Embed Size (px)
Citation preview
Chartbook
“In Gold we Trust 2017“
Ronald-Peter Stöferle & Mark Valek
www.incrementum.li
Download „In Gold we Trust 2017“ here:
https://ingoldwetrust.report/en/gold-report/#form
Twitter: @IGWTreport
@IGWTreport
• 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 60 countries, more than 1.5 mn. readers
• German and English versions, available in a
Compact and Extended version
• Published for the 11th time in 2017
• Further information and old editions can be found at:
www.ingoldwetrust.report
2About The „In Gold we Trust“ Report
@IGWTreport
3Partners Of The „In Gold we Trust“ Report
@IGWTreport
• High expectations of Trump’s reflationary growth policy dampened the gold price increase in 2016. However, Gold was still up 8.5% in 2016 and is up 12.6% since Jan. 2017.
• The normalization of monetary policy in the US is the litmus test for the US economy and it is decisive for how the gold price will develop.
• If the normalization of monetary policy does not succeed – which we expect - gold will pick up momentum.
• Mining stocks continue to be highlyinteresting. In our investment process, we focus on developers and emerging producers.
• Based on the premise that the bull market in gold has resumed, we expect the gold-silver ratio to decline. Therefore, silver mining stocks should offer particularly interesting investment opportunities.
4Executive Summary
Source: Hedgeye
Source: Hedgeye
1. Gold – Where Are We Now And
Where Are We Going?
"Doubt is not a pleasantcondition, but certainty isabsurd."
Voltaire
www.ingoldwetrust.report
@IGWTreport
400
800
1200
1600
2000
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
20,000
2008 2010 2012 2014 2016
Ba
lance
Sh
ee
ts in
bn. U
SD
.
PBOC SNB BOJ ECB FED Gold
Go
ldin
US
D
6
• We live in an age of
advanced monetary
surrealism
• In Q1 2017 alone, the
largest central banks
created the equivalent of
almost USD 1,000 bn.
worth of central bank
money ex nihilo
• Almost a decade of zero
and negative interest rates
has atomised any form of
risk aversion
Source: Bloomberg, Incrementum AG
Base Money Inflation And The Price Of Gold
@IGWTreport
Mind The Donald: Yields Surged After Election
900
1000
1100
1200
1300
1400
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
Go
ld p
rice
in U
SD
Yie
ld in %
/Fun
d R
ate
10Y Treasury Yield Fed Fund Rate Upper Limit Gold Price
• The FED needs rising
yields on the long end
of the curve in order to
sustain the hiking cycle
• Trump optimism and
the related yield surge
enabled continuation of
the hiking cycle in
December 2016
• Will Trump be a
sustainable game
changer for interest
rates and gold?
Source: Federal Reserve Bank St. Louis, Incrementum AG
7
@IGWTreport
2. The Sceptics
The „Everything Bubble“: Financial Assets Relative ToDisposable Personal Income
300%
350%
400%
450%
500%
550%
1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014 2018
Fin
an
cia
l A
sse
ts o
fH
ouse
ho
lds /
Dis
posa
ble
Pe
rso
na
l In
com
e
DotCom Bubble
Housing Bubble
Everything Bubble ?
8
Source: Incrementum AG, Jesse Felder, Federal Reserve St. Louis
"… Stocks, bonds and real estate have all become as overvalued as we have ever seen any one of them individually in this country.
The end result of all of this money printing and interest rate manipulation is the worst economic expansion since the Great Depression and the greatest wealth inequality since that period.“
Jesse Felder
@IGWTreport
Source: Federal Reserve St. Louis, Incrementum AG
1,000
1,200
1,400
1,600
1,800
2,000
2011 2012 2013 2014 2015 2016 2017
World Gold Price Gold Price in USD
• The comparison of the
world gold price with the
USD price reveals that the
divergence has increased
significantly since 2014.
• Reasons:
Expectation that the Fed
would implement the
announced rate hikes & at
a later stage, it was the
consequence of Donald
Trump’s election and the
resulting economic hopes
that were fuelling the USD.
9World Gold Price vs. Dollar Gold Price Since 2011
@IGWTreport
41 58 98 1
60
16
4
12
5
14
8
19
4 31
7
60
4
45
8
37
8
41
7
36
0
31
6
36
4 44
6
43
6
38
2
38
4
36
3
34
4
36
2
38
5
38
3
38
7
33
3
29
4
28
0
27
8
27
1
31
0 36
7
41
2
44
7
60
8 70
1
86
7 97
4
12
28
15
61 16
69
14
10
12
66
11
61
12
46
12
49
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
Avera
ge a
nnualg
old
price
(US
D)
Average Annual Gold Price
10
Source: Federal Reserve St. Louis, Incrementum AG
• Annual average gold prices puts the recent gold price correction into perspective
• Clearly shows the benefit of a regular accumulation of gold ("gold savings plan") as a long-term strategy
Average Annual Gold Price (USD)
@IGWTreport
1970 1971 1972 1973 1974 1975 1976 1977 1978
50
150
450
1,350
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024
Pe
rfo
rma
nce
of G
old
in
Pe
rce
nt
2000 Bull Market 70s Bull Market
11
Source: Federal Reserve St. Louis, Incrementum AG
• The bear market
since 2011 has been
following largely the
same structure and
depth as the mid-
cycle correction from
1974 to 1976.
• However, we can
see that the duration
of both corrections
diverges significantly.
Gold Bull Market 1970s vs. 2000 To Date
@IGWTreport
12
Source: Federal Reserve St. Louis, Incrementum AG
• We consider the strength
of the stock market
currently as the most
significant opportunity cost
for gold.
• We can see that the
relative weakness of gold
seems to be slowly coming
to an end.
• After almost five years of
underperformance relative
to the broad equity market,
the tables might slowly be
turning now in favour of
gold.40%
60%
80%
100%
120%
140%
160%
180%
2011 2012 2013 2014 2014 2015 2016 2017
Gold/S&P Ratio
50d Moving Average
200d Moving Average
Gold Monthly Closes vs. S&P Monthly Closes
@IGWTreport
0
1
2
3
4
5
6
7
8
9
10
201720132008200420001996199219881983197919751971
GSCI Commodity Index / S&P 500
Median: 4.1
Dot.com Bubble
Gulf Crisis
1990
GFC 2008Oil Crisis
1973/1974
Source: Bloomberg, Incrementum AG
• In a historical context, the
relative valuation of
commodities to equities
seems extremely low.
• In relation to the S&P500,
the GSCI commodity index
is currently trading at the
lowest level in 50 years.
Also, the ratio sits
significantly below the
long-term median of 4.1.
• Following the notion of
mean reversion, we should
be seeing attractive
investment opportunities.
13GSCI/S&P500 Ratio: Equities Expensive, Commodities Cheap?
@IGWTreport
14
1.48%
19.15%
27.26%
30.43%
37.01%
39.93% 40.15%
Gold BoJ ECB BoE FED SNB PBoC
Annualised rate of change of central bank balance sheets vs. annual change of gold reserves (2003-2017)
Source: FED, SNB, BOE, PBPC, Incrementum AG
• Central banks try to fine-tune
the tightrope walk between
deflation and inflation.
• This chart underlines the
relative scarcity of gold in
comparison with fiat currencies
that can be inflated at will.
Change Of Central Bank Balance Sheets vs. Change Of Gold Reserves
2. White, Gray And Black Swans
"The two main risk factors for the average portfolio are less than expected growth and more than expected inflation."
Ray Dalio
www.ingoldwetrust.report
@IGWTreport
16
Source: Bloomberg, Incrementum AG
• Of 89 economists surveyed by
Bloomberg, not a single one
currently expects a GDP
contraction in 2017, 2018 or
2019.
• The median expected growth
rate in these years ranges from
2.2 to 2.4 percent.
• The extremely high degree of
confidence in the economy's
robustness is also reflected by
market-based risk indicators.
The last time the VIX was close
to today's levels was in 2007
shortly before the beginning of
the crisis.
• A potential recession in the US,
which would invariably lead to a
U-turn in monetary policy,
represents the potentially most
important catalyst for the future
trend of the gold price.
0
5
10
15
20
25
30
35
40
45
50
-1.00% 0.00% 1.00% 2.00% 3.00% 4.00% 5.00%
Nu
mb
er
of A
naly
st
Fore
casts
Expected GDP growth
2017
2018
2019
A Black Swan? Zero Analysts See Recession
@IGWTreport
0
2
4
6
8
10
12
14
16
18
20
1914 1919 1924 1929 1934 1939 1944 1949 1954 1959 1964 1969 1974 1979 1984 1989 1994 1999 2004 2009 2014
US Recessions Effective Federal Funds Rate (pre 1955 Fed NY discount rate)
12
3 4
14
12
11
10
98
76
5
13
15
16
17?
Source: Fed St. Louis, Federal Reserve Bank New York, Incrementum AG
• As a long-term chart of the Fed funds rate reveals, the vast majority of rate hike cycles has led to a
recession. Moreover, every financial crisis was preceded by rate hikes.
• The historical evidence is overwhelming – in the past 100 years, 16 out of 19 rate hike cycles were followed
by recessions. Only three cases turned out to be exceptions to the rule.
17Rate Hike Cycles And Following Recessions In The US
@IGWTreport
18
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
3
4
5
6
7
8
9
10
11
12
1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011 2015
Recessions
Source: Federal Reserve St. Louis, Incrementum AG
• Should the current economic
expansion in the US continue
for another 20 months, it
would become the longest in
US history.
• Declining unemployment rates
are an effect of economic
expansions. It is frequently
argued that the current low
unemployment rate
represents evidence of the
expansion's robustness, but
we would point to the long-
term characteristics of this
statistic, which simply
oscillates in a wide range.
US Unemployment Rate – Low Levels Beget High Levels And Vice Versa
@IGWTreport
0
500
1000
1500
2000
2500
3000
3500
4000
4500
5000
US
D b
n.
US Recession Fed Balance Sheet
Projected Balance Sheet According to Current Plan 3 trn Mark
2 trn Mark
In June 2019 the current
economic expansion would
become the longest in US
history...
• As part of the normalization process of US monetary policy, QT was implemented starting in October 2017
• As Quantitative Easing was extremely positive for asset price inflation, it can be expected that Quantitative Tightening
might have the opposite effect
• In order to return to pre-crisis levels of the Fed’s balance sheet, there may not occur a further recession until 2024
Source: Federal Reserve St. Louis, Incrementum AG
Quantitative Tightening Having Opposite Consequences Than Quantitative Easing? 19
@IGWTreport
-0.5
-0.3
-0.1
0.1
0.3
0.5
0.7
0.9
0
50
100
150
200
250
300
07/2005 07/2006 07/2007 07/2008 07/2009 07/2010 07/2011 07/2012 07/2013 07/2014 07/2015 07/2016 07/2017
Infla
tion
Sig
nal (1
to -0
,5)
Inflation Signal Silver Gold Bloomberg Commodity Spot Gold Miners
Source: Incrementum AG
• We are increasingly convinced, that the unfavorable environment for inflation sensitive assets, which has
prevailed since 2011, has come to an end.
• By the end of September, our proprietary Inflation Signal switched to “rising inflation”.
20Incrementum Inflation Signal Showing Rising Inflation
@IGWTreport
21
15
.00
%
7.1
0%
-10
.30
%
11
.30
%
3.6
0%
-4.4
0%
10
.50
%
3.4
0%
1.5
0%
2.2
0%
10
.60
%
4.7
0%
5.3
0%
3.7
0%
13
.50
%
1.9
0%
2.5
0%
24
.00
%
-11
.10
%
4.0
0%
26
.40
%
-20%
-10%
0%
10%
20%
30%
Falling Inflation Stable Inflation Rising Inflation
Pe
rfo
rma
nce
p.a
.
Equities Fixed Income US TIPS Energy EquitiesMining Equities Precious Metals Commodities
Source: Wellington Asset Management, Incrementum AG
• Both stocks and bonds tend to lose ground in an environment of accelerating price inflation. Even though
stocks are considered to be suitable inflation hedges, historical data on this point are rather more ambiguous.
• Gold stocks and the stocks of other commodity producers have attractive characteristics in the context of
prudent portfolio diversification, as they are clearly positively correlated with rising inflation rates.
Performance Of Different Asset Classes In A Variety Of Price Inflation Regimes
@IGWTreport
22
Gray SwanInfluence on
USDExpected Influence
on Gold (in USD)
Expected Influence
on inflation
Stagflation Depreciation positive inflationary
Credit crisis in China Appreciation positive uncertain
Political crisis in the US Depreciation positive uncertain
Geopolitical escalation Uncertain positive inflationary
Hyper deflation Appreciation negative deflationary
Inflationary boom Depreciation strongly positive inflationary
Monetary reset Depreciation strongly positive inflationary
Source: Incrementum AG
Gray Swans And Their Possible Effect On The Gold Price
@IGWTreport
23
50
70
90
110
130
150
170
190
210
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
S&P 500 Gross Tax Receipts
• Strong divergence
between stock
market and gross
tax receipts
• If the economy is
improving, why do
tax receipts
stagnate?
Source: https://www.fms.treas.gov/dts/index.html, Mac Overton, Incrementum AG
Mind The Gap! S&P 500 vs. Gross Tax Receipts
@IGWTreport
24
• Especially
Corporate Profits
seem to lose
momentum, which
also confirmed by
most recent
earnings numbers
as well as earnings
revisions.
• An outright
decrease in tax
receipts is only
seen during
economic
contractions.
20
40
60
80
100
120
140
160
180
S&P 500 Net Corp. Tax Receipts
Source: https://www.fms.treas.gov/dts/index.html, Mac Overton, Incrementum AG
S&P 500 vs. Net Corporate Tax Receipts
3. De-Dollarization: Good-bye
Dollar, Hello Gold!
”There is a good case to be made that a shift in emerging markets toward accumulating gold would help the international financial system function more smoothly and benefit everyone.”
Kenneth Rogoff
www.ingoldwetrust.report
@IGWTreport
1400 1500 1600 1700 1800 1900 2000 2100 2200
Portugal
Spain
Netherlands
France
Britain
USA
Gold
26
Source: Incrementum AG, based on a chart by JP Morgan – Michael Cembalest
• The dominant currency is always
issued by the economically
dominant country of an era.
• Gold has always played a decisive
role when the changeover from
one global currency to another one
took place. One can roughly speak
of a revaluation of real assets
against financial assets during
these changeovers.
• Reserve currency status does not
last forever. At some point, they all
have to leave the stage. Will this
hold for the almighty US dollar
as well?
Global Reserve Currencies Since 1400
@IGWTreport
0
10
20
30
40
50
60
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Mio
. F
ine T
roy O
z
Source: The Telegraph
27
Source: Bloomberg, Incrementum AG
• At the G8 meeting in 2008 Dimitri
Medvedev, at the time president
of Russia, said about the
possibility of a supra-national
currency: “I happen to have good
news. I have such a supra-
national coin in my pocket. It was
a present. (…) Here it is. You can
see it and touch it.”
• The process of moving away from
the dollar – prepared by Europe
and triggered by China and
Russia – can no longer be
stopped. And as a “supra-
national” reserve asset, gold plays
an important role in it.
Russian Gold Reserves
@IGWTreport
28
Source: ShadowStats, Federal Reserve St. Louis, Incrementum AG
• We have calculated a series of
shadow gold prices, by dividing the
stocks of the different monetary
aggregates by the amount of gold
holdings in their respective central
banks.
• This helps to get a feeling of how
many units of each currency are in
fact backed by gold.
• The amounts of such aggregates
backed up per troy ounce of gold
reserves currently stand at 5-figure
levels.
0
10,000
20,000
30,000
40,000
50,000
60,000
1971 1981 1991 2001 2011
M0 M1 M2
Monetary Aggregates In US-Dollars Backed-Up Per Troy Ounce Of Gold (1971-2017)
@IGWTreport
29
1
10
100
1000
10000
1918 1929 1940 1951 1962 1973 1984 1995 2006 2017
US Gold Reserves @ Market Prices US Monetary Base
Source: Federal Reserve St. Louis, Incrementum AG
• Since the end of the classical
gold standard, parity between
the US monetary base and US
gold reserves was already
restored on two occasions by
an upward revaluation of gold
(in the mid 1930s and in the
late 1970s).
• Whether a potential dollar
devaluation will happen in the
framework of an international
agreement or in an
uncoordinated manner remains
to be seen.
US Monetary Base vs. US Gold Reserves At Market Prices (Log Scale)
@IGWTreport
0
20
40
60
80
100
120
1959 1964 1969 1974 1979 1984 1989 1994 1999 2004 2009 2014
US
Mo
ne
tary
Co
ve
rag
e R
atio
Scenarios
Coverage Ratio 100%
= Gold price $14,000
Coverage Ratio 40% =
Gold price $5,400
Coverage Ratio 20% =
Gold price $2,700
Coverage Ratio 8.2%
= Gold price $1,174
Nixon Shock
Source: BMG Bullion, Federal Reserve St. Louis, Incrementum AG
• Over the past decades, the
gold-backing of the US
Monetary Base is trending
down.
• The monetary base (M0), has
seen it’s gold-backing dwindle
to levels below 10%.
• One could also conclude that
gold became significantly
cheaper because of this
unrestrained monetary
inflation.
US Monetary Coverage Ratio
@IGWTreport
31
Gold-Backing of US
Monetary AggregatesM0 M1 M2 M3
20 % $ 2,712 $ 2,590 $ 10,144 $ 14,089
40 % $ 5,425 $ 5,180 $ 20,288 $ 28,178
100 % $ 13,563 $ 12,951 $ 50,720 $ 70,447
Source: ShadowStats, Federal Reserve St. Louis, Incrementum AG
• We may also project at which market prices a troy ounce of gold should trade to back up each of such US
monetary aggregates in larger proportions, namely 20%, 40% and 100%.
• “The alternative to revaluing gold to the levels discussed here is to force an outright contraction of the US
broad or possibly even narrow money supply, which would wreak havoc with the banking system and
economy, exactly the opposite of what is needed to restore a degree of monetary stability not only to the US
but also to the global economy“. (John Butler, The Golden Revolution – Revisited)
Gold-Backing Of US Monetary Aggregates
@IGWTreport
32
0
10
20
30
40
50
60
70
80
1955
1958
1961
1964
1967
1970
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
2006
2009
2012
2015
US
D T
rilli
on
Productive Debt
Unproductive
Debt
Counter-
productive
debt
Nominal GDP
Source: Federal Reserve, Bureau of Economic Analysis, HFH
• Throughout the 1950s, 60s and 70s,
productive debt to GDP averaged
just over 40%. Today that ratio has
risen to almost 75%.
• Unproductive debt as a share of
GDP averaged somewhat higher, at
49%, between 1950 and 1980, but
has since exploded to reach a level
of 220% by 2009 before falling
down to a still elevated level of
165%.
• The liquidation of unproductive debt
in the aftermath of the financial
crisis was more than offset by
increases in counterproductive debt
levels which are today at a record
high of more than 130%.
US Debt, By Category, vs. GDP (USD trn.)
@IGWTreport
0
2
4
6
8
10
12
14
16
18
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
M2
/ S
avin
gR
atio
M2/Saving-Ratio
Q3 1987
Q1 2001
Q1 2017
Q1 2008
Black Monday, S&L crisis
Dotcom bubbleSubprime bubble
Everything bubble
Source: US Bureau of Economic Analysis, Federal Reserve St. Louis, Atle Willems, Incrementum AG
33
• Peaks in the MS/S ratio for the U.S. economy are regularly associated with the end of inflationary
booms and the onset of financial crises.
• The higher the MS/S ratio and the longer it remains elevated, the greater the probability of an
economic reaction and hence the greater the chances gold, with its safe haven properties, will
appreciate.
U.S. M2 Money Supply To Saving Ratio
4. The Portfolio Characteristics Of
Gold
www.ingoldwetrust.report
“It aint't what you don't know that gets you in trouble. It's what you know for certain that just ain't true.”
Mark Twain
@IGWTreport
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017USD Index (30mo chg.)
Source: FRED, Incrementum AG
Volcker FED
Drastic Tightening
Latin America
Debt Crises
"Black Monday"
1987 Crash
Japan Top &
US S&L
Crisis
Mexico
Crisis
Asia & Russia
CrisisDotCom Bust &
Turkey Crisis
FED Tightens
US Recession
Global
Financial
Crisis
Oil Price
Decay
Strong Dollar
Weak Dollar
???
USD Index (30mo chg.); Source: FRED, Incrementum AG
35
• The US dollar remains the undisputed senior international fiat currency and with that a mirror image of
global events. This chart shows the thirty-month rate of change of the USD Index.
USD-Index: Indicator For Financial Crises?
@IGWTreport
y = -0.0987x + 0.0098R² = 0.1252
-20%
-10%
0%
10%
20%
-50% -25% 0% 25% 50% 75% 100%
Gold Price YoY in Percent
US-Dollar Index YoY in Percent
Source: FRED, Incrementum AG
36
• In stress situations many investors still
have confidence in the US dollar and
regard it as a safe haven from external
threats – a quality frequently attributed
to gold as well.
• One might be inclined to expect a
positive correlation between gold and
the US dollar. As the chart illustrates,
this is not always the case though.
Why?
• In local crises, the dollar is seen as a
desirable asset by many market
participants because the survival of the
fiat money system as such is not
questioned.
• It is different in the case of systemic
crises. In systemic crises, gold is
perceived to maintain its value, while
paper money is in danger of becoming
completely worthless.
Correlation US-Dollar Index And Gold Since 1974
@IGWTreport
Source: FRED, Incrementum AG
37
• The traditional inverse
correlation between gold and
the US dollar is very helpful
in a portfolio context to
reduce volatility.
• That applies specifically to
the current market
environment, since the US
dollar has been rising from
2011 to 2016 and seems to
be entering a bear market
now.
• Not only the instability of the
monetary system, but the US
dollar's high valuation should
provide significant upward potential for gold.
Performance Of US Dollar Index And Gold
15.2
25.3
11.6
26.028.2
6.1
-15.5
-10.2-8.4
7.8
12.5
-4.7 -3.6
5.8
-3.6 -4.6
2.81.1
3.1
12.6
4.6
-7.1
-20
-15
-10
-5
0
5
10
15
20
25
30
35
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017YTD
Re
turn
%
Gold (US$/oz) Broad U.S.Dollar Index
@IGWTreport
• There are two conspicuous time periods that were shaped by predominantly negative real interest rates (in red).
Both phases clearly represented a positive environment for the gold price.
• However, one can also discern that the trend of real interest rates is extremely important for the gold price. Thus
real interest rates have been stuck in negative territory most of the time since 2011, but were in an upward
trend. This increased the opportunity cost of holding gold, which created an unfavorable environment for the
gold price.
Source: Bloomberg, Incrementum AG
38
0
300
600
900
1,200
1,500
1,800
2,100
-5
-3
-1
1
3
5
7
9
11
Go
ld
Re
al F
ed
Fun
ds R
ate
(%
)
Real Fed Funds Rate Gold
Negative Interest Rates Are A Perfect Environment For Gold!
@IGWTreport
1%
10%
100%
1000%
1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008 2013
Re
latie V
alu
e t
o G
old
Gold
US-Dollar
EURO
Copper
Silver
Oil
Source: FRED, Bloomberg, onlygold.com, Incrementum AG
39
• This chart shows the gradual erosion of purchasing power of several currencies and commodities
versus gold since 1971. While the price of oil in terms of gold tends to be relatively stable over time, the
US dollar has lost more than 95% of its purchasing power relative to oil over the same time period.
• Gold has a track record of successfully preserving value and purchasing power over thousands of
years. In the course of human history, the market has chosen gold as the best money based on logical
and rational reasons – such as its high liquidity, indestructibility, high value density, fungibility, divisibility,
world-wide acceptance, etc.
Copper, Silver, EURO, US-Dollar & Oil In The Currency Gold
@IGWTreport
0
50
100
150
200
250
1950 1960 1970 1980 1990 2000 2010
Litre
sofbeer
per
oun
ce
of
go
ld
1980:
227 Beer/Ounce
1971:
48 Beer/Ounce
Ø87
Beer/Ounce
2017:
100 Beer/Ounce
40
Source: www.HaaseEwert.de, Historisches Archiv Spaten-Löwenbräu, Incrementum AG
• While a liter of beer (a “Maß” in German) at the Munich Oktoberfest in 1950 cost the equivalent of
EUR 0.82, the average price in 2017 was EUR 10.78.
• Historically the average is 87 liters – thus the “beer purchasing power” of gold is currently slightly
above the long-term average.
• These examples illustrate that gold conserves or even increases purchasing power in the long term,
while it is once again made quite clear what a massive deterioration in purchasing power fiat money
has been subjected to.
Gold/Beer Ratio: How Many „Maß“ Beer Does One Ounce Of Gold Buy At The Oktoberfest?
6. Mining Shares
www.ingoldwetrust.report
"Going in one more round when you don't think you can – that's what makes all the difference in your life".
Rocky Balboa, Rocky IV
@IGWTreport
42
0
100
200
300
400
500
600
700
1995 1998 2001 2004 2007 2010 2013 2016
Source: Bloomberg, Incrementum AG
• We want to highlight the
enormous volatility and inflation
sensitivity of the mining sector.
As the chart illustrates, gold
stocks are anything but “buy and
hold” investments and should be
actively managed.
• The following quote confirms
this as well: “Market and sector
forces together typically cause
80% of the price movement in a
stock. That means the company
fundamentals usually account
for less than 20% of a stock’s
price movement. This is the
reason a company’s stock price
sometimes seems to move
independently of the
fundamentals”
“The Latent Statistical Structure of Securities Price Changes”,
Benjamin F. King
Amex Gold Bugs Index (HUI): Bull And Bear Market Cycles Since 1995
@IGWTreport
0
100
200
300
400
500
600
700
800
900
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
MC
ap (
bill
ions)
Gold Bugs Index (HUI) Market Cap (bn USD) APPLE (AAPL) Market Cap (bn USD)Source: Bloomberg, Incrementum AG
43
• At the moment the entire HUI, which includes the 16 largest unhedged gold producers, is valued roughly USD
100 billion. This amount represents just 0.4% of the market capitalization of all S&P 500 Index members. The
market capitalization of Apple alone exceeds that of the 16 companies in the index by more than 700%.
• One could use the cash hoard of Apple (AAPL) to purchase the entire Gold Bugs Index 2.5 times over, or
alternatively buy 6,500 tons of gold. If Apple did the latter, it would be the second largest gold holder in the
world.
Apple vs. Gold Bugs Index
@IGWTreport
Source: Bloomberg, Incrementum AG
44
50
200
350
500
650
800
950
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
bn. U
SD
Market Cap World Mining Index Market Cap GOOGLE (Alphabet)
• The World Mining Index, which comprises of the largest mining companies in the world, currently has a
significantly lower market value than Google.
Alphabet vs. Gold Bugs Index
@IGWTreport
0%
20%
40%
60%
80%
100%
1 41 81 121 161 201 241 281 321 361 401 441
Pe
rfo
rma
nce
Number of Weeks
08.1974 - 08.1976 03.1968 - 12.1969
02. - 11.2008 01.1996 - 10.2000
10.1980 - 06.1982 01.1983 - 11.1986
03.1939 - 04.1942 04.2011 - 01.2016
Source: Nowandfutures, TheDailyGold.com, Barrons, Incrementum AG
45
• While the fundamentals of the mining sector stabilized in the 2014-2015-period, early 2016 was the time of the
final capitulation. At the time, precious metals mining stocks exhibited the worst 5 and 10 year rolling
performance in 90 years.
• During the final slump, they fell to an all-time low relative to the S&P 500 Index, and their price to book ratios
stood at the lowest level in 40 years (which is as far back as the data go). The chart also makes clear that the
preceding bear market was an historically unique event.
Historic Bear Markets In Mining Stocks
@IGWTreport
0%
100%
200%
300%
400%
500%
600%
700%
800%
1 41 81 121 161 201 241 281 321 361 401
Pe
rfo
rma
nce
Number of Weeks
10/1942-02/1946 07/1960-03/1968 12/1971-08/1974
08/1976-10/1980 11/2000-03/2008 10/2008-04/2011
01/2016-09/2017
46
Source: Nowandfutures, TheDailyGold.com, Barrons, Incrementum AG
• If one looks at all bull markets in the Barron's Gold Mining Index (BGMI), one notices that the current uptrend
is still relatively modest in terms of duration and performance.
• Should we really be on the cusp of a pronounced uptrend in the sector – which we assume to be the case –
quite a bit of upside potential would remain.
• Jordan Roy-Byrne, an analyst whom we greatly respect, describes the sector's status as “bearish bull”.
Historic Bull Markets In Mining Stocks
@IGWTreport
-6,000
-4,000
-2,000
0
2,000
4,000
6,000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
in M
illio
n U
SD
Free Cash FlowSource: Bloomberg, Incrementum AG
47
• A clearly positive trend is detectable in terms of operating earnings. The gold industry has evidently
learned to live with lower prices.
• In 2012 and 2013 the component companies of the HUI index still generated significant negative cash
flows. The situation brightened considerably in ensuing years. Last year the gold mining companies in the
index generated free cash flows totaling USD 4.8 bn., which exceeded the previous record high of 2011.
Free Cash Flows Of HUI Companies 2016 Higher Than In 2011!
@IGWTreport
• We are convinced that due to their response to the four-year long bear market, the majority of gold
producers rests on a more solid fundamental basis.
• A preview of the sector's asymmetric return potential and its greater gold price leverage was provided
in the first half of last year, when gold stocks rallied by 180%, while gold generated “only” a gain of
28%.
• The industry must continue to deliver on the promises made in recent years and keep working on
rebuilding investor confidence.
• We remain firmly convinced that the large valuation discount at which gold stocks trade relative to the
broader market is going to narrow over the long term.
• The focus should be on conservatively managed companies which are not merely pursuing an agenda
of growth at any price, but are instead prioritizing shareholder interests.
• In our investment process, we are currently focused on developers and emerging producers.
• Based on the premise that the bull market in gold has resumed, we expect the gold-silver ratio to
decline over the medium term from its current elevated level. In such a scenario, particularly promising
investment opportunities should emerge in the stocks of silver mining companies.
48The Case For Mining Stocks
www.ingoldwetrust.report
7. Conclusion
"There are about three hundred economists in the world who are against gold, and they think that gold is a barbarous relic - and they might be right.
Unfortunately, there are three billion inhabitants of the world who believe in gold.“
Janos Fekete
@IGWTreport
50
• After years of zero interest rate policy, investors have become used to the
“monetary surrealism” created by central banks
• Gold is currently seen as “too low in calories” for yield-starved portfolios.
• Superficially, the current situation in financial markets appears promising. We
believe this perception, which is reflected in market prices and valuations, is
incomplete and highly inconsistent.
• A certain type of fear is currently rife: the fear of missing out. Many skeptics
remain on the dance floor – even if they remain close to the exit. The question is
whether the exit will be big enough to accommodate all of them?
• Whether one fully agrees with our critical assessment of the system is one thing;
the question of whether one should hold an appropriate share of one's liquid
wealth in the form of a “golden insurance reserve” is a different kettle of fish.
Conclusion
@IGWTreport
This Presidential Term
is characterized by
Growth Monetary Normalisation Gold price
in USD
Scenario A:
Genuine Boom
Real growth
> 3% p.a.
Successful;
Real Interest Rates >1.5%700-1,000
Scenario B:
Muddling Through
Growth & Inflation
1.5-3% p.a.not completed 1,000-1,400
Scenario C:
Inflationary Boom
Growth & Inflation >
3% p.a.not completed 1,400-2,300
Scenario D:
Adverse Scenario
Growth / Contraction
<1.5%
Normalization paused or
renewed easing1,800-5,000
Source: Incrementum AG
51Scenarios For The End Of This Presidential Term
@IGWTreport
Disclaimer
This publication is for information purposes only, and 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 the 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, respectively the information
sources, made available, as well as any liabilities or damages, irrespective
of their nature, that may result there from (including consequential or
indirect damages, loss of prospective profits or the accuracy of prepared
forecasts).
Copyright: 2017 Incrementum AG. All rights reserved.
52
Appendix:
About „In Gold we Trust“ and
Incrementum AG
www.ingoldwetrust.report
@IGWTreport
Further information:www.incrementum.li
• We evaluate all our investments not only
from a global economic perspective, but
by also taking into account global
monetary dynamics. This analysis
produces what we consider a truly
holistic view of the state of financial
markets.
• We believe our profound understanding
of monetary history, out-of-the-box
reasoning and prudent research allows
our clients to prosper in this challenging
market environment.
• Incrementum AG is an owner-managed and fully licensed asset manager & wealth
manager based in the Principality of Liechtenstein.
54About Incrementum AG
@IGWTreport
Ronnie is managing partner of Incrementum AG and responsible for
Research and Portfolio Management.
He studied Business Administration and Finance in the USA and at the
Vienna University of Economics and Business Administration, and
also gained work experience at the trading desk of a bank during his
studies. Upon graduation he joined the Research department of Erste
Group, where he published his first “In Gold We Trust” report in 2007.
Over the years, the Gold Report has proceeded to become one of the
benchmark publications on gold, money, and inflation.
Since 2013 he has held the position as reader at scholarium in
Vienna, and he also speaks at Wiener Börse Akademie (i.e. the
Vienna Stock Exchange Academy). In 2014, he co-authored the book
“Austrian School for Investors” and in 2017 “Die Nullzinsfalle” (The
Zero Interest Rate Trap). Moreover, he is an advisor for Tudor Gold
Corp. (TUD), a promising explorer in British Columbia’s Golden
Triangle.
55Ronald-Peter Stoeferle
@IGWTreport
Mark is partner of Incrementum AG and responsible for Portfolio
Management and Research.
While working full time, Mark studied Business Administration at the
Vienna University of Business Administration and has continuously
worked in financial markets and asset management since 1999. Prior
to the establishment of Incrementum AG, he was with Raiffeisen
Capital Management for ten years, most recently as fund manager in
the area of inflation protection and alternative investments. He gained
entrepreneurial experience as co-founder of Philoro Edelmetalle
GmbH.
Since 2013 he has held the position as reader at scholarium in
Vienna, and he also speaks at Wiener Börse Akademie (i.e. the
Vienna Stock Exchange Academy). In 2014, he co-authored the book
“Austrian School for Investors” and in 2017 “Die Nullzinsfalle” (The
Zero Interest Rate Trap).
56Mark J. Valek
@IGWTreport
»I think it is the most comprehensive report
produced on the gold market - to me it is like the
Barclays Gilts Study in the UK - a must read to
understand the medium-term market view and
direction.«
»The annual ‘In Gold we Trust’ report is the
most widely forwarded research piece in the
gold scene.«
Marcus Grubb, Former CEO World Gold Council
John Hathaway, Manager Tocqueville Asset Management
57Testimonials (1)
@IGWTreport
»It is a well-documented fact that Ronald Stoeferle’s ‘In
Gold we Trust’ report was a widely read essay.
However, I believe that this report will be read in
future even more frequently, and that future
economic historians will mention ‘In Gold we Trust’
in their papers and books as an example of an
economist who dared to challenge the destructive
monetary policies of current central bankers.«
»The value of gold depends on three vectors - money,
mining and geopolitics. Most analysts look at only one
or two of these vectors. Incrementum's annual report
‘In Gold we Trust’ is the only research that looks at
all three in depth and in an integrated fashion. It is
the most eagerly awaited and closely read report in
the gold community. Don't miss it! «
Dr. Marc Faber
Author of the Gloom, Boom & Doom Report
James Rickards,
Author of Currency Wars and The Death of Money
58Testimonials (2)
@IGWTreport
»‘In Gold we Trust’ is the gold research piece of
the year; to be honest it’s the only report that I
read.«
»Each report provides a thorough analysis of
the gold market, written by money managers
who understand the principles of Mises,
Rothbard and the other great thinkers of the
Austrian school of economics.«
Philip Barton,President, Gold Standard Institute
James Turk,Founder GoldMoney.com
59Testimonials (3)
Many Thanks For Your Support!
www.ingoldwetrust.report
