In Gold We Trust 2024

Podcast Transcript

Ed Coyne: Hello, and welcome to Sprott Radio. I'm your host, Ed Coyne, Senior Managing Partner at Sprott Asset Management. I'm truly pleased today to welcome back one of our returning guests, Ronnie Stöeferle. Ronnie joins us today with over 11 years of experience at Incrementum as a partner, a portfolio manager, and a managing director. You've been busy over there, Ronnie. Ronnie brings over two decades of investment experience and, over the last decade-plus, has been hyper-focused on gold, gold equities, and some other assets.

I asked Ronnie today to join us on Sprott Radio to talk about all things, but in particular, as always, the In Gold We Trust 2024 booklet, which, for those who love to read, is over 400 pages. They've done a nice job of summarizing it as well. It's always a great book to read and one of my favorites of the year to look at. You do a wonderful job with that. Ronnie, without further ado, thank you for joining Sprott Radio.

Ronnie Stoeferle: Many thanks, Ed. It's always a pleasure. I hope you're well, my friend.

Ed Coyne: I'm doing quite well. It's still amazing. You and I have not been in the same room together after a couple of years, but we have to fix that at some point. Let's get right into it. Wow, what a year for gold so far. What in the world's going on?

Ronnie Stoeferle: There's a reason we are writing 400 pages every year, and it's not about gold. Gold is just sitting there. Gold hasn't changed for millions of years. It's just a world around gold that is moving quickly, dynamic, and crazy to some degree. As you know, last year, the title, the light motif of the report, was Showdown, and we said there would be a showdown in the price of gold because we've been flirting with this $2,000 US barrier for quite a while. It took us four years of flirting with that price level.

Now, finally, we broke out, and now we are entering a completely new ballgame. We have entered terra incognita, and in the report, we explain what has changed in the gold market and why there is some new playbook that we should study very closely. This new playbook is highly influenced by the enormous amount of central bank demand and emerging markets.

Ed Coyne: I love what you just said about how the world has changed around gold. Gold has been very stoic, it just sits there, does its thing, and there is a new playbook out there. Please walk us through what's new. How should investors think about gold today, maybe in a way they haven't thought about it in the past?

Ronnie Stoeferle: We must differentiate between the Western financial investor and what's going on in emerging markets. The marginal gold buyer is now truly in emerging markets in the Middle East, China, and India. I think that's a trend we've described for a while. Still, it seems that both private demand from emerging markets and central bank demand from emerging markets are decisive because if you look at the gold demand in the ETF space, Western financial investors couldn't care less about gold.

For the time being, we had outflows from the physical-backed gold ETFs. I think it was 780 tons since the year 2022. Another great survey by Bank of America said that 71% of all asset allocators hold only between zero and a maximum of 1% gold for their clients. I think it's becoming much more of an emerging market story. I think that's a positive thing because gold, as you know, is often viewed as something for doomsday guys, people hoping that the end of the world is close, hyperinflation, civil war, and so on.

Then, this so-called love trade physical demands from countries with a very high gold affinity, like China, India, Vietnam, the Middle East, and Dubai. Just one number is responsible for 25% of the gold trade worldwide now. I think this love trade is becoming more and more important. At some point, I hope Western financial investors will also wake up and significantly raise their allocation to gold. First of all, the central bank demand has put a floor under the price of gold.

We saw all-time highs in central bank buying in 2022. 2023 was only slightly lower, and the first quarter of 2024 was another all-time high. Central bank demand, also primarily from emerging markets, is the decisive driver now. It started in 2022 because of the sanctions against Russia, when many central banks around the world decided perhaps we had too much dollar exposure. What they did to the Russian FX reserves, they could also do to us.

I think there's a broad trend of diversification of central bank assets. There was a great report coming out from the World Bank in February. It was a handbook for asset managers in central banks, and they said for emerging markets, central banks advise up to 22% gold allocation for the central banks. This trend will continue and is a game changer in the global gold market.

Ed Coyne: It does seem that the rest of the world is maturing. We always see it at Sprott as we go into critical materials for the energy transition. The rest of the world wants what the typical Western world has had, and maybe there is a shift in who buys gold. In your mind, what does gold look like from just a general price standpoint? If the Western world starts to embrace gold the way the East has, what would that look like in your mind?

Ronnie Stoeferle: Obviously, prices should be higher. It might be anecdotal evidence, Ed, but I did many keynotes recently in the German-speaking world, especially in Germany, Austria, and Switzerland. I did my keynote, and most people in the audience said now is the time to sell gold because prices are so high. The reason could be that my keynotes were bad. I think the general sentiment is that nobody can envision and comprehend that gold is relatively cheap from my point of view.

I wrote my first In Gold We Trust report in 2007. I think the price of gold was at $500 or $550, and now, where we're trading at roughly $2,400, I'm significantly more optimistic about the price of gold. With this emerging market trend, let's not forget that in 2000, only 19% of the world's GDP was produced by emerging markets. It will be more than 50% in 2024. Most of the GDP growth comes from emerging markets, and they've got a culturally higher affinity for gold. Gold is a low-beta proxy for emerging markets.

I think that for the Western world, at some point, we will probably also see some FOMO kicking in because the price of gold rose from $1,800 last fall. Now, we're trading around $2,400. It was a big move. Usually, I would tell you we should take a breather. The sentiment was extremely positive. We are seeing that the Commitments of Traders report it looks like a correction should happen, but the price of gold is just not coming down. This is telling me that there are so many buyers on the sideline. They buy into every minor correction.

This is classic early bull market action. We're not only seeing this regarding the price of gold. We are already starting to see that silver is starting to outperform gold. We are seeing that stronger volumes are kicking in in the minor space. We're seeing some early stage, I would say, outperformance from the mining stocks versus gold. This is everything you want to see in the early stages of a new bull market. Just one more thing, Ed. I told you that we've been flirting with this $2,000 U.S. barrier for almost four years. If you go back to the previous big breakout, which happened in the fall of 2009, before that, the price of gold was flirting with this $1,000 U.S. barrier.

Also, from a psychological point of view, this is a very important number. I think gold broke above $1,000 for the first time in March '08 when Bear Stearns went down, but then it took us one and a half years to finally break above that $1,000  barrier. Afterward, after this breakout, the price of gold almost doubled until the summer of 2011. I think we are seeing a similar development at the moment where, slowly but surely, people are realizing that gold has finally broken out, and this is a new bull market stage.

Ed Coyne: You commented, and I read in the report there was a great quote about owning gold versus buying gold. The other comment you made, which is a solid comment, is that at $2,400, you still think this is attractive. I always like to say gold is a relative asset to the rest of the assets around you. Can you talk about that a little bit? How should investors think about gold in their portfolio from an owner's standpoint versus buying or trading it? How should one view gold as they look to allocate to this space potentially?

Ronnie Stoeferle: It's relative valuation, and I think I do regard gold as a monetary asset and not as a commodity because gold has a very high stock-to-flow ratio, and that's a big difference compared to pure commodities with the low stock-to-flow ratio like copper, for example. Even though copper looks super exciting at these price levels, I think that's also a sign that we are seeing some movement in the commodity space.

However, just one number for the U.S. clearly describes this monetary climate change that we described in a previous In Gold We Trust report: we should focus more on fiscal stimulus and less on monetary stimulus. What we're seeing in the U.S. since the eve of the COVID pandemic Q4 2019 is that U.S. debt is up by $11 trillion. Previously, we were getting used to zero interest rates, but now, those interest rates for interest payments are becoming quite significant.

If we stay at current interest rates, next year, interest payments for the U.S. will be $1.7 trillion. What's the U.S. GDP? I think it's $24 or $25 trillion. $1.7 trillion is just interest payments. That's significant from my point of view. This tells me that it's not only the U.S.; we're seeing the same in the Eurozone, with a French debt crisis seemingly building up. We have seen some stress in the Japanese banking sector. As I've said, from a relative point of view, I think gold is still fairly undervalued.

Now, in the second part of the question you described, I think it's important to differentiate between safe-haven gold. This should be physical gold. You should care about counterparty risk, you should care about safe jurisdiction, and the other motivation that you can have for owning gold is just making performance.

Performance gold would be silver, mining equities obviously, and so forth. That has to be differentiated, physical gold as a safe-haven asset. On the other hand, performance gold via mining stocks, for example, has completely different risks and a bigger upside.

Ed Coyne: Let's talk about Performance Gold a little further for a minute because we've seen a huge disconnect between what gold has been doing relative to the miners. You've seen this movie before. How should investors be thinking about gold miners in particular?

Ronnie Stoeferle: To be honest, many people are super frustrated with the performance of the mining space. I think it is now time to rebuild trust in the sector. From my point of view, the industry has done a tremendous job over the last couple of years. They cleaned up their balance sheets, and they're currently producing enormous amounts of free cash flow. From a contrarian point of view, I think it's an excellent setup in the mining space.

However, I think one of the reasons why mining stocks underperformed gold over the last couple of months is probably because emerging markets investors prefer physical gold. They tend to buy not so much mining stocks. I think that's one of the main reasons. On the other hand, many companies came out in Q1 with very high forecasts for their all-in-sustaining cash costs. We are seeing costs moderately rising this year, which means that with the current performance of gold, we will see enormous amounts of free cash flow in the mining space.

I think what's crucial to say is that I've been doing this for a couple of years now, and from my point of view, gold mining stocks are probably the top-down asset class. Historically, bull and bear markets in gold shares have lasted much longer than average mining stock cycles. Fundamental changes in monetary conditions often trigger those super cycles. I think now is the time that when just looking at the sheer numbers, many investors and probably rather the generalist investors from outside of our, let's say, golden commodities bubble, they will realize at some point, well, there's tremendous valuations to be found in the mining space.

We have seen that, for example, there was some big volume kicking in recently for the large caps, like in Newmont Mining. Usually, generalist investors buy into the large caps and the most liquid names first. From a valuation point of view, again, it might be anecdotal evidence. Still, I was at a conference with roughly 300 private bankers managing significant amounts of money. There was only one topic in the conversations at breakfast, coffee break, lunch, afternoon coffee, dinner, and drinks at the bar. It was NVIDIA; everybody was talking about NVIDIA.

NVIDIA at the moment, what is it roughly? $3 trillion market cap. That's ten times as much as all the gold and silver miners in the whole world. From a relative point of view, I think that's quite telling. Again, companies, the quality names in the space, have done a pretty good job over the last couple of years getting their balance sheets in order, and I think now is the time to harvest basically from what they invested over the last couple of years.

Ed Coyne: Yes, and I think on top of inflation, at least potentially softening, you have to believe the margins will continue to strengthen there, particularly if the price of gold continues to escalate. I know from reading your report that you think that, and a lot of the statistics out there support that as well. Let's talk about the price for a minute. I don't want to hold your feet to the fire on this.

Some people are always reluctant to talk about price, but at current rates of over $2,300, what does the rest of this year look like? Have people missed the current move? I know we talk about the price versus the value of something or owning versus buying. Then, what does maybe the next decade look like to you? What would that look like if you had to go through the end of this decade? Could you talk about that for a minute?

Ronnie Stoeferle: I looked at the CPF function on Bloomberg quite recently, and this shows you the analyst consensus for gold by all the big names, including all the big Wall Street banks. The consensus for 2025 is $2,100 next year. For 2026, it's $2,000. For 2027, it's $1,850. This tells me that most analysts working for the big banks on Wall Street are still extremely bearish. They haven't realized that this bull market will continue for the next couple of years.

From a technical point of view, at $2,400, it's time to take a breather for gold to correct, but this correction is a very shallow one. This is an enormously strong sign because, as I've said previously, it shows that there's so much capital on the sidelines, and they're buying every minor dip in the price of gold.

Therefore, I think $2,600 is realistic by the end of the year. I believe our long-term price target is $4,800. We already forecasted that in the In Gold We Trust report 2020, where we said for this decade lay out our framework, we said inflation and inflation volatility would be a big driver; as you know, in 2020, nobody cared about inflation. It wasn't a topic at all. We said back then that we describe our monetary model.

You can read it up In Gold We Trust 2020, and based on that model, we concluded that $4,800 is a realistic target for the end of this decade. It sounds crazy, but who would have expected at the beginning of the 1970s that gold would rise from roughly $30 up to $850? From here until $4,800 by the end of this decade, that's a CAGR, compound annual growth rate of 12%. I think it's optimistic, but from my point of view, it's realistic.

As I've said before, this is a new stage of this bull market. We're seeing early bull market action, with silver starting to outperform gold and mining stocks waking up. That makes me confident, combined with the fact that everyone and their mother in the Western world is still not allocated to gold, and the big banks are super bearish on gold.

Ed Coyne: We have relatively higher interest rates than the last couple of years. Typically, that's the opposite. That hurts gold. Depending on who you ask, the economy is still strong and growing. The markets still reward investors to buy equities, yet gold continues to do well. This is before we get any cracks in the foundation.

As high as that $4,800 sounds, it seems pretty rational to see how gold is doing well in a good environment for everything else. What happens if everything else looks more wobbly, if debt matters again, or if rates start coming down? What does that look like? Any thoughts on that?

Ronnie Stoeferle: Ed, one of our major calls last year was that we said that a recession is on the horizon, and we've been wrong on that for the U.S., not so much for Europe, and also China not doing so well. Why is the U.S. economy doing so well? If I pour in $1.7 trillion of fiscal stimulus and run a 7%, 8% budget deficit with full employment, it's pretty easy to make growth numbers look good. If you should sleep and drink three Red Bulls and four cups of coffee, you'll probably stay awake, but it's not a very healthy strategy.

Recently, we have seen that some numbers we follow closely are cooling off. Then, on the other hand, I tweeted that the expectations for a soft and a hard landing had collapsed. Everybody is buying into this Goldilocks scenario: everything is going fine, inflation numbers are coming down, and the Fed has done a tremendous job managing the economy. That's like the consensus. I'm a little bit critical regarding that, to be honest.

However, I would say that at the beginning of this year, the market was discounting seven to eight rate cuts. Now we're at one or two rate cuts, and the price of gold is trading close to all-time highs. I think this shows the enormous strength of the price of gold. This confirms this new gold playbook that is heavily influenced by emerging markets' demand. Just have a look at the crumbling real estate in China. China is one of the most important drivers in the gold market at the moment. The potential for further gold purchases is enormous. China holds, I think, 108% of their GDP. It's just the cash holdings by private Chinese individuals.

There are not too many alternatives to the real estate market, and gold is the obvious choice for Chinese investors. I think this bull market is standing on a very solid foundation. It's central bank buying, and it's emerging market demand. It is the potential for Western financial investors to come in when a recession and significantly lower rates and, at some point, yield curve control, another round of quantitative easing, and so on will be priced in. That makes me confident going forward. Gold trading is close to all-time highs, and seeing so much bearishness and agony is a brilliant sign.

Ed Coyne: We just scratched the surface of this year's report. How can our listeners find the 2024 In Gold We Trust report if they want to dive deep into it?

Ronnie Stoeferle: Thanks, Ed. First, I must say it's not just Ronnie writing the In Gold We Trust report. I've got a tremendous team of 20 people on four continents contributing to this report, and it's always lots of work and capital invested, as well as lots of love and, sweat and tears, but it's worth it. I love just the feedback we're getting from all over the globe. The report is available free of charge. You don't have to register. You don't have to give us your email address or anything. You can download it from our webpage, ingoldwetrust.report.

You can download the full report, which is 440 pages long, and there's also a compact version. We've got our monthly gold compass, which is a collection of the best charts. It comes out every month, along with lots of other publications. We've got so many plans that we will work on over the next couple of months, so look at the ingoldwetrust.report. You will find all the information on our webpage.

Ed Coyne: Ronnie, thank you, as always, for making the time to join us. I also encourage our listeners; you did an excellent job summarizing the report in the most recent YouTube video I listened to this morning. You did a great job with that, as well. For all of our listeners who want to learn more about not just Incrementum, what they're doing, and the work Ronnie's doing, but just gold in general, I highly encourage you to look at this. It's a really useful tool.

I build my next 12 months around this report every time it comes out. I've lived off that for the last few years, and I can't say enough great things about it. Thank you and your whole team for doing that work. Are there any last parting shots you'd like to throw out there, Ronnie, before we sign off?

Ronnie Stoeferle: Great quote that I've just heard that fits very much, I think, to this differentiation between safe-haven gold and performance gold. I don't know who said that, but I loved it. It is: "save like a pessimist, but invest like an optimist." Ed, thank you very much for having me. Always a pleasure talking to you.

Ed Coyne: Thank you, Ronnie, and I look forward to meeting you in person someday.

Ronnie Stoeferle: Absolutely.

Definitions

“Performance” gold: refers to investments in gold mining shares, but also in silver and silver mining shares. These investments have generally tended to yield a higher return than physical gold but are also correspondingly more volatile.  In no way does the term imply future performance or positive investment outcomes of any kind.

“Safe haven” gold: an asset type (like Treasuries, money market funds, cash, etc.) that typically does not carry a high risk of loss across a variety of market cycles. Nonetheless, there is no guaranteed safety in any investment class, and even "safe” assets may lose value, including possible loss of invested principal.