Episode #5 - In Gold We Trust
Ronnie Stoeferle, a founding partner of Incrementum AG, joins host Ed Coyne for a lively discussion on gold, silver and gold miners. The conversation focuses on Monetary Climate Change, the title theme of the latest In Gold We Trust report. The theme describes the multi-layered paradigm shift triggered by the COVID pandemic and the policy responses that ensued. Incrementum’s analysis suggests that profound changes in fiscal and monetary policy will have tangible consequences for the investing landscape.
Ed Coyne: Welcome to Season 1, Episode #5 of Sprott Gold Talk Radio. Today, I'm very excited. We have one of our first outside guests on the show. Ronnie Stoeferle is joining us from Incrementum to talk about their view on gold, silver and mining equities. Today we're going to highlight something that's really quite special and very useful for Sprott as a firm, which is Incrementum's In Gold We Trust annual report, which includes extensive charts, graphs and talking points on both gold, silver and mining equities in general and the overall economy.
Given that the report just came out, I thought it would be timely to have Ronnie speak on behalf of his firm and give us a bit of insight on what they're seeing today in the gold, silver and mining markets. Ronnie, first and foremost, thank you so much for joining us.
Ronnie Stoeferle: Hi Ed, and thanks for having me.
Ed Coyne: Let's dive right into and talk a bit about not only your background and how Incrementum came to be, but also about what you do as a firm and then obviously spend some time going into the In Gold We Trust report.
Ronnie Stoeferle: Well, it's a long story. I'll give you the short version! I worked in a bank for seven years and a friend of mine recommended a small cap called Osisko Exploration. I started privately investing in it and it did pretty well. It turned out to be a 40 bagger, and I went to my boss and said, hey, “I've got this mining stock. Could I perhaps do a little special report on gold?” He said, go ahead and do the research over the weekend and publish something. That was in 2007 and actually, I didn't have a clue about gold, about silver, about monetary history, about inflation, because it's not taught at all. I studied finance and business administration and economics and you almost never hear about those topics. So I swallowed the red pill and learned more about the Austrian school of economics that over here in Austria is not taught at all.
After a couple of years, I said, well, I feel a bit like the vegetarian in the big butchery, writing about gold and the gold standard and criticizing inflationism and sitting in a bank, so I set up my own company together with two partners from Switzerland, another friend of mine from Austria and we founded Incrementum based in Liechtenstein, which is in the center of Europe.
And it's a fairly small country. It's 35,000 people. We started the company in 2013 and we achieved quite a lot. We are managing six investment funds, now most of them in the precious metals and commodities space. We're doing wealth management for high-net-worth individuals. We're doing special mandates. And we still publish the In Gold We Trust report, which is published in German, in English and now also in Mandarin for two years now. It is probably one of the most widely followed publications on gold. We just published a new 15th edition. It's been lots of work. There are 20 people involved. It's always great fun and I really enjoy working almost 24/7 on the report, crunching the numbers, researching it, thinking about the core messages and so on. It's lots of work and I'm pretty happy that now the report is out and that it's such a big success.
Ed Coyne: Well, we're happy it's out as well and it has been a wonderful book. I can only imagine the amount of time and energy you put into this, but I very much appreciate it. One of the big things that's being talked about these days is inflation or deflation or stagflation, depending on who's talking and when they're talking, those terms are all being thrown out. Inflation, though, is the term that's being thrown out a lot right now. Clearly, you cover that in the In Gold We Trust report, but can we dive into that a bit right now and talk about your view and what you're finding out there from the research you've done about where you think we're headed? Is it inflation? And if so, what do gold, silver and even the miners do in that type of environment?
Ronnie Stoeferle: Well, you know, the title of this year's report or the leitmotif is Monetary Climate Change. Basically, everybody is talking about ESG (environmental, social and governance), SRI (socially responsible investment) and climate change, we want to introduce our readers to our views on another climate change, which is this monetary climate change that is currently happening. From our point of view, this pendulum was swinging over the last couple of months from a rather disinflationary side to the inflationary side. I think the inflationary forces are now really much stronger than the deflationary forces.
Just one example. Two years ago, there was a cover of Bloomberg BusinessWeek and it said, “Did Capitalism Kill Inflation?” Back then, nobody really saw inflation reappearing. Now, Barron’s just had a cover showing “The I Word.” So inflation is a topic again, but the big thing is that if you talk to or listen to central bankers nowadays, they will all tell you that it's temporary, it's just the base effect, that it's commodity prices now being up, etc., but that inflation numbers will come back again. Our take is different. We really see a big shift and a fundamental break.
What are the main reasons for that? What are the most important drivers? First of all, we see extremely aggressive monetary policy. Last year alone, M2 monetary growth was 25% compared to 2008-2009. We're now really seeing the broad monetary aggregates surging. Back then, in the great financial crisis it was only the monetary base that was skyrocketing, but we didn't see any significant credit growth. Now, the main reason for that is that we are seeing some sort of politicization of credit. Over here in Europe, but also in the U.S., you're seeing more and more credit guarantees. Basically, the government says we'll cover you, you can hand out the loan and we'll take care of the risks. Now, of course, every banker will say, OK, let's do business.
I think this is really something that we will see going forward over the next couple of years to finance the next infrastructure new deal, the new green whatever deal, education deal and so on. Big government is back and it really tries to influence and stimulate credit growth much more than previously. Then we see that the Federal Reserve has shifted its inflation targets. Now, it has switched to average inflation targeting, and telling us inflation rates were undershooting over the last couple of years, and now we can accept inflation to overshoot over the next couple of years because on average, we want to see 2%. And since Jay Powell announced that in August last year, we are seeing a very strong trend of rising inflation. I think this is really a fundamental shift in central bank policy. Then we are seeing increasing geopolitical tensions between the U.S. and China, and the U.S. and Russia, and so on. Some sort of a Cold War 2.0.
We see shortages of labor in certain industries. We're seeing rising minimum wages. We're seeing rising unit labor costs. We're seeing that from the side of demographics, it seems that this deflationary pressure is disappearing and it's moving more into the inflationary side. From my point of view, that's really the core topic of the report, there are many, many drivers for inflation rates to rise. This is exactly what politicians, but also central bankers want to achieve.
It is the reverse of Paul Volcker, in the beginning of the 1980s, when his job was to kill inflation. Now, central bankers want to create inflation. They want more inflation. And it seems that it's happening. But be careful what you wish for. It might come true. And it seems that we will have a tough time, really fine-tuning inflation rates, because once the toothpaste is out of the tube, it's pretty hard to get it back in.
Ed Coyne: I laugh, you know, as long as you don't need a home, a car or food, then there is no inflation. You hear time and time again people talking about trying to build a new home or do a renovation on a home and how everything is delayed by six months because they can't get access to lumber. And if they do, the prices have skyrocketed and that's trickling through the entire economy. What you hit on with the average inflation target is incredible to me that they're throwing that in there today, talking about, well, it's OK if we have high inflation now, because if you look at over long periods of time, we're going to average that out. That doesn't help anybody who's trying to acquire something today that was cheaper at some point.
You touched on it a little bit, the debt side of things as well. We're obviously printing all this money. We're handing out money. There's talks of rates potentially going a little higher. From the research you've done, what does that spell for assets like gold, silver and precious metals miners? How do you anticipate those performing or reacting to this current monetary climate change that you're talking about?
Ronnie Stoeferle: I think it's really a pretty good environment for gold, silver and the mining space. Ludwig von Mises talked about the so-called "crack-up boom." If you have a look at prices and the developments over the last couple of months, it seems that we're really at the beginning of such a crack-up boom because it's not only gold, silver equities and cryptocurrencies doing really well; it's real estate, it's Pokémon cards, it's wine, it's the art market that is going crazy.
We are seeing a rush into real assets. It seems market participants are anticipating future inflation. Gold was up 25% last year and silver was up 48% in U.S. dollar terms. Pretty decent performance, I would say. Still, many people were a bit frustrated with the performance in the second half of the year. We shouldn't get too greedy. I think it is not gold's job to make you rich.
The job of gold is to really stabilize and protect your purchasing power. There is this saying that offense wins games, but defense wins championships. And I think that gold as a portfolio stabilizer really delivered last year, especially in those extremely turbulent weeks in March and April. Gold did a tremendous job after the correction that started in August. The 10-year Treasury yield went from 0.45% up to 1.7%. That's doesn't sound like a lot, but it was a pretty big move.
Then, of course, we saw cryptocurrencies stealing the show from gold to some degree, and then later on the U.S. dollar was strong. Those were headwinds. But then in March, we really saw a double bottom in gold at $1,680. I think at the moment, it was really a tremendous setup. Gold is now above $1,900 and nobody really talks about it yet. I see a very neutral sentiment. It's a fantastic setup.
Going forward, the flows will probably come from the bond side. There are still $14 trillion invested in negative-yielding debt. If inflation really becomes a topic over the longer term, and if market participants realize that it's not just temporary, that we might really be on the verge of inflation rates going higher over the next couple of years, then I think we will see significant flows out of fixed income into traditional inflation hedges. We crunched the numbers in our report and we came to this conclusion: Commodities and gold have the highest inflation beta and are the best inflation hedges. The main case for gold and silver over the next couple of years is that inflation might really be the biggest driver going forward.
Ed Coyne: We have talked about gold. We've talked a bit about the economy. One of the things that's been coming up more recently because of technology, whether it's solar panels, flat-panel TVs, cell phones, 5G, all of these things require silver. Clearly, gold's a monetary metal when you think about how investors use gold. But what about silver? You've done a nice job talking about silver the report. What do you make of silver today? Where is the opportunity for an investor?
Ronnie Stoeferle: Last year, for the very first time in a long history of the In Gold We Trust report, we had a special chapter on silver. We wrote that when the gold-silver ratio was trading at 125, so with one ounce of gold, you could have bought 125 ounces of silver. Now we're standing at a gold silver ratio of roughly 70. So it was a pretty big move. But still, I think silver is pretty cheap, especially if you have a look at analyst consensus.
Nobody is really expecting a significantly higher silver price. Nobody is really seeing surging investor demand that we are seeing for quite a while now. Nobody really sees the troubles that we are seeing on the supply side. I think that the expectations for the green demand for silver are too conservative from my point of view. From a supply-demand aspect, I think silver is a great buy at the moment, but also as silver outperforms gold during inflation. So if you believe that gold is in the bull market, then you should own silver.
If you think that inflation will become a topic, then you should have silver. Actually, I think this bull market in silver is still pretty young. Therefore, I think if you can live with the volatility of the silver market, which is obviously significantly higher than in gold, then you should definitely think about silver. At these prices, I think we will go over $30/oz pretty quickly. Over the long term, I really see silver prices above $100/oz over the next couple of years. I think it's a pretty interesting setup.
Ed Coyne: That would make a lot of people very happy. I'd be remiss if I didn't bring up the miners. With the miners, we've seen pretty significant margin expansion over the last couple of years as the prices continue to climb and some of these companies are paying dividends for the first time, they're free cash flow looks really attractive, and on a relative basis to the S&P 500, they look really attractive, when you're talking about enterprise value to EBITDA and so forth.
Can you spend a few minutes on the miners? Are they in good shape today? I guess on a relative basis, say 2011 versus 2021? What's different about them? Do you like them right now? How should investors think about the mining stocks themselves?
Ronnie Stoeferle: Actually, I don't like mining stocks at the moment. I love them. People tend to forget that in 2020 producers had the most profitable year ever. All-in sustaining cash costs were basically flat, while the average spot gold price was at $1,700. This year it's even higher and I don't see all-in sustaining cash costs rising significantly. Most of the companies are producing healthy cash flows, and we're seeing pristine balance sheets. Most of the companies really got their balance sheets in order. They wrote off projects. They got their costs under control. We're seeing mostly M&A activity that make sense, so we don't see any extreme premiums being paid. Last year I had 120 company meetings with management teams from the gold and silver industry and sometimes it really felt like attending a deep value conference. Everybody was talking about dividends and buying back shares and free cash flow and stuff like that. It changed for the better. My friend Alex Black said the gold industry is now a real business.
One fun chart from the report is Dogecoin, which is sort of a fun cryptocurrency that nobody really takes seriously. It had a market cap of $70 billion mid-May, which is significantly higher than the market cap of Newmont Mining or Barrick Gold, by far the two largest gold and silver producers with significant amounts of EBITDA, net profit and employing altogether, I think 30,000 people. We saw that Apple, for example, had cash on its balance sheets at roughly $200 billion so it could easily buy the 20 largest gold and silver miners in the HUI Gold ("Goldbugs") Index.
Those comparisons tell you that the market hasn't realized yet that the gold and silver companies are really making decent amounts of free cash flows. Not only on a relative basis, but also on an absolute basis. I think the sector is extremely attractive, which makes me very optimistic going forward.
Ed Coyne: It does seem to be something that people aren't really paying attention to yet, and they probably should. We're equally excited about the mining stocks today, so that's great to hear. How would you suggest an investor get started and how would you suggest an investor allocate to the metals themselves and the miners?
Ronnie Stoeferle: There's no magic number. Everybody telling you, you have to have 15%, 20% or 25% in gold doesn't make any sense because it depends on the rest of your portfolio. It depends on your time frame. It depends on your risk aversion and so on. From my point of view, at least 10-15% should be allocated in physical gold, because I'm seeing it really as the reliable part of your portfolio. As I've said, gold really delivered last year. Gold does really well in times of recession, in times of negative real interest rates and in times of market turmoil in general. In those periods, gold really delivers and stabilizes your portfolio. Now, when it comes to mining stocks, they have very different risk profiles. If you want a real investment, then I think you shouldn't mix up mining stocks with physical gold. Two different risk profiles, but I think at the moment, both are highly attractive.
Ed Coyne: I always talk about that as well. That the physical gold market is really there to stabilize your portfolio and that the mining stocks are there to add torque or opportunity to your portfolio. The why behind both of them is important. If you're pure about the preservation of capital, than maybe you just own the physical metal. If you're trying to grow your capital, then the miners probably make more sense. We spend a lot of time talking to our financial advisors and our investors to get to the crux of the why. Why are we doing this? Why are we allocating to it? From there, we make a determination of what the percentage should or shouldn't look like, based off the reasoning behind why they're allocating to the space to begin with.
Ronnie, this has been really fun to have you on and talk about this, and I encourage everyone who's listening to this podcast to really go and check out the In Gold We Trust report. Ronnie, if you don't mind, maybe tell the listeners how they can access the website and how they can download the report.
Ronnie Stoeferle: It's fairly easy finding the report. Just Google, "In Gold We Trust report". We've got a web page ingoldwetrust.com in German and in English. You can download the report for free in the big version, which is 350 pages, so you have to take some time off, but I think it's really worth it. We've got the 2021 report online, and all the other 14 previous reports as well. We're doing two chart books every year and we are doing special reports on inflation.
You can download them all for free and it wouldn't be possible without the support of our premium partners, and one of them, thank you very much, is Sprott. It's really something that is dear to my heart, informing and educating people and giving them solutions to make the best out of this current situation. That's the In Gold We Trust report. I'm pretty active on Twitter at @RonStoeferle and yeah, that's basically it.
Ed Coyne: Ronnie, thank you so much. This has again been a real treat and hopefully the listeners all walked away with some new nuggets of knowledge on gold, silver and mining stocks. Thanks again for joining us.
Ronnie Stoeferle: Pleasure. Thank you. Take care.
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