Gold Shining Through the Darkening Recession Clouds
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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
@IGWTreport
In Our Partners We Trust 2
Media Partner:
incrementum AG | Im alten Riet 102, 9494 – Schaan/Liechtenstein | +423 237 26 66 | ingoldwetrust@incrementum.li @IGWTreport
Executive Summary of the In Gold We Trust Chartbook 3
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!
@IGWTreport
1. The Eroding Trust in Monetary Policy and
the International Monetary System
“Put not your trust in money, but put
your money in trust.”
Oliver Wendell Holmes
@IGWTreport
Monetary Policy Tide Turn: From QE to QT and back?
Quarterly CB Flows in USD bn. (lhs) & S&P 500 (YoY%, rhs) 5
• Last year we pointed out that moving from QE to QT poses 3 500
severe risks. The normalization of monetary policy was abruptly QE turns
to QT
halted by the stock market slump in Q4/2018. 3 000
0.5
2 500
• Gold reaffirmed its portfolio position as a diversifier, as trust in the 0.3
“Everything Bubble” was tested in Q4/2018. While equity 2 000
markets suffered double-digit percentage losses, gold gained 8.1% and
gold mining stocks 13.7%. 1 500 0.1
1 000
• Monetary policy was massively asymmetric: While in previous years -0.1
the Fed had expanded its balance sheet by USD 3.7trn, the Fed has 500
reduced its balance sheet by only 0.7trn in total. Starting in September
0
the Fed has increased its balance sheet by a staggering 200 bn again. -0.3
-500
“The time is coming (when) global financial markets stop focusing on
-1 000 -0.5
how much more medicine they will get (QEs) and instead focus on the 2003 2005 2007 2009 2011 2013 2015 2017 2019
fact that it does not work.” FED PBOC BoJ ECB Total S&P 500
Russell Napier Sources: Bloomberg, Incrementum AG
@IGWTreport
The Everything Bubble 6
Everything
6.0 Bubble?
• In the years following the financial crisis, global central
banks flooded the economy with exorbitant monetary 5.5
stimulus. Nearly USD 20 trn. of central bank money Dot-Com
Real Estate
Bubble
Bubble
was created ex nihilo.
5.0
• Global stock markets were deliberately driven up in order to 4.5
accelerate the so-called “wealth effect”. However, this did
not seem to be having any effect in 2015, and stock markets 4.0
began to stagger in the wake of fears of low growth.
3.5
• Alas, commodities remain the exception to the rule and still
do not participate in the Everything Bubble. 3.0
1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014 2018
Financial assets of households/Disposable personal income
Sources: Federal Reserve St. Louis, Incrementum AG
@IGWTreport
Monetary Expansion Decouples from Annual World Gold Production, 1900=100 7
1 000 000
• The gap between monetary expansion and annual world
gold production increased further in recent years.
100 000
• Since 1900, the monetary aggregate M2 has risen
almost 180x faster than annual world gold 10 000
production!
1 000
“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.” 100
Dave Rosenberg
10
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
M2 Annual world gold production
Sources: US Geological Survey, Bloomberg, Incrementum AG
@IGWTreport
Effective Federal Funds Rate, in % and Recessions in the US 8
20
12 13
• As a long-term chart of the fed funds rate reveals, the vast 18
majority of rate-hike cycles have led to a recession.
16
Moreover, every financial crisis was preceded by rate hikes.
14
11
• The historical evidence is overwhelming: In the past 12
100 years, 16 out of 19 rate-hike cycles were 10 10
14
followed by recessions. Only three cases turned out to be
8 2
exceptions to the rule. 15
5
6 16
1 3
4 9
8
„The next recession by definition will happen with income and wealth 4
17?
disparities as their highest levels ever, and the unrest will likely be a 6 7
2
tad more forceful than the well-behaved Occupy Wall Street
movement was nine years ago.“ 0
1914 1920 1926 1932 1938 1944 1950 1956 1962 1968 1974 1980 1986 1992 1998 2004 2010 2016
Dave Rosenberg
Recession Fed Funds Rate
Sources: Federal Reserve St. Louis, Incrementum AG
@IGWTreport
S&P 500 (left scale) and Fed Funds – Upper Bound (in %, right scale) 9
3 100 7
• The following chart indicates that the Federal Reserve's
6
first interest rate cuts have previously had a 2 600
negative effect on the American stock market (S&P 5
500 as proxy).
2 100
4
• History shows that when the Federal Reserve starts cutting
rates, stocks decline. When rates stay flat or rise, stocks 1 600
3
surge. That is contrary to the fables you hear from many
analysts, because declining rates are indicative of economic
2
deterioration. 1 100 Global Financial
Crisis
Tech Bust 1
• If this pattern continues, one should analyze and act with 600 0
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
special care on the US stock market in quarters to come.
S&P 500 Fed funds - upper bound
Sources: Crescat Capital LLC, Federal Reserve St. Louis, Investing.com, Incrementum AG
@IGWTreport
Recession Forecasts Are Not Among the Strengths of Central Bankers
10
“The Fed has through the course of the year seen fit
to lower the expected path of interest rates. That has “It is not in the baseline to have a recession.”
supported the economy. That is one of the reasons
why the outlook is still a favorable one.”
Jerome Powell, September 9, 2019 Christine Lagarde, September 24, 2019
Sources: Bloomberg, CNBC
@IGWTreportRising US Recession Probability 11
50%
• 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 40%
the next 12 months.
30%
• Since this level has been reached only two times in the last
30 years (both times in a recession), we assume that we
20%
might already be in a prerecession phase.
Consequently, crisis-proof assets will again be in
greater demand in the coming months. 10%
0%
1990 1995 2000 2005 2010 2015 2020
Recession Recession probability (12 months ahead)
Sources: Federal Reserve NY, Incrementum AG
@IGWTreportProjected US Debt & Deficit, in USD bn 12
35 000 500
• According to CBO forecasts, the deficit of USD 1,370bn
in 2029 will be only slightly lower than in the crisis 30 000
year 2009 (USD 1,413bn). Budget deficits of comparable 0
size were recorded only in the period 2009-2012. 25 000
-500
20 000
• It should also be noted that the CBO forecasts are based on
very optimistic, almost naive premises. For example, the 15 000
-1 000
CBO assumes that the USA will not slide into recession in
the next ten years (!) and that the economy will grow by 3% 10 000
annually. -1 500
5 000
• From 2020, US government debt will exceed the combined 0 -2 000
1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014 2018 2022 2026
debt of Japan and the eurozone, despite the fact that
absolute US and Japanese debt were at similar levels until US Deficit
US Total public debt
US Deficit projected
US Total public debt projected
2011, rising almost in step. Sources: CBO, Federal Reserve St. Louis, Incrementum AG
@IGWTreportDue to the Enormous Debt Pile, High Positive Real Rates Seem Implausible.
Negative and Falling Interest Rates Boost the Gold Price. 13
2 000 12%
• Real interest rates – their direction and momentum – are 1 800 10%
one of the most important drivers for gold!
1 600
8%
• There are two time periods that were shaped by
1 400
6%
predominantly negative real interest rates (blue shading at 1 200
4%
right): the 1970s and the period since 2001. Both phases 1 000
clearly represented a positive environment for the gold 2%
price. 800
0%
600
• One can also discern that the trend of real interest 400
-2%
rates is extremely important for the gold price. -4%
200
0 -6%
Real federal funds rate Gold
Sources: Federal Reserve St. Louis, Incrementum AG
@IGWTreportISM Manufacturing Index vs. ISM Non-Manufacturing Index 14
70
• The recent development shows that the less-volatile ISM
Manufacturing Business Activity Index has declined for a 65
year already.
60
• For the ISM Non-Manufacturing Business Index we see a
55
similar picture. It seems noteworthy that nowadays the 50
service sector reacts very sensitively to declines in asset
prices. 45
40
• As suggested by the ISM and several indicators, recession
clouds are getting darker and darker. 35
30
1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019
Recession
ISM manufacturing business activity
ISM non-manufacturing business activity
Sources: Investing.com, Incrementum AG
@IGWTreportS&P 500 and NBER Recession Dating 15
3 500
• It takes 5-12 months before economic data is collected and
evaluated in order to officially attest a recession (e.g. in 3 000
2007 it took 1 year until NBER made its official call).
2 500
2 000
1 500
Market Decline Peak-To-Through
Economic Peak NBER Recession Dating Monthly Lag
Pre-Dating
1 000
01/1980 06/1980 5 -7%
07/1981 01/1982 6 -11% 500
07/1990 04/1991 9 -16%
03/2001 11/2001 8 -19%
0
1979 1984 1989 1994 1999 2004 2009 2014 2019
12/2007 12/2008 12 -43%
Recession S&P 500 NBER Recession dating
Sources: Investing.com, NBER , Incrementum AG
@IGWTreportDuncan Leading Indicator (YoY%) 16
15%
• The Duncan Leading Indicator is known as a reliable
recession indicator. Since the late 1960s, this recession 10%
indicator had only one false positive reading, which
was in the mid-1980s.
5%
• It is calculated as the ratio of consumer durables spending 0%
plus residential and business fixed investment to final sales.
-5%
• Every time the YoY% turns negative, the risk of a recession
rises dramatically. -10%
-15%
1968 1973 1978 1983 1988 1993 1998 2003 2008 2013 2018
Recession Duncan Leading Indicator YoY%
Sources: Federal Reserve St. Louis, Incrementum AG
@IGWTreportIndustrial Production Index 17
30%
• Another proven recession indicator is the Industrial
25%
Production Index (IPI), measuring the real production
output of manufacturing, mining, and utilities. It is 20%
published by the Federal Reserve Board. 15%
10%
• Except for the decline in 2015, which did not lead to a 5%
recession, a relatively strong decline always ended up in a
0%
recession.
-5%
-10%
-15%
-20%
1949 1959 1969 1979 1989 1999 2009 2019
Recession Industrial Production Index YoY%
Sources: Federal Reserve St. Louis, Incrementum AG
@IGWTreportCapital/Consumer Goods Ratio 18
1.1
• The chart depicts the ratio between spending on capital and
consumer goods production over time. A rising ratio
1.0
indicates that relatively more capital than consumer goods 0.9
are produced.
0.8
0.7
• If interest rates are distorted, market participants receive
misleading price signals and invest too much into capital 0.6
goods relative to consumer goods. 0.5
0.4
• A reallocation of capital (i.e. bankruptcies, liquidation of
debt) becomes inevitable, which usually coincides with a 0.3
recession. At present the illusion of a monetary 0.2
perpetuum mobile still prevails in the markets. 1949 1954 1959 1964 1969 1974 1979 1984 1989 1994 1999 2004 2009 2014 2019
Recession Capital/Consumer goods ratio
Sources: Federal Reserve St. Louis, Incrementum AG
@IGWTreportWhat Can They Come Up With Now? Five Ways for the Fed to Further Ease 19
QE4
•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…
Zero/Negative Interest Rates
•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.
Currency Wars
•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!
Forward Guidance
•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.
QE for the People (“Helicopter Money”)
•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 is
definitely being spent.
@IGWTreportRising Gold Reserves, in tonnes 20
34 000
• After seeing 650 tonnes purchased by central banks in the
33 000
previous year, the analysts of the World Gold Council expect
purchases of around 700 tonnes again this year. 32 000
31 000
• While the gold reserves of developed countries are 30 000
stagnating, those of emerging economies have steadily risen 29 000
since 2009.
28 000
27 000
“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 26 000
gold held by central banks worldwide plus the IMF and other 25 000
financial institutions? If it’s worthless and meaningless, why 24 000
does everyone still own it?” 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
Alan Greenspan
Sources: World Gold Council, Incrementum AG
@IGWTreportChange in Gold Reserves Held by Emerging Countries, in tonnes 21
2 500
• In recent years, the “axis of gold”* countries have 2 207
questioned the US-dominated global economic order. Their
distrust is reflected in the steady expansion of their gold 2 000 1 927
reserves.
1 500
• Since Q2/2009 Kazakhstan has boosted its central bank
holdings by 415%, followed by Russia (301%), Turkey 1 054
(171%), China (83%), and India (73%). 1 000
618
• The increase in gold reserves should be seen as strong
550
500
375
evidence of growing distrust in the dominance of the US 358
314
dollar and the global monetary and credit system associated 73
116
with it. 0
Russia China India Kazakhstan Turkey
Q2 2009 Q2 2019
* A term famously coined by Jim Rickards Sources: World Gold Council, Incrementum AG
@IGWTreportChinese and Russian US Treasuries Holdings, in USD bn 22
1 400 200
• Russia and China, the largest foreign holders of US debt,
1 200
continue dumping US treasuries.
160
1 000
• Both countries have sold off US treasuries worth about USD
100bn each in the last two years. 800
120
“It seems to me that our American partners are making a 600
80
colossal strategic mistake [as they] undermine the credibility
of the dollar as a universal and the only reserve currency 400
today. They are undermining faith in it…. They really are 40
taking a saw to the branch they are sitting on.” 200
Vladimir Putin
0 0
2007 2009 2011 2013 2015 2017 2019
China Russia
Sources: Bloomberg, US Treasury Department, Incrementum AG
@IGWTreportMonetary Base vs. Gold Reserves at Market Prices, in USD bn (log) 23
10 000
• 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
1 000
(in the mid 1930s and in the late 1970s).
• Whether a potential US dollar devaluation will happen in 100
the framework of an international agreement or in an
uncoordinated manner remains to be seen.
10
• To cover the current monetary base of the US with
gold, the gold price would have to stand at 12,600
USD! 1
1918 1933 1948 1963 1978 1993 2008
Monetary base Gold reserves at market prices
Sources: Federal Reserve St. Louis, World Gold Council, Incrementum AG
@IGWTreportDollars of Debt Required to Finance 1 USD Real GDP 24
4.0
• Expanding the money supply in a fiat money system is
tantamount to piling up debt – and every borrower 3.5
USD 3.8 required to finance
USD 1 of real GDP
obligated to service his debt surrenders part of his future
3.0
autonomy.
2.5
• In the case of government debt, younger generations are 2.0
burdened with the debt accumulated by older ones.
Decreasing marginal utility of additional debt units 1.5
can clearly be seen in this chart.
1.0
• But that is not all: Beyond the servicing of government debt, 0.5
rising rents and property prices driven by money-supply 0.0
expansion represent costs that wage earners have to handle 1954 1959 1964 1969 1974 1979 1984 1989 1994 1999 2004 2009 2014 2019
with more or less static real incomes. Total debt/GDP
Sources: Federal Reserve St. Louis, Incrementum AG
@IGWTreportTotal Credit Market Debt, in USD tn 25
80
• Total credit-market debt has expanded exponentially since
70
the US dollar’s tie to gold was cut in 1971. This chart
impressively illustrates the instability of growth induced by 60
credit expansion.
50
• Since 1954, “total credit market debt” (which is the broadest 40
debt aggregate in the US) has increased from USD 529bn
in Q1/1954 to USD 73,433bn in Q2/2019, or 127 30
times. In every decade, outstanding debt has at least
20
doubled.
10
• There is no reverse gear in the monetary system – if money
0
supply and credit don't continually rise, the system's 1954 1959 1964 1969 1974 1979 1984 1989 1994 1999 2004 2009 2014 2019
situation grows critical. Total credit market debt
Sources: Federal Reserve St. Louis, Incrementum AG
@IGWTreportGold/Monetary Base Ratio 26
160%
• Over the past decades, the gold backing of the US monetary
base has trended down. 140%
120%
• The monetary base (M0), has seen its gold backing
dwindle to levels below 10%.
100%
80%
• One could conclude that gold became significantly cheaper
60%
because of this unrestrained monetary inflation.
Median = 43.1%
40%
20%
0%
1918 1928 1938 1948 1958 1968 1978 1988 1998 2008 2018
Gold/Monetary base ratio
Sources: Federal Reserve St. Louis, World Gold Council, Incrementum AG
@IGWTreport2. 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
@IGWTreportGold Performance in Various Currencies 28
• In many currencies, such as EUR, AUD and CAD, 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%
gold is trading at or close to all-time highs! 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%
• The average annual performance from 2001 to 2019 has 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%
been +10.0%. During this period gold has outperformed 2007 18.4% 30.9% 29.2% 18.3% 12.1% 22.3% 22.9% 21.7% 16.5% 21.7%
practically every other asset class, and in particular every 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%
currency, despite intermittent, sometimes substantial 2010 38.8% 29.5% 34.3% 13.5% 22.3% 24.9% 13.0% 16.7% 23.7% 25.2%
corrections. 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%
Sources: www.goldprice.org, Incrementum AG. Data as of Oct 23rd
@IGWTreportAverage Annual Gold Price, in USD 29
1 800
1 668
1 572
• Since August 15, 1971 – the beginning of the new monetary 1 600
era – the annual rate of increase of the gold price in
1 413
1 357
US dollars has been 10%. 1 400
1 270
1 266
1 258
1 246
1 225
1 161
1 200
• The inflation-adjusted appreciation of the currency gold
970
1 000
against the US dollar averages 4.5% per year.
873
10% p.a.
800
696
613
605
• This long-term context puts the correction of the years 600
462
2013-2015 into perspective, as this chart of average annual
446
445
438
423
410
388
384
384
384
381
377
367
363
362
361
360
344
332
prices shows. The chart also provides impressive evidence
317
310
400
307
294
279
279
271
that it is advisable to regularly accumulate gold (“gold
194
161
158
148
125
200
97
saving”) by harnessing the cost-average effect.
58
41
0
Average annual gold price
Sources: Federal Reserve St. Louis, Incrementum AG
@IGWTreportWorld Gold Price and Gold, in USD 30
2 000
• This chart is one of the classics of every In Gold We Trust
1 900
report. It shows the so-called world gold price, which
represents the gold price not in US dollars or euros but in 1 800
trade-weighted US dollars. 1 700
1 600
• The chart shows that the world gold price is 1 500
currently trading at USD 1,995 (monthly average).
1 400
1 300
1 200
1 100
1 000
2011 2012 2013 2014 2015 2016 2017 2018 2019
Gold in USD World gold price
Sources: Federal Reserve St. Louis, Incrementum AG
@IGWTreportGold, in EUR 31
1 600
• The 20th anniversary of the introduction of the euro as book
money gives us an opportunity to take a closer look at
1 400
+454%
performance over this period. 1 200
1 000
• Since the euro was introduced as book money on
January 1, 1999, the price of gold in euros has risen 800
by 454%.
600
• The annualized performance from January 1999 to 400
September 2019 is 9%!
200
0
1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019
Gold in EUR
Sources: Federal Reserve St. Louis, Incrementum AG
@IGWTreportMilligrams of Gold per Euro 32
140
• The dramatic loss of purchasing power of the euro against
120
gold is even more impressive if depicted as an inverse. This
chart shows how many milligrams of gold correspond to one
100
euro.
80
• Whereas on January 1, 1999 one euro “contained” 124.8 mg
of gold, 20 years later the figure was only 28.3 mg. This 60
corresponds to a loss of 82% in the value of the euro
against gold. 40
-82%
20
0
1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019
Milligram gold per Euro
Sources: Federal Reserve St. Louis, Incrementum AG
@IGWTreportPurchasing Power of Main Currencies Valued in Gold (log) 33
100
• 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
10
franc has lost the least in valuation, by far.
1
1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016 2019
USD EUR GBP CHF
Sources: Federal Reserve St. Louis, Investing.com, Incrementum AG
@IGWTreportCurrency Value Relative to Gold 34
120
• This chart basically tells us the same story as the previous
one, but just with a longer time horizon. 100
• It shows where the erosion of trust in paper money leads in 80
extreme cases. When paper currencies were not trustworthy
in the eyes of the population anymore, they reverted to their 60
intrinsic value, and that is zero!
40
20
0
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
Gold USD Deutsche Mark
ECU EUR GBP
JPY Mark Reichsmark
Sources: World Gold Council, Harold Marcuse – UC Santa Barbara, Incrementum AG
@IGWTreportGold ETF Holdings, in USD bn (left scale) and Gold, in USD (right scale) 35
3 000 2 000
• The interest of financial investors in gold is rising
1 800
again. This is confirmed by the inflows into gold ETFs, 2 500
which have been on the rise since the end of 2015. 1 600
1 400
2 000
• For us, this indicator is representative of Western financial 1 200
investors, who choose ETFs as the primary instrument for 1 500 1 000
managing their gold exposure. This is also reflected in the
800
fact that gold ETF inflows follow an extremely procyclical 1 000
pattern. 600
400
500
• Geographical segmentation shows that in recent years 200
European investors have weighted gold ETFs more strongly 0 0
than their North American peers have done. 2003 2005 2007 2009 2011 2013 2015 2017 2019
North America Europe Asia Other Gold in USD
Sources: World Gold Council, Incrementum AG
@IGWTreportGold/S&P Ratio Bottoming 36
1.8
• We consider the bull market in equities as the biggest
opportunity cost for gold. 1.6
1.4
• Comparing the gold price to S&P 500 development, we can
see that the relative performance of gold vs. the
1.2
S&P 500 is bottoming and making higher lows. 1.0
0.8
• After seven years of gold’s underperformance vis-à-vis the
broad equity market, the tables may soon be turning in 0.6
favour of gold.
0.4
0.2
2011 2012 2013 2014 2015 2016 2017 2018 2019
Gold/S&P 500 ratio 200d MA 90d MA
Sources: Federal Reserve St. Louis, Incrementum AG
@IGWTreportGold, in USD (left scale) and Silver, in USD (right scale) 37
2 000 50
• This chart demonstrates the nominal gold and silver price
1 800 45
moves since 2000.
1 600 40
• The silver price could also be interpreted as a sentiment
1 400 35
indicator for gold. Strong bull markets for silver usually only 1 200 30
happen in the course of rising gold prices, because investors 1 000 25
seek higher leverage and end up with mining stocks or
800 20
silver.
600 15
• Silver has lagged gold so far but tends to catch up late in 400 10
cycle. 200 5
0 0
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
Gold Silver
Sources: Federal Reserve St. Louis, Investing.com, Incrementum AG
@IGWTreportGold in Nominal and Real Terms, in USD 38
2 500
• The comparison of gold in nominal and real (inflation- 2,215 USD
adjusted – July 2019 USD) prices are demonstrated in this
chart. 2 000
• Inflation began rising tremendously in the mid-1970s and 1 500
reached about 14% in 1980. The reason for the Great
Inflation was mainly monetary policy that allowed for
1 000
excessive growth in the money supply. Gold peaked at
USD 2,215 at that time.
500
0
1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014 2018
Gold (nominal) Gold (inflation adjusted - July 2019 USD)
Sources: Federal Reserve St. Louis, Incrementum AG
@IGWTreportS&P 500 (left scale) and Gold/Silver Ratio, inverted (right scale) 39
3 000 20
• Since 2011, disinflationary forces have provided a
tremendous tailwind to financial assets. Since the early 2 500
30
1990s there has been an astonishing synchronization 40
between financial assets and the gold/silver ratio: A rising
2 000
stock market usually goes hand in hand with a 50
falling gold/silver ratio, i.e. an outperformance of
1 500 60
silver compared to gold. However, in 2012 this
correlation broke down. 70
1 000
80
• Our interpretation for this phenomenon is that in previous
500
economic cycles reflation was conventionally 90
achieved by expanding credit. This time, reflation was
0 100
achieved by buying securities, which made monetary assets 1990 1994 1998 2002 2006 2010 2014 2018
more expensive but did not sustainably fuel consumer price S&P 500 Gold/Silver ratio (inverted)
inflation.
Sources: Federal Reserve St. Louis, Incrementum AG
@IGWTreport3. 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
@IGWTreportBGMI/Gold Ratio 41
6
• The extent of underperformance of gold mining stocks
compared to bullion gold becomes particularly clear when 5
we make a longer-term comparison.
4
• The oldest available gold mining index, the Barron’s Gold
Mining Index (BGMI), is currently at its lowest level relative 3
to gold in 78 years.
2
• In addition, the current value is miles below the long-
term median of 1.5. 1
0
1950 1956 1962 1968 1974 1980 1986 1992 1998 2004 2010 2016
BGMI/Gold ratio Median (BGMI/Gold)
Sources: Bloomberg, Incrementum AG
@IGWTreportBGMI/S&P 500 Ratio 42
12
• The BGMI/SPX ratio currently stands at a similar level
as in 2001 and 12/2015, when the last bull markets 10
in gold stocks started.
8
• The recent M&A deal flow might have marked the bottom of
the bear market. 6
“It's unpriced optionality, then, because there's going to be 4
an M&A wave at some point. There has to be, because the
largest companies have been spritzing reserves hand over 2
fist and will have to come to the market.”
Ned Naylor-Leyland 0
1950 1956 1962 1968 1974 1980 1986 1992 1998 2004 2010 2016
BGMI/S&P 500 ratio
Sources: Bloomberg, Robert Shiller Online Data, Incrementum AG
@IGWTreportXAU/S&P 500 Ratio 43
1984 1988 1992 1996 2000 2004 2008 2012 2016
• 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 level
0.2
than it was in 2000, when the last big boom began,
and at the same level as in 2016, when a 170% rally began.
0.0
XAU/S&P 500
Sources: Investing.com, Incrementum AG
@IGWTreportHUI Index: Bull and Bear Market Cycles Since 1995 44
700
• We want to highlight the enormous volatility and inflation
sensitivity of the mining sector. As the chart illustrates, gold 600
stocks are anything but “buy and hold” investments and
should be actively managed. The following quote confirms 500
this as well:
400
“Market and sector forces together typically cause 80% of 300
the price movement in a stock. That means the company
fundamentals usually account for less than 20% of a stock’s 200
price movement. This is the reason a company’s stock price
100
sometimes seems to move independently of the
fundamentals.”
0
Benjamin F. King
1996 1999 2002 2005 2008 2011 2014 2017 2020
HUI Index
Sources: Investing.com, Incrementum AG
@IGWTreportCRB Commodity Index vs. US Dollar Index 45
700 60
• Systemic instability in recent years: All industrial
commodities and practically all fiat currencies have 600 70
massively lost against the US dollar; crude oil declined by
more than 50% within a mere seven months. There has been 500 80
a disinflationary earthquake in the US dollar-
centric monetary system.
400 90
• Commodities, as an asset class, are an antidote to the 300 100
US dollar: Price movements are reciprocal, with causality
running from the US dollar to commodities attributable to
200 110
the US dollar to a greater extent than is generally assumed.
100 120
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))
Sources: Federal Reserve St. Louis, Thomson Reuters, Incrementum AG
@IGWTreportGDX/Gold Ratio & GDXJ/Gold Ratio Confirm Rising Strength of Gold Miners 46
0.07 Peak: 0.067 0.14
Peak: 0.13
0.06 0.12
0.05 0.10
0.04 0.08
0.03 0.06
0.02 0.04
0.01 Trough: 0.012 0.02
Trough: 0.016
0.00 0.00
05/2006 05/2008 05/2010 05/2012 05/2014 05/2016 05/2018 11/2009 11/2010 11/2011 11/2012 11/2013 11/2014 11/2015 11/2016 11/2017 11/2018
GDX/Gold ratio GDXJ/Gold ratio
Sources: Federal Reserve St. Louis, Investing.com, Incrementum AG
@IGWTreportBull Markets in Mining Shares: Performance Is Way Below Average 47
800
10/1942-02/1946 07/1960-03/1968
• The chart shows all bull markets in the Barron’s Gold 12/1971-08/1974 08/1976-10/1980
Mining Index (BGMI) since 1942.
700
11/2000-03/2008 10/2008-04/2011
01/2016-09/2019
600
• One can see that the current uptrend is still relatively weak
compared to its predecessors. Should we actually be at the 500
beginning of a pronounced uptrend in precious metals
400
stocks – which we assume to be the case – then there
remains plenty of upside potential. 300
200
• Moreover, the chart shows that every bull market in the
sector ended in a parabolic upward spike, which lasted nine 100
Current bull market
months on average and resulted in prices doubling at a
minimum. 0
1 41 81 121 161 201 241 281 321 361 401
Number of weeks
Sources: Nowandfutures, TheDailyGold.com, Barrons, Incrementum AG
@IGWTreport4. 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
@IGWTreportCycle of Market Emotions 49
• In the early stages of a bull market the enthusiasm of Euphoria Anxiety
investors is usually very subdued; skepticism and disinterest Thrill
tend to predominate. This changes gradually as the cycle Denial
progresses, until euphoria and buying panics predominate Excitement
near the end of the cycle.
Fear
Optimism
“The mind is a fascinating instrument that can make or Optimism
Desperation
break you.”
Yvan Byeajee
Panic
Relief
Capitulation
Despondency Hope
Depression
Sources: Incrementum AG
@IGWTreportThe Emotional Rollercoaster Is Turning Upwards 50
1 800
• Comparing the idealized sentiment cycle to the gold price
(360-day moving average), the point of maximum 1 700
frustration appears to have been reached at the beginning of Euphoria Anxiety
1 600
2016.
Denial
1 500
• We are currently in the stage of relief, which means that the Thrill Fear
gold bull market we are observing right now has just entered 1 400
the market-emotions cycle.
Desperation
Relief
1 300 Panic
Excitement Capitulation
1 200 Despondency Hope
Desperation
1 100 Optimism
1 000
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
360d MA Gold
Sources: Federal Reserve St. Louis, Incrementum AG
@IGWTreportGold Bull Markets Comparison, log scale (indexed 10/26/1970 & 01/04/2000 = 100) 51
1970 1971 1972 1973 1974 1975 1976 1977 1978
• The following chart illustrates the similarities between the
1970s bull market and the current bull market. 1 350
• The analysis reveals the fact that the bear market since 2011
has been following largely the same structure and depth as 450
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
150
a while.
50
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024
2000s Bull market 70s Bull market
Sources: Federal Reserve St. Louis, Incrementum AG
@IGWTreportGold/Silver Ratio (left scale) and USD 5y5y Inflation Swap, in %, inv. (right scale) 52
100 1.25
• The gold/silver ratio clearly correlates with inflation expectations.
90 1.50
• Strong bull markets for silver usually happen only in the course of
rising gold prices, because investors seek higher leverage and end up 80 1.75
with mining stocks or silver.
70 2.00
• Consumer prices continue to show only a restrained upward trend, a
trend that central banks use to justify the continuation of their zero- 60 2.25
or low-interest-rate policies. Rising price inflation coupled with
mounting economic risks would probably mean the perfect 50 2.50
storm for gold: stagflation. At the moment, however, the
consensus view is that this seems an almost impossible 40 2.75
scenario.
30 3.00
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
• Our proprietary “Incrementum Inflation Signal” has just
switched to a full-blown signal! Gold/Silver ratio USD 5y5y inflation swap (inverted)
Sources: Federal Reserve St. Louis, Investing.com, Incrementum AG
@IGWTreportCommodities vs. Stocks: Lowest Valuation Since 1971 53
10
Gulf War 1990
• This chart was by far the most-quoted one in last year’s
9
In Gold We Trust report. GFC 2008
Oil Crisis 1973/74
8
• It clearly illustrates that the relative valuation of 7
commodities in comparison with equities is extremely low 6
by historical standards. Compared to the S&P 500, the 5
GSCI Commodity Index (TR) is trading at its lowest level Median: 4.10
4
since 1971.
3
• Moreover, the ratio trades significantly below its long-term 2
median of 4.10. 1 Dot-Com Bubble Everything
(except commodities)
Bubble
0
1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011 2015 2019 2023
• If we postulate the general tendency of reversion to the
SPGSCITR Commodity Index/S&P 500 ratio
mean, we see attractive commodities investment
opportunities. Sources: Professor Dr. Torsten Dennin, Lynkeus Capital, Bloomberg, Incrementum AG
@IGWTreportGSCI Commodity Index/Dow Jones Industrial Average Ratio Since 1900 54
• Now we want to take a view of the commodities sector over 1.2
an even longer time span. This chart shows that
commodities are currently trading at their lowest level 1.0
relative to US equities since the 1960s.
Commodities radically overvalued
0.8
• Moreover, there were only two other occasions when
0.6
commodities were similarly undervalued relative to equities:
just ahead of Black Thursday on October 24, 1929, and Median = 0.41
0.4
during the excesses of the dotcom bubble.
0.2
Commodities radically undervalued
0.0
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020
GSCI/DJIA Ratio
Sources: Goldman Sachs Commodity Index until 1970, Goehring & Rozencwajg Commodity Index pre-1970,
Bloomberg, Incrementum AG
@IGWTreportGSCI Commodity Index (left scale) and S&P 500 (right scale) 55
12 000 3 500
• The extreme relative undervaluation of commodities
3 000
compared to the stock market becomes evident in this chart. 10 000
It shows the development of the S&P GSCI and of the S&P
2 500
500, as well as their combined long-term trend line. 8 000
-48%
2 000
• To return to this trend line – which happens on average every 6 000
6 to 8 years – the S&P would have to fall by 48% and the GSCI 1 500
to rise by 113%. 4 000
+113% 1 000
• This is a scenario that seems highly unlikely, if not 2 000
500
impossible, at the moment. However, a glance at this chart or
into history books puts this alleged impossibility into 0 0
1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011 2015 2019
perspective.
S&P GSCI S&P 500 Linear trend line
Sources: Professor Dr. Torsten Dennin, Lynkeus Capital, Bloomberg, Investing.com, Incrementum AG
@IGWTreportGold/Silver Ratio: Bullish on Gold? Then Consider Silver! 56
100
• Recently the gold/silver ratio traded at the highest
level since 1991!
90
80
• At the moment, it seems as if the ratio has hit a potential 70
reversal point again after an upward trend of more than
60 Silver
three years. The ratio has peaked at over 90 and is currently
Silver
+1811% +60% Silver
Gold Gold +38%
trading at 84. 50
+595% +9% Gold
+9%
40 Silver
Silver
+203%
+60%
• According to the results of our statistical analysis, a Gold
+8%
Silver
+64%
Gold
+80%
30
sustainable increase in the gold price is unlikely to happen
Gold
-21% Silver
Silver +371%
in tandem with an increase in the gold/silver ratio. A falling 20 +159%
Gold
Gold
+77%
+42%
gold/silver ratio significantly increases the probability of a 10
bull market in gold and silver. 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016 2019
Falling ratio Gold/Silver ratio
Sources: Bloomberg, Investing.com, Incrementum AG
@IGWTreportGold/Oktoberfestbier Ratio – Litres of Beer per Ounce of Gold 57
250
• At the Oktoberfest 2019 a Maß of beer (1 liter) costs up to
11.80 EUR. 1980:
200 227 Beer/Ounce
2019:
• In 1950 the beer-loving visitor had to put only 0.82 EUR on 2012:
137 Beer/Ounce
115 Beer/Ounce
the counter. Since 1950, the annual average inflation rate of 150
Oktoberfestbier has therefore been 3.9%.
Average:
89 Beer/Ounce
1971:
• How many Maß of Oktoberfestbier do you get this year for 100 48 Beer/Ounce
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 50
average.
0
• Link to our “O'Zapft Is - In Gold We Trust 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
Oktoberfest Special” Sources: Statista.de, http://www.wbrnet.info/vbhtm/9999-Entwicklung-Bierpreise.html, Incrementum AG
@IGWTreportThe In Gold We Trust Report in 8 Bullet Points 58
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.
@IGWTreportThe In Gold We Trust Report in 8 Bullet Points 59
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.
@IGWTreportSubscribe and download the
In Gold We Trust report 2019
by following the link!
https://ingoldwetrust.report/igwt/
?lang=en
@IGWTreportAddendum
Because we care…
About our Clients.
About the Society.
About the Future.
@IGWTreportAbout the In Gold We Trust Report 62
• 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
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• Published for the 13th time in English and German and for
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• Further information and all editions can be found
at: https://ingoldwetrust.report/?lang=en
@IGWTreport
#igwt2018About the Authors 63
Ronald-Peter Stoeferle, CMT Mark J. Valek, CAIA
• Ronni is managing partner of • Mark is a partner of Incrementum
Incrementum AG and responsible AG and responsible for portfolio
for research and portfolio management and research.
management
• Prior to Incrementum, he was with
• In 2007 he published his first In Merrill Lynch and then for 10 years
Gold We Trust report. Over the with Raiffeisen Capital
years, the study has become one of Management, most recently as fund
the benchmark publications on manager in the area of inflation
gold, money, and inflation. protection.
• Advisor for Tudor Gold Corp. • He gained entrepreneurial
(TUD), a significant explorer in experience as co-founder of philoro
British Columbia’s Golden Triangle. Edelmetalle GmbH.
• Member of the advisory board of
Affinity Metals (AFF).
@IGWTreport
#igwt2018Selected Testimonials 64
“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.”
John Reade
Chief Market Strategist
World Gold Council
@IGWTreportSelected Testimonials 65
“A must-read for people who invest in precious
metals and precious metals equities. A pleasant
read, too – well-researched and well-written.”
Rick Rule
President & CEO
Sprott U.S. Holdings, Inc.
@IGWTreportSelected Testimonials 66
“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.”
Brien Lundin
Editor of Gold Newsletter and CEO of the
New Orleans Investment Conference
@IGWTreportSelected Testimonials 67
“When it comes to finding the most insightful
and comprehensive annual gold report, in
Incrementum I trust.”
Simon Mikhailovich
Founder
Tocqueville Bullion Reserve
@IGWTreportAbout Incrementum AG 68
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
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• Our core competencies are in the areas of:
more information on o Wealth management
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@IGWTreportContact Us 69
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Email: ingoldwetrust@incrementum.li
@IGWTreportDisclaimer 70
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).
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