The newest edition of the annual In Gold We Trust report goes again to the heart of gold’s value: gold is a monetary asset rather than an industrial commodity. The In Gold We Trust 2014 report takes a sober look at the big picture in the monetary system and offers a holistic analysis of the gold sector. This is the eighth edtion of the report. It is written by Ronald Stoeferle who is the managing partner at Incrementum AG in Liechtenstein. He manages a global macro fund, focusing on a proprietary management approach, heavily influenced by the Austrian School of Economics.
Probably the most important of the ongoing trends is the frightening observation that we arrrived in terra incognita when it comes to our monetary world. This is the result of continuing monetary interventions by central banks around the world. Monetary policy doesn’t work like a scalpel, but like a sledgehammer. Superficially, extreme monetary policy stimulus has calmed financial markets overall. The results, in terms of the real economy by contrast, continue to lag behind expectations. The often invoked ‘self- sustaining recovery’ is rather modest in many regions and is not ‘self- sustaining’ anywhere so far. It will probably still take months or years before the full extent of the collateral damage from these monetary measures will become visible. In our opinion, these will be predominantly negative. Interventions always result in keeping existing misallocations afloat, while new ones are added to them.
What is already clearly recognizable is that these massive market interventions marked a regime change: while before 2008, a balance between economic growth and moderate price inflation were the focus of central bank efforts, central bankers have in the meantime mutated into slaves of the financial markets. The continual artifices of banking and currency policy appear to have now become a necessity, so as to prolong the continued existence of the fiat debt money system.
Japan’s Abenomics program is in Ronald Stoeferle’s view emblematic for the “Keynesian endgame” currently underway. It is a final desperate attempt to keep a debt dynamic going that must sooner or later collapse. We also see Japan as a harbinger of what the West will soon face as well. A painless way out of this situation is by now unthinkable.
From an economic point of view, the current “lowflation” environment that still prevails, which is characterized by low price inflation and growth figures that largely remain below expectations, has turned out to be a Land of Cockaigne for stock market investors. As long as stimulus does not show up in inflation data, market participants don’t fear a drying up of the monetary aphrodisiac. Among investors, the prevailing sentiment is “the crisis was yesterday”, and the “Yellen Put” is considered an integral feature of asset allocation decisions in many portfolios. The longer the low interest rate environment continues, the more investors will be pushed toward excessive risk tolerance.
The tug-of-war between monetary tectonics of inflation and deflation will be decided in favor of one or the other will be very important. One thing is certain, the pressure that has been built up between them becomes ever stronger. According to Ronald Stoeferle, it is by no means certain that inflationary forces will prevail. However, the socio-economic incentive structures and all-encompassing high indebtedness clearly suggest that in case of doubt, higher inflation rates will be tolerated. The political calculation is simple: there are few creditors and many debtors. True reform is politically unpalatable, as “austerity” is certain to lose elections. Inevitably, politicians will choose inflation.
If one wants to understand the future, one must look at the past. Future problems are always rooted in the crises of the past. The West is still at the beginning of its great paper money experiment – 43 years are not a long time period for a monetary order. The Austrian School of Economics not only poses the correct questions in this context, it also provides the correct answers. The root of the calamity, is the unbacked, government regulated monetary system. Together with a growing number of economists, we are firmly convinced that the global monetary system needs an anchor again. Gold can play an important role in this context. Change won’t come from one moment to the next through a central institution, but rather is a long-term process that has already begun.
As far as gold is concerned, our view is fully in line with Mohamed El-Erian who compares the behavior of central bankers to that of a pharmaceutical company that forces the market to take a medication that has never before been clinically tested. Investors should not only focus on the near-term successes of the treatment, but also consider the long-term side effects. The current state of the monetary system and expected continuation of monetary policies by central planners around the world make up for the fundamental case of a gold investment.
The In Gold We Trust 2013 report was published on 27 June 2013, just as the anxiety over the metal’s declining price trend reached its peak. In hindsight, this date turned out to coincide with a multi-year low. Last year, Ronald Stoeferle came to the conclusion that massive technical damage had been inflicted and that it would take some time to repair the technical picture. That forecast has turned out to be correct, even though the counter-trend move turned out to be significantly weaker than expected. Recent months show clearly that many speculators have given up on the sector. A majority of bulls appear to have thrown in the towel. Volatility and market participant interest have decreased significantly in the last year.
From a technical perspective our assumption is that the gold price is near the end of its long consolidation period. The clearly positive CoT data, negative sentiment and not least the recently evident relative strength in gold mining shares all suggest as much. The ongoing consolidation since the all-time high in the late summer of 2011 is important for the bull market’s health. The nominal gold price may well appear to be still high, but relative to the monetary base it is actually at an all- time low. In our opinion this is a temporary anomaly which we regard as an excellent entry opportunity. The report shows that gold remains attractively priced relative to stocks and bonds, but also relative to a number of hard assets. Hence, the gold bubble argument often forwarded by pessimists is refuted as well, making the gold investment case even more compelling.
Stoeferle is convinced that gold stocks’ risk-reward profile is highly asymmetric, i.e., the downside seems limited relative to the potential upside. Creative destruction in the sector is normal and healthy for the long-term. In the course of the market adjustment, mining companies are resetting their priorities: profitability, capital discipline and shareholder value have replaced maximization of production. Moreover, there is currently no other sector that meets with more scepticism from investors.
In terms of gold price expectations, it appears that the repair of technical picture is now behind us and that a stable bottom has formed. The next 12 month price target is the USD 1,500 level. Longer term, the author expects a parabolic trend acceleration, with a long-term target of USD 2,300 by the end of the cycle.
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