Showdown - In Gold We Trust 2023

Podcast Transcript

Ed Coyne: Hello and welcome to Sprott Radio. I'm your host, Ed Coyne, Senior Managing Partner at Sprott. With me today is one of our returning guests, Ronnie Stöferle, Managing Partner of Incrementum AG who is responsible for research and portfolio management. Ronnie, thank you for joining us today on Sprott Radio. 

Ronnie Stöferle: Hi, Ed. Thanks for having me again. 

Ed Coyne: Ronnie, we're going to get right into this. This year's In Gold We Trust report is titled Showdown. Walk us through what led you and your team to this title. 

Ronnie Stöferle: Coming up with a good title or leitmotif for the report is always a pretty intense discussion. We said there's so much going on in the world when it comes to geopolitics, when it comes to central banks, interest rates, when it comes to financial markets, when it comes to the price of gold. How can we come up with a term or a title that combines all those various topics? 

If you look at the dictionary at what showdown means, it says it's a conclusive settlement of an issue or a difference in which all resources, power, or the like are used. It’s a decisive confrontation. I think that perfectly sums up three showdowns that we're seeing. We're seeing a monetary policy showdown; we are seeing a geopolitical showdown that is associated with de-dollarization, a topic that we have been writing about for quite a while and that is now becoming mainstream; and then we're seeing the showdown in the gold price. 

We're pretty happy to have chosen this title. I think it's a very good fit. Throughout the report, we try to explain why we are moving into an environment where there will probably be some sort of a final showdown happening. 

Ed Coyne: You're in your second decade of doing this report. If I read it correctly, your first report came out in 2007, so you've got a lot of information and research. Let's go into the radical monetary tightening we've been seeing. Seems extremely stubborn when you talk about inflation, even with all the stuff the Fed has done. Is there a way for that to finally cool? What's your view on that?

Ronnie Stöferle: Short answer, recession. The recessionary clouds that are getting darker is a core topic of this year's report where we first make the case for a recession that is becoming more and more of our base-case scenario. Then we crunch numbers and analyze what asset classes work best in the various stages of a recession. 

From my point of view, one year ago, if you had told me that interest rates would go above 5% in the United States and that we are not in a recession and that equity markets are close to all-time highs, and that the gold price is trading close to all-time highs, I would have said, "No, not going to happen." Here we are. 

I think that central bankers always underestimate the time lags involved, so we call this the tequila theory of money. Thank God I'm not of the age where I'm drinking tequila shots anymore, but I was a student and I had my days or evenings. If you have a couple of tequila shots, you're starting to go wild, you have a good time, you've got fun, and then the next day, you wake up and don't remember anything. 

The analogy that I want to make is that the time lags are completely forgotten with drinking tequila shots, but also when it comes to central bank policy. We are now only slowly seeing the consequences of this enormous rise in interest rates. First of all, it is historic. It's the most aggressive rate hike cycle of the last 40 years, which was totally unexpected. I have to tell you, Ed, I didn't see it coming. I don't know any strategist, analyst, or economist who forecasted this brutal move on the rate side. 

Therefore, I think we're now starting to see more and more signs that this rapid rise in interest rates has negative consequences., By looking mostly at economic indicators that tell us what has happened in the past, I think the Federal Reserve also completely underestimates those time lags involved. They over-ease, then have to over-tighten, and it starts again, so we see that. 

Therefore, my scenario is that I think we're very, very close to the point where the market will realize the emperor has no clothes. We will see that they hit the pause button and have to reverse their policy pretty quickly, and this will probably be the point when gold takes off. 

Ed Coyne: You talk about the resiliency of the economy, and I guess now we're probably about a month or two into it. The banking crisis happened, and it seems like that's yesterday's news already. Do you think that was just a blip or a byproduct of this, or do you see this as something longer-term? Are the real issues starting to present themselves in the market? 

Ronnie Stöferle: I think it's a bit too simplistic to blame the collapse of those regional banks, Silicon Valley, Signature and First Republic, for poor management and their exposure to the stumbling technology sector. We know that technology is a high-duration asset class, so they are extremely rate-sensitive and suffering from those rate hikes pretty quickly and are extremely rate-sensitive. 

Three of history's four largest U.S. bank failures occurred over the last few weeks. When it comes to seeing the impact on markets, I think the Federal Reserve—also with the whole administration--reacted pretty quickly, and we could tell that now the Federal Reserve is facing not a dilemma but a trilemma. It's, first of all, killing inflation, then on the second hand, avoiding a major recession, and then the third thing is the stability of financial markets and our banking system. 

Crises always start at the periphery, pockets of the market where everybody says, "Wow, this is just poor management. This is a scam. This is a Ponzi scheme," whatever. "This is just because of the nature of this country," whatever, but those are all signs that those business models were addicted to low interest rates and don't work at 5% anymore. We're seeing it in the banking space, we're seeing it in technology, we're seeing it in the crypto space. We're seeing it in real estate. Therefore, I think the longer the Federal Reserve tries to stay on the hawkish side, the worse it will be. 

Ed Coyne: We talked a lot about the financial risk out there. Let's shift gears for a second and talk about geopolitical risk. A lot of stuff has been happening both here and abroad. What are some of the risks you're seeing out there, and also does it present some opportunities going forward? 

Ronnie Stöferle: When it comes to this growing political self-confidence of the BRICS [Brazil, Russia, India, China and South Africa] nations, I think it's just a logical consequence of their increasing economic importance. Measured in purchasing power parity, these countries have had a higher aggregate GDP than the G7 countries since 2021. It's not only the BRICS countries, there are perhaps 17 countries that now want to join the BRICS. We see the SCO, the Shanghai Corporation Organization, becoming increasingly important. 

I think those are the countries where most of the growth is, where demographics are much more favorable than in the Western world. China is a big exception because it has the same demographic problems as we do. Those [BRICS countries] are where 87% of all currency reserves are, the countries where productivity and capital formation are happening, and where gold obviously also has a higher importance than in the Western world. 

The fact that last year we saw a new all-time high in central bank gold buying is no coincidence because last year we wrote about that. We actually forecasted that the Western world, with the stroke of a pen, said the Russian currency reserves are worthless. Of course, this changes other nations' views on holding their reserves in U.S. dollars and U.S. Treasuries. 

I think gold will play a major role in that game because you want to have a highly liquid reserve currency that doesn't have any counterparty risk, is accepted all over the globe, and has quite a sophisticated infrastructure for trading. I think that gold qualifies pretty well for those requirements. 

We always think that the price of gold is being made in the Western world. If you look at the numbers, if you go to Dubai, if you go to Shanghai, if you go to Mumbai, you can tell that, for those nations, gold is much, much more important than in the Western world. 

If you have a look at consumer demand, if you have a look at central bank demand, but also if you have a look at gold production where China and Russia are the two leading producers of gold, I think you can tell that the center of the gold world is going more and more into the emerging markets. 

Ed Coyne: Can we talk a little bit about commodities in general? You do a nice job in the most recent report, talking about other metals besides gold and/or silver. Talk a bit about commodities. What is your outlook there? 

Ronnie Stöferle: I think we're in a secular bull market for commodities. The basis of my positive outlook is, first of all, the CapEx [capital expenditure] cycle. If you understand the lack of investment over the last couple of years — what's the saying, "the cure for high prices is high prices" — I would say that this lack of investment in new projects, exploration and also in manpower, I think that's one of the main causes for higher commodity prices. 

Then we see that the increasing focus on fiscal support measures also impacts commodity prices. I think that's clearly the big difference compared to 2008/2009, where the new big thing was quantitative easing. It worked with a timeline, but in 2020, we saw over the course of the COVID crisis, it wasn't only monetary stimulus, it was also massive fiscal stimulus. I think that fiscal stimulus will continue to be a major driver. 

The next thing is that institutional investors are highly underweight or not invested in commodities. If my case for structurally higher inflation plays out, I think those large institutional players will have to start allocating capital in the commodity space again. We're seeing that, to some degree, when it comes to critical metals, I think it was a wake-up call last year that we in the Western world realized reliable access to commodities is necessary for our industry. There was a paradigm shift in thinking about the importance of commodities. 

Then the next thing — and this is probably not a thing that we want to hear — but during times of war and during times of de-globalization, during times of friend shoring, and so on, this also usually positively affects the commodity space because we have to re-arm, we have to reshore, we have to restock and invest, and we also have to rewire the grid when it comes to the energy transition, for example. 

Ed Coyne: Yes. I think that's not going away, particularly if we want to get to a carbon-neutral future by 2050. All these metals are needed. As you say in the In Gold We Trust report, we will need more of them, right? All of a sudden, mining has become top-of-mind with many investors in the market and the economy. 

Ronnie Stöferle: To achieve the net-zero emissions goal, the world would need 54% additional copper by 2030. There was a study by the International Renewable Energy Agency--and of course, they're somewhat biased--but they calculated if we want to achieve the 1.5 [degrees Celsius] target by 2050, investments of $150 trillion are necessary. 

I know that the topic of commodities is controversial, but I think, clearly, if we want to achieve those goals, we would need much, much more mining and not less mining. I think that's a very, very important message. Therefore, we always write about ESG developments in the mining space. I believe all those people just criticizing commodities and mining, most of them have never been to a mine. 

Ed Coyne: I think that's the reality. Even if you cut those numbers and estimates in half, they're still staggering. I believe we are somewhere in between maximum capacity and none. I think that it will be interesting to see how that plays out. I want to do what I like to call now a speed round, give you a couple of words, and then get your reaction. I'd love to do that with you if you're game for that.

For example, what comes to mind when I say the word inflation? 

Ronnie Stöferle: Central bankers. 

Ed Coyne: Perfect. How about debt? 

Ronnie Stöferle: Too much. 

Ed Coyne: How about de-dollarization? 

Ronnie Stöferle: Happening. 

Ed Coyne: You just mentioned this one, ESG. 

Ronnie Stöferle: Important. I think it's important to communicate what mining companies do for the infrastructure, hospitals, building schools, access to clean water and providing very high-paying jobs. I think that's really important, especially these days. That's something that I care about. 

Ed Coyne: That's something mining companies have been doing forever, right? It's not just a popular thing. This is something they've done for decades. How about silver? 

Ronnie Stöferle: A little bit too soon now, but it will have its day. We've got a brilliant chapter about silver again, and I think, if my recession call plays out, it's probably still a bit too early because silver tends to underperform in the earlier parts of a recession. Once this reflation happens, there will be a fantastic opportunity in the silver space, especially as the demand side is becoming that attractive, with the solar industry being a significant driver on the demand side. 

Ed Coyne: At the risk of changing the term speed round, I also have to ask what is going on with mining stocks? 

Ronnie Stöferle: Volatility. Just the last 12 months were just a perfect example of this enormous volatility that we're seeing in the mining space. Volatility can be your enemy, but it can also be your friend. I think if you treated that cycle well, you could make staggering performance in the mining space. What's important now is that, if you look at risk appetite, the large royalty and streaming companies like Wheaton Precious Metals and Franco-Nevada Corporation are trading close to their all-time highs. While the larger names, the top three producers, they're still trading way below their all-time highs. Then when it comes to the developers, when it comes to the juniors, they are way underwater. 

This clearly tells me there's no risk appetite in the mining space at the moment. This will probably change, but what's most important for a longer-term investor is that the mining space, the valuation and the balance sheets that I'm seeing in the mining space are attractive. I see pristine balance sheets. I'm seeing free cash flow generation. I see that companies have got costs under control. 

We've seen massive deleveraging in the mining space. We are seeing pretty stable margins. In combination with extremely negative sentiment and the price of gold that seems to be breaking out at some point due to the showdown, I think that's a pretty interesting setup. 

Ed Coyne: That gets me to my last question, which is the one that I think everybody wants to know. At Sprott, we're always reluctant to give forecasts because they're hard to do. In  Gold We Trust, you've done a phenomenal job of breaking down the potential outlook for gold in the short-term, mid-term, and, more importantly, the longer term. Most investors invest in gold for decades, not days. I'd love to hear your view and close out this podcast with your view on gold in the short and long term.

Ronnie Stöferle: Today, gold is trading around $100 below all-time highs. I can tell you, Ed, people couldn't care less about gold at the moment. With the price only slightly below all-time highs, there is little interest. From a contrarian point of view, that's an exciting setup. I don't see that central banks will be able to continue their hawkish stance. I don't buy into the narrative that Jay Powell is the new Paul Volcker. I think he would like to be. I would also like to be, I don't know, Lionel Messi or Tom Brady or whatever, but it's just not- 

Ed Coyne: He's not tall enough. Let's start with that. 

Ronnie Stöferle: The thing is, just when it comes to the level of debt, not only for private individuals, but also when it comes to businesses, the financial space, and then most importantly government debt, Jay Powell is just in a completely different position compared to Paul Volcker back in the days. I would also argue that Paul Volcker had the full support of the White House. Paul Volcker caused two nasty recessions, back-to-back recessions. I'm not sure if Jay Powell will have the full support of the White House once unemployment goes up significantly and once the U.S. enters a recession. 

To answer your question, we crunched the numbers regarding our recession model, and based on that, we will see over the next 12 months gold trading at around $2,300. Based on our long-term price forecast, we would have to hit $4,800 by the end of this decade. This might sound like a wild forecast, but it averages to a 12.4% increase per year until 2030. 

From 2000 until now, the average yearly performance of gold in U.S. dollar terms was 9.3% and in Euro terms 8.9%. It's not that outlandish. If you compare it to the previous big bull market in the 1970s, we saw this massive mid-cycle correction from 1974 to 1976, which was disinflationary and also went hand-in-hand with a major recession. Back then, the price of gold in 1976 ended up at $100. If you had called $850 within four years, people would have said, "Not going to happen. That's like a mad max scenario." It happened. 

Obviously, I don't want to rule out my forecast. I think it is realistic, especially in an environment where inflation is becoming more of the topic. In the financial markets, I think there are very, very few people that know how to navigate in an inflationary environment because we're all so used to this great moderation: four decades of falling inflation, four decades of low inflation volatility. Actually, for portfolio construction, inflation has never been the main essential issue. It's never been a central point when you allocated capital. 

Now, if you talk to people from Turkey, for example, if you speak to people from high-inflation countries, for them actually, having a high allocation in gold and real assets and commodities is just natural because, for them, probably the first view that they want to have when it comes to portfolio construction is the topic of inflation. I think that we will return to this environment where, for asset allocators, inflation will become increasingly important. In this environment, I don't see gold not being a major diversifier for your portfolio. 

Ed Coyne: We've seen it in the last couple of decades relative to the S&P 500, relative to bonds. Even in the face of a strong dollar, gold has done very well for the last few decades, so I think you're right. It'll be interesting to see. I guess for those investors or listeners who want to learn more about what you do at Incrementum, how can investors access In Gold We Trust and read all these great research reports you've done? What's the best way to find you and get the information you provide to all of us? 

Ronnie Stöferle: It's fairly easy. We've got a web page, ingoldwetrust.report, where you can find the In Gold We Trust report in the normal version, which is 420 pages. I know that not everybody is keen on reading 420 pages about the topic of gold, so there's also a compact version. There are videos, we've got infographics, we've got In Gold We Trust nuggets where we publish small parts of the report. I'm pretty active on Twitter. I'm tweeting out many charts and thoughts on gold, markets in general, and then odd things like soccer over here in Austria. Yes, have a look at ingoldwetrust.report. 

Our company is called Incrementum. We're a boutique asset manager based in Liechtenstein. We manage funds primarily in real assets, commodities and gold. That's where we feel comfortable. I must thank Sprott and all our other premium partners because we try to make a difference. We want to educate people about sound money, inflation, financial repression, etc. 

We've got a team of 20 people working on this report, so it's also a massive investment. Without the support of our premium partners, it wouldn't be possible to publish such a report for free, so thank you very much to Sprott and the whole team. It's overwhelming the positive feedback we get, so thank you very much for the support of Sprott. 

Ed Coyne: I always enjoy reading it. It's one of the few reports that you start your day reading with a coffee, and by the time you're done, you're having a cocktail because it is over 400 pages. I'll tell you, it's a lot of great stuff, and I live the next year off of this report with all the talking points you provide. I encourage everybody to go on the website, look at In Gold We Trust, and read it at leisure. It's a great read. 

Ronnie, it's always great to have you on Sprott Radio. We appreciate you taking the time. I think very highly of all your work, so once again, thank you for being on Sprott Radio. 

Ronnie Stöferle: Thank you very much, Ed. 

Ed Coyne: Once again, I'm your host, Ed Coyne, and you're listening to Sprott Radio,