We’d highly recommend you check out the comprehensive new report by Ronald Peter Stoeferle and Mark Valek: In Gold We Trust Report 2015
If you’re not familiar with Ronni you may want to first check out the summary we wrote when he visited New Zealand and gave a talk back in 2013:
We were fortunate enough to be able to share a dinner and some very enlightening conversation with him while he was here.
Anyway every year he writes (along with Mark Valek) the In Gold We Trust Report and it is so comprehensive it is always a must read. Interestingly we understand it is also widely read in the institutional investing world, so has a greater penetration than many other gold reports out there.
This week we received an email from Ronni outlining the content of this years report:
► “After the barely averted implosion of the financial system in autumn of 2008, we are now in the seventh year of world-wide central bank experimentation. We have all become guinea pigs of an unprecedented attempt at re-inflation, the outcome of which remains uncertain. Questionable monetary policy ventures like quantitative easing and negative interest rates are a direct consequence of a systemic addiction to inflation.
► We are convinced that we are now close to a decisive fork in the road: the disinflationary trend will (have to) be broken. Rising price inflation rates are possible both in conjunction with a revival in economic activity and in a stagflationary environment. In both cases, inflation-sensitive investments including gold and gold mining stocks will benefit.
► The majority of market participants have gradually abandoned all concerns over inflation in recent years. This is reflected in exceptionally low inflation expectations and the composition of investment portfolios. The exit from the current “low-flation” phase could prove to be the “pain-trade” for most investors.
► From a technical perspective, the picture is not unequivocal. The downtrend hasn’t been broken yet. However, pronounced negative sentiment indicates resignation among gold bulls. We believe a final sell-off is possible. During such a sell-off, the support at USD 1,140 could be tested. A reversal following such a test would be a reliable indication of a primary trend change in the gold market.
► Based on the “big picture” analysis that is packed into this report, we see no reason for a change of course: In gold we (still) trust. We are firmly convinced that gold remains in a secular bull market that is close to making a comeback.
Further highlights of the report:
– Monetary policy: Waiting for Godot
– The gold/silver ratio as an indicator measuring inflation momentum
– What is seen and what is not seen: the fatal consequences of zero interest rate policy
– Financial repression: escape route from over-indebtedness
– Gold in the context of portfolio diversification
– Past, present and future of the monetary order
– The golden love trade
– A gold bug’s nightmare
– Gold stocks – reasons for our confidence”
He also gave a recent interview with Gordon T Long which gives a good summary if you prefer to watch rather than read.
A summary of what is covered includes:
The gold price has stabilized in 2014, after its collapse in April and June of 2013. Investors’ interest in the yellow metal is los. Hence, market sentiment vis-à-vis gold is standing at a multi-year low, maybe even a multi-decade low. History learns that extreme underperformance usually lasts for one year. If history is any guide, than there should be a recovery in the gold price in the foreseeable future. Even with the severe underperformance since 2013, gold is up approximately 9% per year since it started to trade freely in 1971. As seen on the next chart, depending on the currency in which it trades, the average yearly performance is excellent for investors with a long term horizon. In other words, gold does what is always has done throughout history: preserve value and purchasing power.
Preservation of wealth is the primary reason why one should hold gold nowadays. Monetary policies of central banks are extremely unusual. The U.S. Fed could be talking about “normalization,” but with 7 years at zero percent interest rates we are nowhere near “normal” conditions. The most extreme monetary conditions, today, are being seen in Japan. It is really no coincidence that the gold price in Yen is near its all time highs. The gold price in Yen is simply reacting on the extreme expansion of the monetary base by the Japanese central bank. As the next chart shows, the balance sheet of the Bank Of Japan (BOJ) is approximately 65% of the country’s GDP. In other words, the assets that the BOJ is holding nears 2/3 of the total economic output of the country. When compared to other regions, it is clear that is a monstrous amount. It seems that Japan is near its endgame.
One of the “reasons” gold has gotten so little attention in the last two years is that investors have been focused on stock markets around the world. The U.S. stock market has seen a huge rally since October of 2012, European stocks catapulted higher when the European version of QE was announced earlier this year, Japan keeps on making multi-year highs in the wake of an ever expanding monetary policy. Meantime, however, stocks are not cheap anymore. On a historic basis, when expressed in a price/earnings ratio according to the Shiller method, the stock market in the U.S. sits at relatively high levels (although no extremes). Although it is not given that the stock market is about to go south, there always is a possibility that the top is set in which case gold should see positive returns. As the next chart shows, during periods of the worst performance of the S&P 500, stocks and commodities have lost significant value while gold remained steady.
A correction in the stock market is certainly in the cards. Why? Because traditionally the gold/silver ratio is mostly negatively correlated with the S&P 500. In other words, as the gold/silver ratio goes down which means there is a disinflationary environment, stocks come down as well. Over the last 25 years, that correlation has held very well, but started to diverge strongly 3 years ago.
Gold is underperforming in a disinflationary environment. That has been one of the key observations in the last In Gold We Trust reports. There was enough evidence in the datapoints so far, but the most up-to-date chart says it all (see below). While the real rates were standing at -4% in 2011, they have gone up steadily since then, and are again in positive territory this year. The gold price has moved in the opposite direction in that same time period. The In Gold We Trust Report 2015 focuses, among many other things, on the correlation between the gold price and inflation expectations. Gold is an inflation sensitive asset. The U.S. 10-Year real yields provide an indication of inflation expectations. As readers can see, a strong divergence is in place since 2013, arguing for a strong revaluation of the gold price as inflation expectations are in an uptrend since then.
Suppose, however, that inflation expectations will change their trend … would that be bad for precious metals? The answer to that question is to be found in the last chart. During deflationary periods, like the ones starting in 1814 or 1864, the Great Depression of the 30ies or the financial crisis of 2008, gold did remarkably well. It is during those periods of “financial stress” that gold shows its real value, i.e. preserve wealth and provide protection against other assets.
The themes in this years 2015 “In Gold Trust Report” are the real value of gold as a financial asset and the end of gold’s underperformance.