funds Rate, in % and Recessions in the US
• As a long-term chart of the fed funds rate reveals, the vast
majority of rate-hike cycles have led to a recession.
Moreover, every financial crisis was preceded by rate hikes.
• The historical evidence is overwhelming: In the past
100 years, 16 out of 19 rate-hike cycles were
followed by recessions. Only three cases turned out to be
exceptions to the rule.
„The next recession by definition will happen with income and wealth
disparities as their highest levels ever, and the unrest will likely be a
tad more forceful than the well-behaved Occupy Wall Street
movement was nine years ago.“
Dave Rosenberg
Sources: Federal Reserve St. Louis, Incrementum AG
0
2
4
6
8
10
12
14
16
18
20
1914 1920 1926 1932 1938 1944 1950 1956 1962 1968 1974 1980 1986 1992 1998 2004 2010 2016
Recession Fed Funds Rate
1
2
34
5
6 7
89
10
11
12 13
14
15
16
17?
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9S&P 500 (left scale) and Fed Funds – Upper Bound (in %, right scale)
• The following chart indicates that the Federal Reserve's
first interest rate cuts have previously had a
negative effect on the American stock market (S&P
500 as proxy).
• History shows that when the Federal Reserve starts cuttingrates, stocks decline. When rates stay flat or rise, stocks
surge. That is contrary to the fables you hear from many
analysts, because declining rates are indicative of economic
deterioration.
• If this pattern continues, one should analyze and act with
special care on the US stock market in quarters to come.
Sources: Crescat Capital LLC, Federal Reserve St. Louis, Investing.com, Incrementum AG
0
1
2
3
4
5
6
7
600
1 100
1 600
2 100
2 600
3 100
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
S&P 500 Fed funds - upper bound
Tech Bust
Global Financial
Crisis
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10Recession Forecasts Are Not Among the Strengths of Central Bankers
Sources: Bloomberg, CNBC
“The Fed has through the course of the year seen fit to lower the expected path of interest rates. That has
supported the economy. That is one of the reasons why the outlook is still a favorable one.”
Jerome Powell, September 9, 2019
“It is not in the baseline to have a recession.”
Christine Lagarde, September 24, 2019
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11Rising US Recession Probability
• Based on the probability of a US recession predicted by
treasuries spreads (twelve months ahead), we are currently
confronted with a 38% chance of a recession within
the next 12 months.
• Since this level has been reached only two times in the last
30 years (both times in a recession), we assume that we
might already be in a prerecession phase.
Consequently, crisis-proof assets will again be in
greater demand in the coming months.
Sources: Federal Reserve NY, Incrementum AG
0%
10%
20%
30%
40%
50%
1990 1995 2000 2005 2010 2015 2020
Recession Recession probability (12 months ahead)
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12Projected US Debt & Deficit, in USD bn
• According to CBO forecasts, the deficit of USD 1,370bn
in 2029 will be only slightly lower than in the crisis
year 2009 (USD 1,413bn). Budget deficits of comparable
size were recorded only in the period 2009-2012.
• It should also be noted that the CBO forecasts are based on
very optimistic, almost naive premises. For example, the
CBO assumes that the USA will not slide into recession in
the next ten years (!) and that the economy will grow by 3%
annually.
• From 2020, US government debt will exceed the combined
debt of Japan and the eurozone, despite the fact that
absolute US and Japanese debt were at similar levels until
2011, rising almost in step. Sources: CBO, Federal Reserve St. Louis, Incrementum AG
-2 000
-1 500
-1 000
-500
0
500
0
5 000
10 000
15 000
20 000
25 000
30 000
35 000
1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014 2018 2022 2026
US Deficit US Deficit projected
US Total public debt US Total public debt projected
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13
Due to the Enormous Debt Pile, High Positive Real Rates Seem Implausible.Negative and Falling Interest Rates Boost the Gold Price.
• Real interest rates – their direction and momentum – are
one of the most important drivers for gold!
• There are two time periods that were shaped by
predominantly negative real interest rates (blue shading at
right): the 1970s and the period since 2001. Both phases
clearly represented a positive environment for the gold
price.
• One can also discern that the trend of real interest
rates is extremely important for the gold price.
Sources: Federal Reserve St. Louis, Incrementum AG
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
0
200
400
600
800
1 000
1 200
1 400
1 600
1 800
2 000
Real federal funds rate Gold
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14ISM Manufacturing Index vs. ISM Non-Manufacturing Index
• The recent development shows that the less-volatile ISM
Manufacturing Business Activity Index has declined for a
year already.
• For the ISM Non-Manufacturing Business Index we see a
similar picture. It seems noteworthy that nowadays the
service sector reacts very sensitively to declines in asset
prices.
• As suggested by the ISM and several indicators, recession
clouds are getting darker and darker.
Sources: Investing.com, Incrementum AG
30
35
40
45
50
55
60
65
70
1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019
Recession
ISM manufacturing business activity
ISM non-manufacturing business activity
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15S&P 500 and NBER Recession Dating
• It takes 5-12 months before economic data is collected and
evaluated in order to officially attest a recession (e.g. in
2007 it took 1 year until NBER made its official call).
Sources: Investing.com, NBER , Incrementum AG
0
500
1 000
1 500
2 000
2 500
3 000
3 500
1979 1984 1989 1994 1999 2004 2009 2014 2019
Recession S&P 500 NBER Recession dating
Economic Peak NBER Recession Dating Monthly LagMarket Decline Peak-To-Through
Pre-Dating
01/1980 06/1980 5 -7%
07/1981 01/1982 6 -11%
07/1990 04/1991 9 -16%
03/2001 11/2001 8 -19%
12/2007 12/2008 12 -43%
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16Duncan Leading Indicator (YoY%)
• The Duncan Leading Indicator is known as a reliable
recession indicator. Since the late 1960s, this recession
indicator had only one false positive reading, which
was in the mid-1980s.
• It is calculated as the ratio of consumer durables spending
plus residential and business fixed investment to final sales.
• Every time the YoY% turns negative, the risk of a recession
rises dramatically.
Sources: Federal Reserve St. Louis, Incrementum AG
-15%
-10%
-5%
0%
5%
10%
15%
1968 1973 1978 1983 1988 1993 1998 2003 2008 2013 2018
Recession Duncan Leading Indicator YoY%
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17Industrial Production Index
• Another proven recession indicator is the Industrial
Production Index (IPI), measuring the real production
output of manufacturing, mining, and utilities. It is
published by the Federal Reserve Board.
• Except for the decline in 2015, which did not lead to a
recession, a relatively strong decline always ended up in a
recession.
Sources: Federal Reserve St. Louis, Incrementum AG
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
1949 1959 1969 1979 1989 1999 2009 2019
Recession Industrial Production Index YoY%
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18Capital/Consumer Goods Ratio
• The chart depicts the ratio between spending on capital and
consumer goods production over time. A rising ratio
indicates that relatively more capital than consumer goods
are produced.
• If interest rates are distorted, market participants receive
misleading price signals and invest too much into capital
goods relative to consumer goods.
• A reallocation of capital (i.e. bankruptcies, liquidation of
debt) becomes inevitable, which usually coincides with a
recession. At present the illusion of a monetary
perpetuum mobile still prevails in the markets.
Sources: Federal Reserve St. Louis, Incrementum AG
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
1.1
1949 1954 1959 1964 1969 1974 1979 1984 1989 1994 1999 2004 2009 2014 2019
Recession Capital/Consumer goods ratio
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19What Can They Come Up With Now? Five Ways for the Fed to Further Ease
•Each QE program so far has been less effective in terms of raising consumer prices (falling marginal utility).
•An enormous asset price inflation has been caused instead.
•If markets are confronted with another round of QE, this might trigger a loss of confidence in the USD and more inflation than is welcome…
QE4
•Flawed models led the Fed to hike rates in December 2018 (“tightening into weakness”).
•In the coming months, the FOMC might finally have to admit that they do not see only a “mid-cycle adjustment”.
•Negative interest rates are increasingly being discussed.
Zero/Negative Interest Rates
•Cheapening the US dollar could provide some superficial ease.
•However, others are trying the same (i.e. China, Japan, Eurozone).
•If everyone wants to devalue, the only things left to devalue against are gold and commodities!
Currency Wars
•Possibly the first policy tool: the Fed assures that it won't raise rates in the foreseeable future.
•People will reenter carry trades: Short the US dollar, invest in emerging markets for the longer term.
•This tends to weaken the US dollar and to import inflation.
Forward Guidance
•Running larger fiscal deficits and monetizing the debt through central bank action could “likely be the way forward”.
•Contrary to “traditional” QE, QE for the People implemented with tax deductions, would likely be more effective in raising inflation: Money isdefinitely being spent.
QE for the People (“Helicopter Money”)
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20Rising Gold Reserves, in tonnes
• After seeing 650 tonnes purchased by central banks in the
previous year, the analysts of the World Gold Council expect
purchases of around 700 tonnes again this year.
• While the gold reserves of developed countries are
stagnating, those of emerging economies have steadily risen
since 2009.
“Well, it’s interesting, gold is still significant. I ask myself, if
gold is a relic of a long history, why is $1 trillion worth of
gold held by central banks worldwide plus the IMF and other
financial institutions? If it’s worthless and meaningless, why
does everyone still own it?”
Alan Greenspan
Sources: World Gold Council, Incrementum AG
24 000
25 000
26 000
27 000
28 000
29 000
30 000
31 000
32 000
33 000
34 000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Developed markets Rest of the world
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21
• In recent years, the “axis of gold”* countries have
questioned the US-dominated global economic order. Their
distrust is reflected in the steady expansion of their gold
reserves.
• Since Q2/2009 Kazakhstan has boosted its central bank
holdings by 415%, followed by Russia (301%), Turkey
(171%), China (83%), and India (73%).
• The increase in gold reserves should be seen as strong
evidence of growing distrust in the dominance of the US
dollar and the global monetary and credit system associated
with it.
Change in Gold Reserves Held by Emerging Countries, in tonnes
Sources: World Gold Council, Incrementum AG* A term famously coined by Jim Rickards
550
1 054
358
73116
2 207
1 927
618
375314
0
500
1 000
1 500
2 000
2 500
Russia China India Kazakhstan Turkey
Q2 2009 Q2 2019
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22Chinese and Russian US Treasuries Holdings, in USD bn
• Russia and China, the largest foreign holders of US debt,
continue dumping US treasuries.
• Both countries have sold off US treasuries worth about USD
100bn each in the last two years.
“It seems to me that our American partners are making a
colossal strategic mistake [as they] undermine the credibility
of the dollar as a universal and the only reserve currency
today. They are undermining faith in it…. They really are
taking a saw to the branch they are sitting on.”
Vladimir Putin
Sources: Bloomberg, US Treasury Department, Incrementum AG
0
40
80
120
160
200
0
200
400
600
800
1 000
1 200
1 400
2007 2009 2011 2013 2015 2017 2019
China Russia
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23Monetary Base vs. Gold Reserves at Market Prices, in USD bn (log)
• Since the end of the classical gold standard, parity between
the US monetary base and US gold reserves has been
restored on two occasions by an upward revaluation of gold
(in the mid 1930s and in the late 1970s).
• Whether a potential US dollar devaluation will happen in
the framework of an international agreement or in an
uncoordinated manner remains to be seen.
• To cover the current monetary base of the US with
gold, the gold price would have to stand at 12,600
USD!
Sources: Federal Reserve St. Louis, World Gold Council, Incrementum AG
1
10
100
1 000
10 000
1918 1933 1948 1963 1978 1993 2008
Monetary base Gold reserves at market prices
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24Dollars of Debt Required to Finance 1 USD Real GDP
• Expanding the money supply in a fiat money system is
tantamount to piling up debt – and every borrower
obligated to service his debt surrenders part of his future
autonomy.
• In the case of government debt, younger generations are
burdened with the debt accumulated by older ones.
Decreasing marginal utility of additional debt units
can clearly be seen in this chart.
• But that is not all: Beyond the servicing of government debt,
rising rents and property prices driven by money-supply
expansion represent costs that wage earners have to handle
with more or less static real incomes.
Sources: Federal Reserve St. Louis, Incrementum AG
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
1954 1959 1964 1969 1974 1979 1984 1989 1994 1999 2004 2009 2014 2019
Total debt/GDP
USD 3.8 required to finance
USD 1 of real GDP
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25Total Credit Market Debt, in USD tn
• Total credit-market debt has expanded exponentially since
the US dollar’s tie to gold was cut in 1971. This chart
impressively illustrates the instability of growth induced by
credit expansion.
• Since 1954, “total credit market debt” (which is the broadest
debt aggregate in the US) has increased from USD 529bn
in Q1/1954 to USD 73,433bn in Q2/2019, or 127
times. In every decade, outstanding debt has at least
doubled.
• There is no reverse gear in the monetary system – if money
supply and credit don't continually rise, the system's
situation grows critical.
Sources: Federal Reserve St. Louis, Incrementum AG
0
10
20
30
40
50
60
70
80
1954 1959 1964 1969 1974 1979 1984 1989 1994 1999 2004 2009 2014 2019
Total credit market debt
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26Gold/Monetary Base Ratio
• Over the past decades, the gold backing of the US monetary
base has trended down.
• The monetary base (M0), has seen its gold backing
dwindle to levels below 10%.
• One could conclude that gold became significantly cheaper
because of this unrestrained monetary inflation.
Sources: Federal Reserve St. Louis, World Gold Council, Incrementum AG
0%
20%
40%
60%
80%
100%
120%
140%
160%
1918 1928 1938 1948 1958 1968 1978 1988 1998 2008 2018
Gold/Monetary base ratio
Median = 43.1%
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2. The Status Quo of Gold
“Gold’s Perfect Storm investment thesis argues that gold is at the beginning of a
multiyear bull market with ‘a few hundred dollars of downside, and a few thousand
dollars of upside’. The framework is based on three phases:
testing the limits of monetary policy, testing the limits of credit markets, and testing the
limits of fiat currencies.”
Diego Parilla
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28Gold Performance in Various Currencies
• In many currencies, such as EUR, AUD and CAD,
gold is trading at or close to all-time highs!
• The average annual performance from 2001 to 2019 has
been +10.0%. During this period gold has outperformed
practically every other asset class, and in particular every
currency, despite intermittent, sometimes substantial
corrections.
Sources: www.goldprice.org, Incrementum AG. Data as of Oct 23rd
EUR USD GBP AUD CAD CNY JPY CHF INR Average
2001 8.1% 2.5% 5.4% 11.3% 8.8% 2.5% 17.4% 5.0% 5.8% 7.4%
2002 5.9% 24.7% 12.7% 13.5% 23.7% 24.8% 13.0% 3.9% 24.0% 16.2%
2003 -0.5% 19.6% 7.9% -10.5% -2.2% 19.5% 7.9% 7.0% 13.5% 6.9%
2004 -2.7% 5.3% -2.3% 1.8% -1.9% 5.3% 0.7% -3.4% 0.6% 0.5%
2005 36.8% 20.0% 33.0% 28.9% 15.4% 17.0% 37.6% 37.8% 24.2% 26.1%
2006 10.6% 23.0% 8.1% 13.7% 23.0% 19.1% 24.3% 14.1% 20.9% 17.2%
2007 18.4% 30.9% 29.2% 18.3% 12.1% 22.3% 22.9% 21.7% 16.5% 21.7%
2008 10.5% 5.6% 43.2% 31.3% 30.1% -2.4% -14.4% -0.1% 28.8% 15.5%
2009 20.7% 23.4% 12.7% -3.0% 5.9% 23.6% 26.8% 20.1% 19.3% 16.5%
2010 38.8% 29.5% 34.3% 13.5% 22.3% 24.9% 13.0% 16.7% 23.7% 25.2%
2011 14.2% 10.1% 10.5% 10.2% 13.5% 5.9% 4.5% 11.2% 31.1% 11.2%
2012 4.9% 7.0% 2.2% 5.4% 4.3% 6.2% 20.7% 4.2% 10.3% 7.5%
2013 -31.2% -28.3% -29.4% -16.2% -23.0% -30.2% -12.8% -30.1% -18.7% -24.1%
2014 12.1% -1.5% 5.0% 7.7% 7.9% 1.2% 12.3% 9.9% 0.8% 6.2%
2015 -0.3% -10.4% -5.2% 0.4% 7.5% -6.2% -10.1% -9.9% -5.9% -3.8%
2016 12.4% 9.1% 30.2% 10.5% 5.9% 16.8% 5.8% 10.8% 11.9% 12.3%
2017 -1.0% 13.6% 3.2% 4.6% 6.0% 6.4% 8.9% 8.1% 6.4% 6.3%
2018 2.7% -2.1% 3.8% 8.5% 6.3% 3.5% -4.7% -1.2% 6.6% 2.6%
2019 ytd 21.7% 16.4% 15.4% 21.4% 12.5% 20.0% 15.4% 18.0% 19.3% 17.8%
Average 9.6% 10.4% 11.6% 9.0% 9.4% 9.5% 10.0% 7.6% 12.6% 10.0%
@IGWTreport
29Average Annual Gold Price, in USD
• Since August 15, 1971 – the beginning of the new monetary
era – the annual rate of increase of the gold price in
US dollars has been 10%.
• The inflation-adjusted appreciation of the currency gold
against the US dollar averages 4.5% per year.
• This long-term context puts the correction of the years
2013-2015 into perspective, as this chart of average annual
prices shows. The chart also provides impressive evidence
that it is advisable to regularly accumulate gold (“gold
saving”) by harnessing the cost-average effect.
Sources: Federal Reserve St. Louis, Incrementum AG
41 58 9
7158
161
125
148 194
307
613
462
377 423
361
317 367
446
438
381
384
362
344
360
384
384
388
332
294
279
279
271 310 3
63 410 445
605
696
873
970
1 2
25
1 5
72 1
668
1 4
13
1 2
66
1 1
61 1 2
46
1 2
58
1 2
70 1 3
57
0
200
400
600
800
1 000
1 200
1 400
1 600
1 800
Average annual gold price
10% p.a.
@IGWTreport
30World Gold Price and Gold, in USD
• This chart is one of the classics of every In Gold We Trust
report. It shows the so-called world gold price, which
represents the gold price not in US dollars or euros but in
trade-weighted US dollars.
• The chart shows that the world gold price is
currently trading at USD 1,995 (monthly average).
Sources: Federal Reserve St. Louis, Incrementum AG
1 000
1 100
1 200
1 300
1 400
1 500
1 600
1 700
1 800
1 900
2 000
2011 2012 2013 2014 2015 2016 2017 2018 2019
Gold in USD World gold price
@IGWTreport
31Gold, in EUR
• The 20th anniversary of the introduction of the euro as book
money gives us an opportunity to take a closer look at
performance over this period.
• Since the euro was introduced as book money on
January 1, 1999, the price of gold in euros has risen
by 454%.
• The annualized performance from January 1999 to
September 2019 is 9%!
Sources: Federal Reserve St. Louis, Incrementum AG
0
200
400
600
800
1 000
1 200
1 400
1 600
1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019
Gold in EUR
+454%
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32Milligrams of Gold per Euro
• The dramatic loss of purchasing power of the euro against
gold is even more impressive if depicted as an inverse. This
chart shows how many milligrams of gold correspond to one
euro.
• Whereas on January 1, 1999 one euro “contained” 124.8 mg
of gold, 20 years later the figure was only 28.3 mg. This
corresponds to a loss of 82% in the value of the euro
against gold.
Sources: Federal Reserve St. Louis, Incrementum AG
0
20
40
60
80
100
120
140
1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019
Milligram gold per Euro
-82%
@IGWTreport
33Purchasing Power of Main Currencies Valued in Gold (log)
• This chart clearly demonstrates the fact why gold is often
considered as a hedge against inflation. Since 1971 – the end
of the gold standard era – all four stated major currencies
have lost drastically in purchasing power relative to gold.
• Among the currencies USD, EUR, GBP and CHF, the Swiss
franc has lost the least in valuation, by far.
Sources: Federal Reserve St. Louis, Investing.com, Incrementum AG
1
10
100
1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016 2019
USD EUR GBP CHF
@IGWTreport
34Currency Value Relative to Gold
• This chart basically tells us the same story as the previous
one, but just with a longer time horizon.
• It shows where the erosion of trust in paper money leads in
extreme cases. When paper currencies were not trustworthy
in the eyes of the population anymore, they reverted to their
intrinsic value, and that is zero!
Sources: World Gold Council, Harold Marcuse – UC Santa Barbara, Incrementum AG
0
20
40
60
80
100
120
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
Gold USD Deutsche Mark
ECU EUR GBP
JPY Mark Reichsmark
@IGWTreport
35Gold ETF Holdings, in USD bn (left scale) and Gold, in USD (right scale)
• The interest of financial investors in gold is rising
again. This is confirmed by the inflows into gold ETFs,
which have been on the rise since the end of 2015.
• For us, this indicator is representative of Western financial
investors, who choose ETFs as the primary instrument for
managing their gold exposure. This is also reflected in the
fact that gold ETF inflows follow an extremely procyclical
pattern.
• Geographical segmentation shows that in recent years
European investors have weighted gold ETFs more strongly
than their North American peers have done.
Sources: World Gold Council, Incrementum AG
0
200
400
600
800
1 000
1 200
1 400
1 600
1 800
2 000
0
500
1 000
1 500
2 000
2 500
3 000
2003 2005 2007 2009 2011 2013 2015 2017 2019
North America Europe Asia Other Gold in USD
@IGWTreport
36Gold/S&P Ratio Bottoming
• We consider the bull market in equities as the biggest
opportunity cost for gold.
• Comparing the gold price to S&P 500 development, we can
see that the relative performance of gold vs. the
S&P 500 is bottoming and making higher lows.
• After seven years of gold’s underperformance vis-à-vis the
broad equity market, the tables may soon be turning in
favour of gold.
Sources: Federal Reserve St. Louis, Incrementum AG
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2011 2012 2013 2014 2015 2016 2017 2018 2019
Gold/S&P 500 ratio 200d MA 90d MA
@IGWTreport
37Gold, in USD (left scale) and Silver, in USD (right scale)
• This chart demonstrates the nominal gold and silver price
moves since 2000.
• The silver price could also be interpreted as a sentiment
indicator for gold. Strong bull markets for silver usually only
happen in the course of rising gold prices, because investors
seek higher leverage and end up with mining stocks or
silver.
• Silver has lagged gold so far but tends to catch up late in
cycle.
Sources: Federal Reserve St. Louis, Investing.com, Incrementum AG
0
5
10
15
20
25
30
35
40
45
50
0
200
400
600
800
1 000
1 200
1 400
1 600
1 800
2 000
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
Gold Silver
@IGWTreport
38Gold in Nominal and Real Terms, in USD
• The comparison of gold in nominal and real (inflation-
adjusted – July 2019 USD) prices are demonstrated in this
chart.
• Inflation began rising tremendously in the mid-1970s and
reached about 14% in 1980. The reason for the Great
Inflation was mainly monetary policy that allowed for
excessive growth in the money supply. Gold peaked at
USD 2,215 at that time.
Sources: Federal Reserve St. Louis, Incrementum AG
0
500
1 000
1 500
2 000
2 500
1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014 2018
Gold (nominal) Gold (inflation adjusted - July 2019 USD)
2,215 USD
@IGWTreport
39S&P 500 (left scale) and Gold/Silver Ratio, inverted (right scale)
• Since 2011, disinflationary forces have provided a
tremendous tailwind to financial assets. Since the early
1990s there has been an astonishing synchronization
between financial assets and the gold/silver ratio: A risingstock market usually goes hand in hand with afalling gold/silver ratio, i.e. an outperformance ofsilver compared to gold. However, in 2012 thiscorrelation broke down.
• Our interpretation for this phenomenon is that in previouseconomic cycles reflation was conventionallyachieved by expanding credit. This time, reflation was
achieved by buying securities, which made monetary assets
more expensive but did not sustainably fuel consumer price
inflation.Sources: Federal Reserve St. Louis, Incrementum AG
20
30
40
50
60
70
80
90
1000
500
1 000
1 500
2 000
2 500
3 000
1990 1994 1998 2002 2006 2010 2014 2018
S&P 500 Gold/Silver ratio (inverted)
@IGWTreport
3. Gold Mining Stocks
“For the first time in my lifetime the gold mining industry has actually decided to
become an industry rather than a floating abstraction. This focus on productivity, this ability to deliver economic results in 2018,
combined with the expectation of performance in the mining industry, which is
nil, is going to yield surprise after surprise after surprise in 2018, with damn near all of
those surprises being good.”
Rick Rule
@IGWTreport
41BGMI/Gold Ratio
• The extent of underperformance of gold mining stocks
compared to bullion gold becomes particularly clear when
we make a longer-term comparison.
• The oldest available gold mining index, the Barron’s Gold
Mining Index (BGMI), is currently at its lowest level relative
to gold in 78 years.
• In addition, the current value is miles below the long-
term median of 1.5.
Sources: Bloomberg, Incrementum AG
0
1
2
3
4
5
6
1950 1956 1962 1968 1974 1980 1986 1992 1998 2004 2010 2016
BGMI/Gold ratio Median (BGMI/Gold)
@IGWTreport
42BGMI/S&P 500 Ratio
• The BGMI/SPX ratio currently stands at a similar levelas in 2001 and 12/2015, when the last bull marketsin gold stocks started.
• The recent M&A deal flow might have marked the bottom of
the bear market.
“It's unpriced optionality, then, because there's going to be
an M&A wave at some point. There has to be, because the
largest companies have been spritzing reserves hand over
fist and will have to come to the market.”
Ned Naylor-Leyland
Sources: Bloomberg, Robert Shiller Online Data, Incrementum AG
0
2
4
6
8
10
12
1950 1956 1962 1968 1974 1980 1986 1992 1998 2004 2010 2016
BGMI/S&P 500 ratio
@IGWTreport
43XAU/S&P 500 Ratio
• If we look at mining stocks in relation to the broad equity
market, we clearly see that the gold sector has been met with
enormous skepticism since 2011.
• The XAU/S&P 500 ratio is currently at a lower levelthan it was in 2000, when the last big boom began,and at the same level as in 2016, when a 170% rally began.
Sources: Investing.com, Incrementum AG
0.0
0.2
1984 1988 1992 1996 2000 2004 2008 2012 2016
XAU/S&P 500
@IGWTreport
44HUI Index: Bull and Bear Market Cycles
• We want to highlight the enormous volatility and inflation
sensitivity of the mining sector. As the chart illustrates, gold
stocks are anything but “buy and hold” investments and
should be actively managed. The following quote confirms
this as well:
“Market and sector forces together typically cause 80% of
the price movement in a stock. That means the company
fundamentals usually account for less than 20% of a stock’s
price movement. This is the reason a company’s stock price
sometimes seems to move independently of the
fundamentals.”
Benjamin F. King
Sources: Investing.com, Incrementum AG
0
100
200
300
400
500
600
700
1996 1999 2002 2005 2008 2011 2014 2017 2020
HUI Index
@IGWTreport
45CRB Commodity Index vs. US Dollar Index
• Systemic instability in recent years: All industrial
commodities and practically all fiat currencies have
massively lost against the US dollar; crude oil declined by
more than 50% within a mere seven months. There has been
a disinflationary earthquake in the US dollar-
centric monetary system.
• Commodities, as an asset class, are an antidote to the
US dollar: Price movements are reciprocal, with causality
running from the US dollar to commodities attributable to
the US dollar to a greater extent than is generally assumed.
Sources: Federal Reserve St. Louis, Thomson Reuters, Incrementum AG
60
70
80
90
100
110
120100
200
300
400
500
600
700
2001 2003 2005 2007 2009 2011 2013 2015 2017 2019
CRB Commodity Index US Dollar Index (inverted)
200d MA (CRB Commodity Index) 200d MA (US Dollar Index (inverted))
@IGWTreport
46GDX/Gold Ratio & GDXJ/Gold Ratio Confirm Rising Strength of Gold Miners
Sources: Federal Reserve St. Louis, Investing.com, Incrementum AG
0.00
0.01
0.02
0.03
0.04
0.05
0.06
0.07
05/2006 05/2008 05/2010 05/2012 05/2014 05/2016 05/2018
GDX/Gold ratio
Peak: 0.067
Trough: 0.012
0.00
0.02
0.04
0.06
0.08
0.10
0.12
0.14
11/2009 11/2010 11/2011 11/2012 11/2013 11/2014 11/2015 11/2016 11/2017 11/2018
GDXJ/Gold ratio
Peak: 0.13
Trough: 0.016
@IGWTreport
47Bull Markets in Mining Shares: Performance Is Way Below Average
• The chart shows all bull markets in the Barron’s Gold
Mining Index (BGMI) since 1942.
• One can see that the current uptrend is still relatively weak
compared to its predecessors. Should we actually be at the
beginning of a pronounced uptrend in precious metals
stocks – which we assume to be the case – then there
remains plenty of upside potential.
• Moreover, the chart shows that every bull market in the
sector ended in a parabolic upward spike, which lasted nine
months on average and resulted in prices doubling at a
minimum. 0
100
200
300
400
500
600
700
800
1 41 81 121 161 201 241 281 321 361 401
Number of weeks
10/1942-02/1946 07/1960-03/1968
12/1971-08/1974 08/1976-10/1980
11/2000-03/2008 10/2008-04/2011
01/2016-09/2019
Current bull market
Sources: Nowandfutures, TheDailyGold.com, Barrons, Incrementum AG
@IGWTreport
4. Quo Vadis, Aurum?
“The record of fiat currencies through history, 100%, is eventual failure. The record
of gold for 5,000 years, 100%, is lack of failure.”
Simon Mikhailovich
@IGWTreport
49Cycle of Market Emotions
• In the early stages of a bull market the enthusiasm of
investors is usually very subdued; skepticism and disinterest
tend to predominate. This changes gradually as the cycle
progresses, until euphoria and buying panics predominate
near the end of the cycle.
“The mind is a fascinating instrument that can make or
break you.”
Yvan Byeajee
Sources: Incrementum AG
Optimism
Excitement
Thrill
EuphoriaAnxiety
Denial
Fear
Desperation
Panic
Capitulation
Despondency
Depression
Hope
Relief
Optimism
@IGWTreport
50The Emotional Rollercoaster Is Turning Upwards
• Comparing the idealized sentiment cycle to the gold price
(360-day moving average), the point of maximum
frustration appears to have been reached at the beginning of
2016.
• We are currently in the stage of relief, which means that the
gold bull market we are observing right now has just entered
the market-emotions cycle.
Sources: Federal Reserve St. Louis, Incrementum AG
1 000
1 100
1 200
1 300
1 400
1 500
1 600
1 700
1 800
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
360d MA Gold
Optimism
Excitement
Thrill
Euphoria Anxiety
Denial
Fear
Desperation
Panic
Capitulation
Despondency
Desperation
Hope
Relief
@IGWTreport
51Gold Bull Markets Comparison, log scale (indexed 10/26/1970 & 01/04/2000 = 100)
• The following chart illustrates the similarities between the
1970s bull market and the current bull market.
• The analysis reveals the fact that the bear market since 2011
has been following largely the same structure and depth as
the mid-cycle correction from 1974 to 1976.
• Supposing that the similarities persist for the next couple of
years, gold should continue its upward movement for quite
a while.
Sources: Federal Reserve St. Louis, Incrementum AG
1970 1971 1972 1973 1974 1975 1976 1977 1978
50
150
450
1 350
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024
2000s Bull market 1970s Bull market
@IGWTreport
52Gold/Silver Ratio (left scale) and USD 5y5y Inflation Swap, in %, inv. (right scale)
• The gold/silver ratio clearly correlates with inflation expectations.
• Strong bull markets for silver usually happen only in the course of
rising gold prices, because investors seek higher leverage and end up
with mining stocks or silver.
• Consumer prices continue to show only a restrained upward trend, a
trend that central banks use to justify the continuation of their zero-
or low-interest-rate policies. Rising price inflation coupled with
mounting economic risks would probably mean the perfect
storm for gold: stagflation. At the moment, however, the
consensus view is that this seems an almost impossible
scenario.
• Our proprietary “Incrementum Inflation Signal” has just
switched to a full-blown signal!
Sources: Federal Reserve St. Louis, Investing.com, Incrementum AG
1.25
1.50
1.75
2.00
2.25
2.50
2.75
3.0030
40
50
60
70
80
90
100
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Gold/Silver ratio USD 5y5y inflation swap (inverted)
@IGWTreport
53Commodities vs. Stocks: Lowest Valuation Since 1971
• This chart was by far the most-quoted one in last year’s
In Gold We Trust report.
• It clearly illustrates that the relative valuation of
commodities in comparison with equities is extremely low
by historical standards. Compared to the S&P 500, the
GSCI Commodity Index (TR) is trading at its lowest level
since 1971.
• Moreover, the ratio trades significantly below its long-term
median of 4.10.
• If we postulate the general tendency of reversion to the
mean, we see attractive commodities investment
opportunities. Sources: Professor Dr. Torsten Dennin, Lynkeus Capital, Bloomberg, Incrementum AG
0
1
2
3
4
5
6
7
8
9
10
1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011 2015 2019 2023
SPGSCITR Commodity Index/S&P 500 ratio
Median: 4.10
GFC 2008
Gulf War 1990
Oil Crisis 1973/74
Dot-Com Bubble Everything
(except commodities)
Bubble
@IGWTreport
54GSCI Commodity Index/Dow Jones Industrial Average Ratio Since 1900
• Now we want to take a view of the commodities sector over
an even longer time span. This chart shows that
commodities are currently trading at their lowest level
relative to US equities since the 1960s.
• Moreover, there were only two other occasions when
commodities were similarly undervalued relative to equities:
just ahead of Black Thursday on October 24, 1929, and
during the excesses of the dotcom bubble.
Sources: Goldman Sachs Commodity Index until 1970, Goehring & Rozencwajg Commodity Index pre-1970,
Bloomberg, Incrementum AG
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020
GSCI/DJIA Ratio
Median = 0.41
Commodities radically overvalued
Commodities radically undervalued
@IGWTreport
55GSCI Commodity Index (left scale) and S&P 500 (right scale)
• The extreme relative undervaluation of commodities
compared to the stock market becomes evident in this chart.
It shows the development of the S&P GSCI and of the S&P
500, as well as their combined long-term trend line.
• To return to this trend line – which happens on average every
6 to 8 years – the S&P would have to fall by 48% and the GSCI
to rise by 113%.
• This is a scenario that seems highly unlikely, if not
impossible, at the moment. However, a glance at this chart or
into history books puts this alleged impossibility into
perspective.
Sources: Professor Dr. Torsten Dennin, Lynkeus Capital, Bloomberg, Investing.com, Incrementum AG
0
500
1 000
1 500
2 000
2 500
3 000
3 500
0
2 000
4 000
6 000
8 000
10 000
12 000
1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011 2015 2019
S&P GSCI S&P 500 Linear trend line
-48%
+113%
@IGWTreport
56Gold/Silver Ratio: Bullish on Gold? Then Consider Silver!
• Recently the gold/silver ratio traded at the highest
level since 1991!
• At the moment, it seems as if the ratio has hit a potential
reversal point again after an upward trend of more than
three years. The ratio has peaked at over 90 and is currently
trading at 84.
• According to the results of our statistical analysis, a
sustainable increase in the gold price is unlikely to happen
in tandem with an increase in the gold/silver ratio. A falling
gold/silver ratio significantly increases the probability of a
bull market in gold and silver.
Sources: Bloomberg, Investing.com, Incrementum AG
10
20
30
40
50
60
70
80
90
100
1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016 2019
Falling ratio Gold/Silver ratio
Silver
+64%
Gold
-21%
Silver
+203%
Gold
+80%
Silver
+371%
Gold
+77%
Silver
+38%
Gold
+9%
Silver
+1811%
Gold
+595%
Silver
+159%
Gold
+42%
Silver
+60%
Gold
+8%
Silver
+60%
Gold
+9%
@IGWTreport
57Gold/Oktoberfestbier Ratio – Litres of Beer per Ounce of Gold
• At the Oktoberfest 2019 a Maß of beer (1 liter) costs up to
11.80 EUR.
• In 1950 the beer-loving visitor had to put only 0.82 EUR on
the counter. Since 1950, the annual average inflation rate of
Oktoberfestbier has therefore been 3.9%.
• How many Maß of Oktoberfestbier do you get this year for
an ounce of gold? Currently one ounce buys you 115 Maß of
beer. Measured by the historical average of 89 Maß, the
“beer purchasing power” of gold is above its long-term
average.
• Link to our “O'Zapft Is - In Gold We Trust
Oktoberfest Special” Sources: Statista.de, http://www.wbrnet.info/vbhtm/9999-Entwicklung-Bierpreise.html, Incrementum AG
0
50
100
150
200
250
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
1980:
227 Beer/Ounce
1971:
48 Beer/Ounce
2012:
137 Beer/Ounce
Average:
89 Beer/Ounce
2019:
115 Beer/Ounce
@IGWTreport
58The In Gold We Trust Report in 8 Bullet Points
1. The breakdown of trust in the international monetary order is manifesting itself in the
highest gold purchases by central banks since 1971 and the ongoing trend to repatriate
gold reserves.
2. Gold reaffirmed its portfolio position as a good diversifier as trust in the “Everything
Bubble” was tested in Q4/2018. While equity markets suffered double-digit percentage
losses, gold gained 8.1% in USD and gold mining stocks 13.7% in USD.
3. The normalization of monetary policy was abruptly halted by the stock market slump in
Q4/2018. The “monetary U-turn” that we had already forecasted last year has begun.
4. Recession risks are significantly higher than discounted by the market. In the event of a
downturn, negative nominal interest rates, a new round of QE, and the implementation of
even more extreme monetary policy ideas (e.g. MMT) are to be expected.
@IGWTreport
59The In Gold We Trust Report in 8 Bullet Points
5. The Belt and Road Initiative (BRI), a.k.a. One Belt, One Road (OBOR) or New Silk Road, is
going to cement China's position as the world's top-ranked gold consumer as well as
producer and will keep boosting physical gold trading at the Shanghai Gold Exchange
(SGE).
6. Regarding the process of de-dollarization, more and more countries are looking for
alternatives to the US dollar, be it trading in other currencies, accumulating reserves of
non-US-dollar currencies, or buying gold.
7. After several years of creative destruction in the mining sector, most companies are now
on a much healthier footing. The recent M&A wave reinforces our positive basic
assessment.
8. The political and economic tensions between the USA and China are increasing. These and
other uncertainties, such as the worsening situation in Iran, should support the gold price.
@IGWTreport
Subscribe and download the
In Gold We Trust report 2019
by following the link!
https://ingoldwetrust.report/igwt/
?lang=en
@IGWTreport
Addendum
Because we care…
About our Clients. About the Society. About the Future.
#igwt2018
62
@IGWTreport
About the In Gold We Trust Report
• The gold standard of gold research: Extensive annual study
of gold and gold-related capital market developments
• Reference work for everybody interested in gold and mining
stocks
• International recognition – newspaper articles in more than
60 countries; almost 2 million readers
• Published for the 13th time in English and German and for
the first time in Chinese.
• Further information and all editions can be found
at: https://ingoldwetrust.report/?lang=en
#igwt2018
63
@IGWTreport
About the Authors
Mark J. Valek, CAIA
• Mark is a partner of Incrementum
AG and responsible for portfolio
management and research.
• Prior to Incrementum, he was with
Merrill Lynch and then for 10 years
with Raiffeisen Capital
Management, most recently as fund
manager in the area of inflation
protection.
• He gained entrepreneurial
experience as co-founder of philoro
Edelmetalle GmbH.
Ronald-Peter Stoeferle, CMT
• Ronni is managing partner of
Incrementum AG and responsible
for research and portfolio
management.
• In 2007 he published his first In
Gold We Trust report. Over the
years, the study has become one of
the benchmark publications on
gold, money, and inflation.
• Advisor for Tudor Gold Corp.
(TUD), a significant explorer in
British Columbia’s Golden Triangle.
• Member of the advisory board of
Affinity Metals (AFF).
@IGWTreport
64
John Reade Chief Market Strategist
World Gold Council
“Arguably, the In Gold We Trust report is the
most comprehensive analysis of the global
political economy through the lens of the
Austrian School of economic thought. A unique
perspective on gold, with some fantastic charts
and always an enjoyable read.”
Selected Testimonials
@IGWTreport
65
Rick RulePresident & CEO
Sprott U.S. Holdings, Inc.
“A must-read for people who invest in precious
metals and precious metals equities. A pleasant
read, too – well-researched and well-written.”
Selected Testimonials
@IGWTreport
66
Brien LundinEditor of Gold Newsletter and CEO of the
New Orleans Investment Conference
“The annual In Gold We Trust report has
become today’s most widely read and perhaps
most influential piece of research on gold,
along with the major economic and market
trends affecting it.”
Selected Testimonials
@IGWTreport
67
Simon MikhailovichFounder
Tocqueville Bullion Reserve
“When it comes to finding the most insightful
and comprehensive annual gold report, in
Incrementum I trust.”
Selected Testimonials
@IGWTreport
68About Incrementum AG
Incrementum AG is an owner-managed and fully licensed asset manager & wealth manager based in the Principality of Liechtenstein.
• Independence is the cornerstone of our philosophy. The partners own 100% of the company.
• Our goal is to offer solid and innovative investment solutions that do justice to the opportunities and risks of today’s complex and fragile environment.
• Our core competencies are in the areas of:
o Wealth management
o Precious metal and commodity investments
o Active inflation protection
o Crypto and alternative currency exposure
o Special mandates
more information onwww.incrementum.li
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69
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9494 – Schaan/Liechtensteinwww.incrementum.liwww.ingoldwetrust.li
Email: [email protected]
Contact Us
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70Disclaimer
This publication is for information purposes only. It represents neither investment advice nor an investment analysis or an
invitation to buy or sell financial instruments. Specifically, the document does not serve as a substitute for individual-investment
or other advice. The statements contained in this publication are based on knowledge as of the time of preparation and are
subject to change at any time without further notice.
The authors have exercised the greatest possible care in the selection of the information sources employed. However, they do
not accept any responsibility (and neither does Incrementum AG) for the correctness, completeness, or timeliness of the
information as well as any liabilities or damages, irrespective of their nature, that may result therefrom (including consequential
or indirect damages, loss of prospective profits, or the accuracy of prepared forecasts).
Copyright: 2019 Incrementum AG. All rights reserved.