With his dry Austrian wit Ronald-Peter Stoeferle opened his hour plus talk with a few interesting anecdotes regarding Austria (his home country) being to Germany what New Zealand is to Australia. Namely the little brother and often mistaken for one and the same. He quipped that this was the most spiritual place he had ever given a talk – the Bishops library – a grand 19th century building. Perhaps fitting given he was after all discussing something that like the church has been around for a couple thousand years.
He then went on to outline why his report is called “In Gold We Trust”. Simply because money is, in his opinion, the 2nd most important form of communication after language. Trade relies implicitly upon trust in the other party. On delivering said good, or payment for said good. And gold has shown to be most worthy of trust with its long history as money.
To back up his trust in gold or at least trust in those keen to hear about gold, he passed about a pure gold Austrian Philharmonic 1oz coin amongst the 150 plus in attendance “I TRUST I will get it back at the end!”
Mid Cycle Correction 1974 to 1976 vs. Current Correction (indexed to 100)
He covered off why gold has been falling of late. These are the same reasons he covers in full in his excellent “in Gold We Trust” report so you can read a full explanation of them in there. (It’s linked at the end of this article and these reasons begin on Page 5).
– Disinflation – the money supply has decreased in the Eurozone and the UK
– the outlook of QE being tapered and eventually exited
– rising real interest rates
– partly declining money supply (especially ECB)
– record high short positions
– backwardation since April 5, which has intensified
– rising opportunity cost of owning gold due to the rally in stocks
– ETFs: the majority of the outflows were from the SPDR gold trust, and thus probably mainly initiated by US investment managers who are turning away from gold in order to switch into the rallying stock market
– tightening credit spreads
– cascading sell orders by trend-following systems, CTAs, managed futures accounts, etc., as the technical support level of $1,530 was violated
– increasingly negative analyst opinions (among others, Goldman Sachs, Credit Suisse, Societe Generale,…)
He believes this week the Fed may announce a reduction of only US$10-20 billion in asset purchases. And while the mainstream is making a big deal of this reduction he did point out that the remaining monthly purchase of $65-75 billion would actually still be more than QE2.
The analogy of a car doing 240km/h down the highway was a good way to explain this. The brakes have not been put on, it’s just a slight easing off on the accelerator a little, to now be doing 220km/h. But you’re still flying down the highway.
However regardless of how big the reduction is he was very strongly of the belief that in a year it will actually be more than it is now. As because the Fed is buying so much of the US government debt they will be forced to buy even more to keep interest rates low.
The first of his slides was a cartoon clearly showing the problems of the Eurozone.
A German coming into a lounge room after a hard days work to be met with the site of a number of Greeks lounging about watching TV while holding up a pile of envelopes labeled bills and saying “These came for you”.
Ronni believes in the end we won’t see austerity but rather more taxes on the wealthy in the form of wealth taxes, capital gains taxes, inheritance taxes and bail ins.
He believes France is still the big question. They actually have 350 billion Euros of bonds to be refinanced in the next year, which could be very telling.
Merkel will likely win the upcoming German election in a landslide.
They will then announce another bailout package for Greece and again say this will be the last one!
We will see more capital infusion for Portugal, but France and Spain will be where the real test for Europe lies.
He believes we will see the rise of secession movements for Catalans in Spain but also for the likes of Bavaria. Where they are already complaining they subsidise the rest of Germany so why should they subsidise Europe as well?
He believes Greece and Portugal will have to leave the Eurozone in the end. However the difficulty will obviously be that the there are no rules drawn up for how a country leaves the Eurozone while still remaining a member of the European Union.
So we will likely see a muddle through or can kicking making the whole mess last even longer.
He had just read a US Congressional Budget Office document where the US deficit was projected to be “only” $8.4 trillion in the next 10 years. However the small print here was very telling as this projection was based upon:
So he thought this was laughable.
Given the size of the US debt there is very very little room for rates to rise significantly. So since he thinks the debt is likely to increase much more than predicted, this is why he believes the Fed will have to engage in even more QE within a year or so.
This massive debt level is why the current bubble is in treasuries/bonds not in gold.
However even though the US debt levels are so high he believes it is Japan that is the “Keynesian end game”. Because if Portugal and Spain have caused so much trouble what will Japan do with their ballooning debt and aim to double their monetary base? It is an experiment that has never been tried before.
Its debt service costs already amount to 25% of Japanese tax revenues. If refinancing costs increased by three percentage points (to 4.6%) it would take the entire public revenue to fund its debt! So higher interest rate levels cannot possibly work in the current situation.
The chart below summed up just how negative real interest rates are the key driver for gold. For the gold bull market to be over real interest rates will have to rise significantly. But given the high levels of debt in major economies central banks and governments cannot let this happen.
As for whether we will see inflation or deflation in the end? He used the analogy of tectonic plates, where the unseen plates moving deep beneath the earths crust cause the likes of volcanoes and earthquakes to be seen on the surface. In the same way with Central Bank money printing we cannot be sure exactly where and when the impacts of this will show up. But like moving tectonic plates eventually we will see the result on the surface.
We would see massive deflation if Central Banks did nothing and while we haven’t seen massive inflation yet, history shows it will come. He liked the analogy of Marc Fabers where he likened QE to whacking a bottle of Ketchup (a.k.a. Watties Tomato Sauce). You keep hitting and keep hitting and nothing happens and then eventually it all comes firing out and all over you and your shirt is wrecked.
Again, a humorous cartoon featuring a Time magazine cover with QE 56 show what he believes is inevitable.
He also discussed a book few of us had heard about, available on Amazon called Central Banking Simplified by Micheal J Pazner that he thought gave an insight into the mind of a central banker.
Warning: Read This First Before You Buy!
He shared the contents of the book with us. The first 199 pages say “Print Money” with the final page saying “Keep on printing”!
However he thinks people at large do trust central banking again. WIth the mainstream media promulgating the notion that Ben Bernanke and co “saved us”.
He shared a few Bernanke greatest hits that we are sure we’ve mentioned before too. Just a gentle reminder that any renewed faith in Central Bankers is not warranted. We couldn’t write them all down so we’ve done a bit of googling of our own to get the actual quotes:
“We’ve never had a decline in house prices on a nationwide basis. So, what I think what is more likely is that house prices will slow, maybe stabilize, might slow consumption spending a bit. I don’t think it’s gonna drive the economy too far from its full employment path, though.” (July 2005)
“The GSEs are adequately capitalized. They are in no danger of failing,” (July 2008)
Now on to more recent quotes:
“I’m 100% confident [in the feds ability to control inflation]” (December 2010)
“I don’t believe significant inflation is going to be the result of any of this,” (January 2013)
So given Bernanke’s track record perhaps you should be worried about what he has said recently on inflation.
A couple of charts then to finish up were of dollars in gold since 1971. Down 97%.
The Purchasing Power of the US Dollar Measured in Gold and Oil Terms versus the Purchasing Power of Gold in Oil Terms (logarithmic scale)
Dollars in Oil since 1971. Down 98%.
Compared to oil in gold has been remarkably stable over the same period.
Look out for indicators such as a Time Magazine cover with a golden bull and headlines like “Why gold is going to the moon.”
Ronald had a few simple points to summarise:
His final comment was an old english proverb:
“When we have gold, we are in fear.
When we have none, we are in danger.”
For those in the audience who hadn’t read the latest “In Gold We Trust” report this was a very easy to listen to summary of it. With the bonus of Ronni’s thoughts on the likes of Fed Tapering and what lies ahead for Europe which are contained in the report. If you haven’t read it yet we would recommend you take the time to do so.
Download Link: In Gold We Trust 2013 Full Report
Perhaps the most interesting part of the evening was an extended audience question and answer session. The knowledgeable crowd didn’t hold back and had some direct and to the point questions for him.
Is there enough physical gold to cover the paper gold traded?
Daily LBMA volume is US$240 billion shows that the gold market is one of th most traded after the US treasury market.
He believes every ounce is traded 120-150 times in paper which is even higher than some of the guesstimates we have seen previously. This is why you shouldn’t buy ETFs or “paper” gold, but physical instead. Perhaps there may at some point be a crash on the COMEX as a result of this but who knows exactly.
What is his view on manipulation?
Whether you call this manipulation or rather an intervention? Governments and central banks intervene in currency markets, stock markets and bond markets. So why not in gold markets? It is in their interests to keep the price of gold from rising too fast.
However if they are intervening, then DOW theory (technical analysis) says a primary trend in a bull market can not be manipulated for long. So the true price will shine through in the end.
What’s his view on China given New Zealand is becoming more and more dependent on China?
Not ideal to be like Australia and also to some extent NZ to be very dependent on one trading partner such as China. He hasn’t been to China so he has only read many varied reports, but it seems they will be due some problems.
However Japan will be where the real trouble lies.
Will the US lose its reserve currency role?
He didn’t think so. Mainly because the US is so dominant militarily. In fact he thought the US dollar will likely be the last fiat to fail. [A view we have noted in the past more than once which is shared by Sandeep Jaitly and one that NZ dollar based buyers of gold should take heed of. As if the US dollar is the last to fall, at some point in the future the kiwi dollar may be very weak against the US dollar. Something virtually no one expects now, and gold would be the hedge against this.]
On the German gold repatriation subject:
He spoke to the Valcambi boss (a large European gold refiner) about why it is taking 7 years for Germany to get it’s gold back from the US. His reply was that “it is a joke”. It would have taken him like 5 days to transport that amount of gold.
What are the chances of a gold confiscation?
Doesn’t think a confiscation is likely. More likely they would tax gold as they have with VAT on silver in some parts of Europe and as they are doing in India right now.
Easy to tax paper gold like ETFs.
But this won’t happen on a wide scale for a long time yet as gold is still so off the radar.
What is his opinion on silver?
If you think the odds of inflation are high then silver is good as history shows it will outperform gold in inflationary times.
He sees it as a leveraged bet on gold. It will rise more but will fall more as well. SO as long as you can handle the volatility…
What are his thoughts on the discussion of a BRICs development bank?
It’s a sign they are getting more confident and probably a very good sign. There have been rumours of a gold back ruble. So yes, really just a sign of their growing confidence in their economies and position in the world.
Gold as insurance versus an investment?
Well you can look at it in both ways. It is an insurance but you can also see it rising in dollar terms. As part of an asset allocation then it could be looked at more as cash. Why do you hold cash? Because you are not happy with investing in other assets.
What about SDR’s?
It is a derivative on a derivative so people wouldn’t trust it, so unlikely to come about on a global scale.
Doesn’t think a global currency is likely.
Further thoughts on gold paper market?
There will be some sort of default likely in the paper market eventually. He wrote a report talking about bail-ins years ago and that was laughed at and look at what happened in Cyprus.
Another audience member asked where could they find the NZ version of the bail in. There were more than a few in the room that knew the answer just look up OBR and it’s on the reserve bank website.
On why the stock to flow ratio is main reason for gold’s monetary Importance:
About 172,000 tonnes is the total gold ever mined.
Annual production is 2700 tonnes
So that gives a “natural inflation” of gold of only 1.5%
A few of us were lucky enough to enjoy a dinner afterwards where we got educated on the Austrian Property market which sounds remarkably similar to ours with rising prices chiefly in the likes of Vienna. And Ronni was educated on the vagaries of All Black versus South Africa test matches.
A great evening overall and our thanks again to our friend Louis Boulanger for organising Ronni’s visit.
Oh, and in case you were wondering, yes he did get his Austrian Philharmonic gold coin back at the end!
What do you think of Ronald Stoeferle’s theories? Anything you didn’t understand? Let us know you’re alive and leave a comment below!