Let's Talk About Gold and Purchasing Power

Podcast Transcript

Ed: Hello, and welcome to Sprott Radio. I'm your host, Ed Coyne, Senior Managing Partner at Sprott Asset Management. I'm pleased to welcome back Ronni Stoeferle, Managing Partner at Incrementum AG. Ronni, thank you for joining Sprott Radio.

Ronnie Stöferle: Hi, Ed. Thanks for having me again, and happy New Year.

Ed: Happy New Year to you. Let's start with a recap of 2023. As it relates to gold and gold equities, what were some of the highlights?

Ronnie Stöferle: If we look at the performance of gold last year, I think it's important to emphasize that gold has made new all-time highs in basically every currency and U.S. dollar terms again. When we last talked, I said gold is in a perfect uptrend. Gold is making new all-time highs in Euro, Swiss franc and Japanese yen terms, as well as those weak feared currencies like the Turkish lira, Argentine peso, etc.

So far, we haven't seen a new all-time high in U.S. dollar terms, which changed at the end of 2023. In U.S. dollar terms, gold was up roughly 13%, and that's pretty decent. In Chinese yuan terms, for example, 16%. In Japanese yen terms, 20%, and in Canadian dollars, 10%. It's been a very good year for gold.

The interesting thing, Ed, is that I can tell you that journalists are calling me. We are getting interest from people who have always been interested in gold but don't see new people coming in. If you have a look at the flows in gold ETFs, that's the confirmation of that thesis that the mainstream hasn't recognized yet, that gold is doing tremendously well, and that it has made new all-time highs in now really every currency. We are far away from a mania. We are far away from this irrational exuberance, and that's a pretty good sign from my point of view.

When it comes to the mining space, I would say the companies had to deal with the inflation pressure. I think most of the companies that we did a pretty good job, and inflation on the cost side should be fairly muted this year. We're seeing record-high margins for many companies we follow, but we don't see any risk appetite in the mining space. We're seeing that the cost of capital has increased significantly. Financing a project at 5% is a different story compared to 0%.

Then, what we also see is that political risk has come back in the last couple of months. It's been a tough year for the mining space, but that's a job that management teams have to navigate and smartly allocate capital in a tough environment.

Ed Coyne: Let's return to the currency statement momentarily. One of my favorite reports you do is the Monthly Gold Compass. One of the first things you talk about is exactly what you just mentioned: gold in different currencies. Talk a little more about why that's important and why investors should look at what gold's doing in multiple currencies. Could you spend a little bit of time on that?

Ronnie Stöferle: This table that we basically show at every presentation, every keynote that we do, and also in our Monthly Gold Compass shows the performance of gold in major currencies since the year 2000, the yearly performance of gold in U.S. dollar terms, in Euro terms, British pound, Australian dollar, Canadian dollar, Chinese Yuan, Japanese yen, Swiss Franc, and Indian rupee, and then also the average performance in all those currencies.

It's fascinating that the average compound annual growth rate in all those currencies since 2000 is 8.7% per year. That's a decent performance from this pet rock and this useless thing lying around. I think it has done well. For example, the compound annual growth rate was 8.6% in U.S. dollar terms. In the Indian rupee, it was 11.6%, and in Swiss franc terms, 5.7%.

For good reasons, the Swiss franc continues to be one of the few safe haven currencies. One of those reasons is probably also that the gold affinity and the gold tradition in Switzerland are extremely high. I want to emphasize with this table that gold is just fine and is rising in basically every currency. Of course, there are years when the U.S. dollar is doing better or worse. There are years when the Japanese yen is selling off, like last year. I think that basically confirms our thesis. It is crucial to understand that it's actually not the price of gold rising. It is the purchasing power of feared money that is falling. It's falling at slightly different rates, but it's falling. You need more and more units of U.S. dollars, Euros, British pounds, or whatever to buy one unit of gold.

We've got this gold-beer ratio, for example, that we've been talking about. We've got the gold-iPhone ratio that shows you the purchasing power of gold measured in iPhones. Soon, there's the big downhill race in Kitzbühel. We said, "Everybody's complaining that the ski and lift tickets get more expensive every year." We crunched the numbers and found a database showing us the price of lift tickets since 1990. Measured in gold, skiing became less expensive. Again, This shows us that the job of gold is to protect your hard-earned money and purchasing power. It's doing this job tremendously well.

Ed Coyne: I don't know if you've seen this, but Costco, in the fourth quarter, reported they raised over $100,000,000 by selling one-ounce gold bars at their store. It's become so popular that each member is limited to two bars. Maybe people are going to start shopping for gold, particularly when they go skiing. It seems like that's a great value.

I love those charts when they come out. They're fantastic. The beer one remains my favorite, but they're all great. It's also interesting because rising rates and the dollar were both strong, yet gold performed well. Does that concern you? Does that make you excited about the prospect of gold going forward? What would you say to that?

Ronnie Stöferle: People think that if they're positive on gold, they have to be negative on the U.S. dollar. We all know the de-dollarization thesis. We all know that countries from Mid-East Asia and so on are becoming slightly critical regarding our monetary system with the World Reserve and the world trade currency, the U.S. dollar. All those forecasts that we are close to the end of the U.S. dollar are a story that will probably play out over the next decades.

Before we see a significant move regarding de-dollarization, I think the first victim will be the Euro, more of a de-euroization than a de-dollarization. This is also what we are seeing when it comes to the Swift numbers. I'm not referring to Taylor Swift, but the Swift banking data. We see that the importance of the U.S. dollar is growing while the importance of the Euro in international trade is falling.

We all know that the BRICS keeps growing with five new members. Argentina backed out, so they're more in the dollarization camp. I did a keynote presentation in Dubai last November and then held a seminar for the Dubai Gold Exchange. I was impressed with the sophistication of market participants there, the infrastructure being developed, and a very different attitude when it comes to gold.

People don't care about daily price fluctuations. They're more interested in the long-term picture. They're very self-confident regarding their region, be it Arabic countries, but also obviously China, India, Vietnam, Turkey, and so on. All those players are like the small brother who is quickly growing up and becoming very strong, but the big brother doesn't recognize it yet and doesn't trust this development.

In the gold world, the flows in that direction are getting bigger and bigger. We've also seen that Central Bank demand and Central Bank gold demand have been some of the most important drivers for the price of gold last year. Most of that demand comes from BRICS nations and emerging markets.

For example, China has imported roughly 25,000 tons over the last 20 years and is still the largest producer. They don't export any gold. India has imported 29,000 tons of gold, and it is a one-way street, so it's not coming back. We in the gold community should emphasize the importance of Asian markets more and more. This is one of the main insights I gathered from this trip to Dubai.

Ed Coyne: The world has awarded the S&P is coming back, it's returned. It's hit new highs and so forth. What I think's interesting is no one's talking about what gold has done, and over the last two years, gold's outperformed the S&P, and no one's talking about that. Why do you think that's the case? Why do people put their heads in the sand, put the S&P up on a huge mantle, and largely ignore what gold's been able to do? As you mentioned, it's done really well in the long term. Even in the short term, it's done quite nicely to the point where it's outperforming the S&P over the last two years. Why are people ignoring that?

Ronnie Stöferle: One reason probably is that the asset management industry isn't interested in gold. Banks are not interested in gold. It is not something where they make lots of money. I think that's one of the reasons. For example, if you sell as a bank, and over here in Europe, it's possible to walk into a bank branch and buy physical gold, but then the money is gone. If you sell a mutual fund, you can charge management fees and so on.

I think that is one of the reasons. Then I would say from a psychological point of view, I think that gold is still being regarded as a disaster hedge, something that you buy if you think or hope that hyperinflation, a civil war, or the next World War is approaching. This very negative view bugs me because I think you can make a very positive case for gold. It is this fear trade, but also this love trade that I explained before, coming primarily from emerging market countries.

We just put out an article saying that there are three different camps when it comes to our monetary system. Some believers basically say, "Well, okay, the Federal Reserve is doing a great job, and they've been a bit behind the curve. Of course, it wasn't Central Bank policy that was responsible for inflation. It was mainly those greedy business owners." This is the first camp.

The second camp is on the skeptics. I think the skeptics are a growing camp. They feel that something is going in the wrong direction, that this gap between the rich and the poor is growing, and that the government is not trustworthy anymore. They're seeing that with alternative media coming up, many things being communicated are slightly different in reality.

This is a fairly large camp, and those people in the financial industry, banking, and asset management quite often privately buy huge amounts of gold. But in their official role, they're hesitant because recommending gold doesn't make any money. Then also, it is something that, in big institutions, people don't like, but privately, they get it.

Then there's the third camp, which is the critics, and those are the people who get it. They know history, they know monetary history, and they understand gold. They understand the virtues of real assets of commodities in general of, let's say, portfolio insurance and so on.

The interesting thing about that, Ed, is that it's a one-way street. Once you are in the critics' camp, you won't go back and say, "Well, actually, in effect, did a tremendous job, and we have to print a little bit more now and then do a little bit more quantitative tightening and so on." It is a one-way street. With every crisis, this camp is getting bigger and bigger, and I know so many people nowadays who get gold and understand why you've got gold in your portfolio. It's significantly more than, let's say, 5 or 10 years ago.

Ed Coyne: I was in Dallas last week, and it seems the temperature's changing, so more investors don't see it as one versus the other. They see it as part of the overall portfolio. The way they look at cash or the way they look at bonds in a portfolio is a way to diversify the fund. It's not saying that they don't believe in the equities they own; it's just that this is there to support those.

Gold has done well. We know this. It's over $2000 an ounce. It's continuing to do quite nicely in the market. It's doing its job, yet silver remains in the shadows. Why is that the case? Why are people not jumping on the silver bandwagon as much as we would anticipate, particularly because it's also being consumed? It's a true commodity, and it's getting used in products and services. What do you think needs to happen for silver to have some breakout?

Ronnie Stöferle: I think that silver needs a breakout of the price of gold. I never really believed in this decoupling theory that silver is going to decouple from the price of gold completely. I think silver needs a strong gold price, and so far, we've had this breakout. We've made new all-time highs, but we haven't made this decisive move that would take us to $2300 quickly. Once that happens, I think silver will pick up momentum and start outperforming gold. The gold-silver ratio should be falling then.

When it comes to silver, it is discounting the fact that gold has not decisively broken out, but this could happen in 2024. I think this year could be when silver really starts outperforming gold. Then we can go quickly, I don't know, into the '30s or even higher because I can tell you nobody in the mainstream investing world cares about silver at the moment.

As we've seen in the uranium space, Sprott is obviously a very big name in uranium. Incrementum is running one of the few investment funds in Europe investing in uranium equities. The simple supply-demand case we've been marketing was there for many years, and then, poof. Then we reached that tipping point in uranium, and now it is becoming more and more of a mainstream investment. Why shouldn't it happen in the silver space as well? The supply-demand fundamentals are crystal clear and very positive, but it just needs this trigger and this momentum to kick in, and then the train starts moving.

Ed Coyne: Let's talk a bit about cryptocurrencies. This is a topic I haven't brought up in the past year or two because it's been largely ignored. More recently, we've had a suite of multiple ETFs coming online, giving investors exposure to cryptocurrencies. I know you've done some work on this in the past. What do you think that's going to mean for precious metals in general, as more investors now have access to this space through the ETFs?

Ronnie Stöferle: We've been following this monetary experiment for many years as private investors, and then we also launched two funds that combine gold with Bitcoin. One of them, for example, is 75% physical gold stored in Liechtenstein and 25% Bitcoin with a rebalancing strategy and an options overlay where we harvest the enormous volatility in the Bitcoin space. Now, Ed, we faced lots of criticism from the gold camp but also lots of criticism from the Bitcoin camp. In our last In Gold We Trust report, we wrote that there's a civil war in the South money camp. From my point of view, they're not enemies. They're rather, let's say, cousins. Of course, bitcoin is hardly a teenager now, and gold has been around for 5,000 years, but we can see that Bitcoin is growing up with those ETFs now. I think this is a milestone.

When it comes to volume, the market cap of gold is now roughly 13 trillion, while Bitcoin is trading at roughly 1 trillion, slightly lower. According to the World Gold Council, gold trades 140 billion per day, while Bitcoin, on-chain and on crypto exchanges and CME futures, trades roughly 40 billion.

You can see that gold is still significantly larger, but Bitcoin is growing. Therefore, our approach, I think it makes sense to combine both. Both are a life raft during a great fiat flood, basically that we are seeing. Both buying gold and buying Bitcoin are active decisions to leave the fiat money system, which is important.

Now, will Bitcoin be around in 10 years, Ed? I've got no idea. Chances are good, Based on the Lindy effect and so much development in that space. If it will be around in 10 years, then the price will probably be significantly higher, but this is why-- There's still a chance that competitors are coming up or some technical issues will arise. Therefore, we do use 75% physical gold and 25% Bitcoin. If Bitcoin goes bust, we still have 75% physical gold. That is our approach, and we are all following a big monetary experiment. I think it's fascinating for me to meet so many young people in the Bitcoin camp who now find out about our monetary system, how it works, and where inflation is coming from. They start reading the Austrian School of Economics. I think that's a very positive development. Therefore, I think they can both get along really well. They aren't competitors.

Ed Coyne: It's interesting, your last comment, as I've traveled around and met with private families, and it's the founder of a business, the parents of the business, and then the kids of the parents. Bitcoin, in general, has brought a new generation into the precious metal's narrative, which has been fascinating to watch that develop. I think that's going to continue as more people understand the importance of having a portion of their portfolio outside of the traditional system. I think, to your point, they're cousins, and they work quite well together.

From an investment standpoint, then, as our podcast listeners think about the world, whether on the physical or the equity side, how should they be looking at this? I know that's a big ask, but with your experience, what would you tell an investor as they're looking to add to their portfolio and get exposure to gold? How would they do it, or how would you recommend doing that?

Ronnie Stöferle: People often ask me, "Should I buy physical gold or mining equities now?" I say, "Well, actually, completely different risk profiles." I like both, but with physical gold, if you store it, perhaps outside of the banking system, that's a monetary hedge for worst-case scenarios.

If you want to have, let's say, performance gold, then you could consider gold ETFs or gold mining ETFs. That's a completely different risk than buying physical gold. Then, of course, as Eric Sprott knows well, you can have 10, 20, or 30 baggers if you get it right.

It needs your attention, where you must do the homework, and if you say, "Well, I don't have the nerves, I don't have the time," then just outsource this to professionals. If you ask me, "What's the perfect percentage of gold in your portfolio," I think it's impossible to say that. I would generally say the younger you are, the more equity risk you should probably take. We crunch numbers, and at least you should have, I would say, 10% to 15% gold.

Whenever a Swiss private bank says, "We recommend our clients to hold 2% physical gold as a hedge," I'll say, "Well, it's nice, but it's not going to make a difference. That's not a hedge." I think 10% to 15% should be allocated in the gold space. If you can tolerate the risk, then, of course, also the mining space because, as the great Jim Grant said, "The only permanent truth in finance is that people will get bullish at the top and bearish at the bottom."

Ed Coyne: Is there anything that I haven't asked that you wanted to convey to our listeners out there? Are there any last points of wisdom you want to leave us with?

Ronnie Stöferle: I think for everybody who's slightly uneasy about the price of gold, look at the development of debt. U.S. national just crossed above 34 trillion for the first time. That's 101,000 per U.S. citizen, or, I think, $260,000 per taxpayer. I think that's already a pretty good case for gold. I would say people shouldn't expect too much from the price of gold.

Every time I hear outrageous price forecasts, I think, "Well, hold your horses." I think gold is just fine. Gold has really delivered; it has reliably done its job over the last couple of years, and I think it will continue. If you want to have a little bit more oomph and momentum, then consider silver and mining stocks. Gold, I think, is just fine.

Ed Coyne: That's a great way to leave our listeners. Thank you for that insight. Speaking of our listeners, I encourage you to visit their website for anyone out there who wants to learn more about Ronni and his extensive research at Incrementum. It's a spectacular site for research reports and papers; frankly, the Monthly Gold Compass is one of my favorites. I start monthly with that report, look at the charts, and build my ideas.

You can visit them at incrementum.li, it's I-N-C-R-E-M-E-N-T-U-M.li, and you'll see all the different opportunities to download reports. For those who want to be interested, you can go to our website once we publish and look at the transcript, and we'll have a link to their site there. Ronni, seeing you and having you on here is always a treat. Thank you for making the time to join us on Sprott Radio.

Ronnie Stöferle Ed, thank you very much. It's always a pleasure. The next In Gold We Trust report will be out on May 17.

Ed Coyne: I’d like to have you back in the summer to hear about it. I'm Ed Coyne and thank you all for listening to Sprott Radio.