„Any well-diversified portfolio should contain gold, and, at present, we’d recommend an aggressive overweight. That will act as a hedge against geopolitical and fiscal risks, offer a safe harbor against a breakdown in the equity bull-run, and give positive exposure to the coming easing cycle and period of dollar weakness. Don’t be afraid to go in at current levels.“
Dave Rosenberg
In the world of sports, new and innovative playbooks have regularly overturned existing paradigms. Bill Belichick of the New England Patriots has had a lasting impact on the NFL with his ability to adapt game plans precisely to the opponent, with the flexibility of his offensive and defensive systems, but also with his psychological warfare. Under Belichick’s guidance, Tom Brady, who was selected as only the 199th draft pick in 2000, quickly developed into a true difference maker. Their partnership led the Patriots to six Super Bowl victories and made the two the most successful quarterback-coach team in NFL history. Belichick’s most famous line is “Do your job”. This reflects his philosophy that everyone on the team must perform their role precisely to ensure overall success.
The same applies to asset allocation. Each asset class has its role to play. If used correctly, gold could become a real difference maker in the portfolio within the framework of the new gold playbook.
“The biggest financial event of 2023 has been the recession that never arrived,” says our friend Trey Reik. We had also described a US recession as a likely scenario in the In Gold We Trust report 2023, “Showdown”. To our surprise (but not only ours), this has so far failed to materialize. But why has the US been spared a recession so far despite a sharp rise in interest rates? The still very high budget deficit and the continuing spending spree of consumers, fueled by strong nominal wage increases and the robustness of the labor market, are two important reasons. In addition, the US is benefiting from increasing reindustrialization and the still very loose financing conditions for US companies.
However, the following chart will occasion little joy in the camp of Keynesianminded admirers of the current “economic miracle”. It shows GDP divided by national debt. You can see the diminishing marginal return of an additional unit of debt on GDP. As soon as the dose of debt is not further increased, the withdrawal symptoms will likely be painful.
Source: Reuters Eikon, Incrementum AG
Even if nevercession and no landing are now the consensus view on economic development in the US, we remain suspicious of the various goldilocks and landing scenarios. After all, history shows that tightening cycles have almost always ended in a recession.
Source: Reuters Eikon, Incrementum AG
Perhaps the gold price is once again proving its portfolio characteristic as the sixth sense of the financial markets? Let’s ignore the scenario of a recession in a „conventional“ economic cycle for a moment. In the 1970s in particular, gold price outbreaks were preceded by recessions that had geoeconomic triggers. After the gold price outbreak in 1972, for example, the US entered a recession in November 1973. This was triggered by the oil embargo in response to Western support for Israel in the Yom Kippur War in October 1973. After the gold price outbreak of 1978, the US slipped into recession in February 1980 as a result of the energy crisis triggered by the Iranian Revolution, while the inflation rate in the US rose to just under 15%.
Source: Reuters Eikon, Incrementum AG
It is little known that the rise in oil prices in the early 1970s was a direct reaction of the OPEC states to the closure of the gold window on August 15, 1971. This “temporary” decoupling of the US dollar from gold was interpreted by OPEC members as a devaluation of the US dollar, which reduced their real oil revenues accordingly. This is documented by the minutes of the 25th (extraordinary) meeting of OPEC on October 7, 1971, in Vienna, which OPEC was kind enough to provide to us exclusively:
Source: OPEC
Even today, there is sufficient potential for a geo-economically induced recession as part of the geopolitical showdown. In fact, this historic OPEC document reminds us of the statement made by Gazprom CEO Alexei Miller in June 2022: “The game of nominal value of money is over, as this system does not allow to control the supply of resources. Our product, our rules. We don’t play by the rules we didn’t create.”
The risk of an oil or commodity shock deliberately caused for political reasons is underestimated by many market participants despite the ongoing spiral of sanctions. To paraphrase Mark Twain, imagine that the BRICS+ countries artificially shortage large parts of the commodities market (oil, natural gas, agricultural commodities, copper, nickel, rare earths, etc.) in a rhyming repeat of the 1970s. This would trigger another wave of inflation, which would have the potential to cause much worse economic turbulence than that of the past few quarters. Political and social unrest could be expected in this case.
Even without such concerted action, there are sufficient indications that the commodity-rich emerging markets are continuing the process of de-dollarization that has been going on for some time. The geopolitical implications of this decoupling process are reflected in the following recent quote from US presidential candidate Donald Trump: “I would not allow countries to go off the dollar because when we lose that standard, that will be like losing a revolutionary war. That will be a hit to our country.” It can be assumed that the geopolitical showdown towards a multipolar order will be with us for some time to come. In the best-case scenario, it will continue to take place on a regional basis; in the worst-case scenario, we are already in the Thucydides Trap without having realized it yet.
Any remnants of fiscal sanity were finally thrown overboard by Western countries as part of Covid-19 policy. This monetary climate change, as we called it in 2021, is still in full swing and has by no means reversed even after the end of the pandemic. In addition to costly initiatives such as the Inflation Reduction Act, the Green New Deal, and the sharp rise in spending on a social system that is structurally underfunded as a result of the demographic situation, there is now also the need to cope with the financing of military rearmament.
In addition, the fiscal situation of many countries is deteriorating due to persistently high budget deficits and the recent significant rise in refinancing costs. The significant increase in national debt in the wake of the Covid-19 pandemic is now also taking its toll. Compared to Q4/2019, i.e. on the eve of the Covid-19 pandemic, US debt has risen by USD 11trn or around 50% (!). And there seems to be no end in sight to the debt binge.
Source: BofA Global Investment Strategy, Reuters Eikon, Incrementum AG
A decisive factor here is the financing structure and the remaining term of the bonds already issued. This has a significant influence on how quickly the rise in interest rates will affect interest payments. The average maturity of US federal debt is currently only 70.7 months. In recent years, a particularly large number of short-term debt instruments have been issued, which has further increased interest rate sensitivity. It can be assumed that the increasingly short financing should limit the rise in long-term yields. On the other hand, this also implicitly gives the Federal Reserve a greater incentive to lower interest rates sooner rather than later.
For its long-term forecast, the CBO assumes an average interest rate on US government debt of 4% over the next three decades. This is significantly higher than the current average interest rate of around 3.2%, but at the same time significantly lower than the current yield. The consequence of an increase in the average interest rate to the 4% assumed by the CBO would be a US budget deficit of around 10% of GDP. Every further increase of a percentage point would raise interest payments by an additional USD 2.8trn over 10 years. That would be around 75% more than the entire (!) current deficit.
Increased recourse to the many different instruments of financial repression therefore seems as certain as the “Amen” that concludes a prayer. Possible measures range from interest rate caps and quantitative and qualitative easing to hidden or open non-servicing of debt, particularly in the case of social security benefits. Capital controls, competitive devaluations („currency wars“), and significantly higher income and, especially, wealth taxes are also likely to be on the political agenda. We have already dealt with the various facets of financial repression several times in the In Gold We Trust report.[1]
Source: Reuters Eikon, Incrementum AG
In an extremely perspicuous commentary, Niall Ferguson presents another lesson from the rich history of fiscal intemperance, providing an additional argument for why the current period of geopolitical instability will be with us for some time to come:
My sole contribution to the statute book of historiography – what I call Ferguson’s Law – states that any great power that spends more on debt service (interest payments on the national debt) than on defense will not stay great for very long. True of Hapsburg Spain, true of ancien régime France, true of the Ottoman Empire, true of the British Empire, this law is about to be put to the test by the US beginning this very year, when (according to the CBO) net interest outlays will be 3.1% of GDP, defense spending 3.0%. Extrapolating defense spending on the assumption that it remains consistently 48% of total discretionary spending (the average of 2014-23), the gap between debt service and defense is going to widen rapidly in the coming years. By 2041, the CBO projections suggest, interest payments (4.6% of GDP) will be double the defense budget (2.3%). Between 1962 and 1989, by way of comparison, interest payments averaged 1.8% of GDP; defense 6.4%.
But 2024 is also the year of elections. Around half of the world’s population will elect a new president or parliament this year. The most relevant election for international world affairs will undoubtedly take place – no, not in Austria – in the US. The key question for gold investors is, will the expected mud-slinging and its outcome have a direct impact on the gold price? Our answer: If at all, then only in the short term. After all, fiscal math in the US and elsewhere cares very little about the question of who the incumbent president or the ruling party (coalition) is. Rather, the fiscal legacy of political leaders’ predecessors provides either a narrower or a broader framework. Luke Gromen suggests that the US election has much in common with the classic “coyote versus roadrunner” sequence, in which the squabble over who gets to hold the stick of dynamite with the burning fuse.
In the eurozone, it is slowly being realized that not only Italy is a potential problem child, but also France. In mid-April, France had to revise its deficit forecast upwards from an already high 4.4% to 5.1%. France is now as far away from meeting the Maastricht criteria as Vaduz is from Vanuatu. The relaxation of EU debt rules finally agreed at the end of April – packaged as greater consideration for the debt situation in the respective EU member states – will not bring Vaduz any closer to Vanuatu, nor will it make politicians who are happy to spend more disciplined.
Moreover, in France – in contrast to Italy, for example – the corporate sector and private households also have above-average levels of debt. In other words: At almost 330% of GDP, the total debt of all three economic sectors in France is the highest in Europe. This is around 80 percentage points higher than in Italy and more than 60 percentage points higher than in the US. Japan leads the world with just over 400%.
While the central banks of Western industrialized nations have all implemented significant monetary tightening in the last two years, the Bank of Japan (BoJ) has steadfastly maintained its zero interest rate policy. In response to the neo-Keynesian mantra that Japan has all too often been plagued by falling consumer prices over the past two decades, the recent rise in inflation is now being hailed as a cure for the supposed deflationary plague. Inflation, which is now well away from deflationary territory, should under no circumstances be jeopardized by monetary policy countermeasures.
It is well known that Japan is the global leader in terms of national debt.[2] This is not recognized as a serious problem by the majority of investors and analysts, as it is commonly argued that the government debt is held domestically. In reality, however, the BoJ now holds more than half of Japan’s outstanding government bonds on its balance sheet. This restricts the central bank’s ability to act, as a sale of debt instruments by the central bank into the market – i.e. quantitative tightening – would make the government’s financing costs skyrocket.
Source: Bank of Japan, Incrementum AG
*excl. Treasury Bills
The Japanese yen has come under increasing pressure over the past year due to the interest rate differential between the BoJ and other major central banks. In response, the Bank of Japan (BoJ) recently introduced a new monetary policy strategy that could act as a blueprint for a new playbook for (Western) central banks. On March 19, the BoJ raised interest rates moderately, meaning that nominal interest rates are no longer negative for the first time in 17 years. The BoJ also announced the end of its yield curve control (YCC) policy. It is particularly noteworthy that, in an unprecedented but unsurprising move in view of government debt of 263% of GDP, it is maintaining its QE program with monthly JGB purchases of USD 40 billion.
This is the first time that a central bank has combined conventional interest rate hikes with balance sheet expansion through QE. This amounts to a monetary policy oxymoron, as it effectively means tightening while easing monetary policy conditions. Has the BoJ once again positioned itself as a trendsetter for the monetary policy vanguard? In any case, the yen has continued its downward trend since then. At the end of April, it broke through the 155 mark against the US dollar for the first time since 1990. The exchange rate proceeded to fall below the 160 mark until a sharp correction caused the yen to appreciate by around 3% in a very short space of time.
Japanese investors, confronted with a depreciating currency and low interest rates, are increasingly turning to gold as a means of storing value. This is particularly evident in the heavy rush for the MUFG Gold ETF, which recorded a premium of 12.5% above its net asset value due to immense demand. No wonder, given the fact that the gold price in yen rose by almost 25% in the first four months of the year, after gaining +21.6% in the previous year. Since 2019, the increase has been more than 150%. Investor demand – which is very volatile in Japan – exploded by 228% in 2023 compared to 2022.
Source: Reuters Eikon, Incrementum AG
In view of these unpleasant facts, we are more convinced than ever that financial and sovereign debt crises could soon no longer be the exclusive domain of developing and emerging countries, but could also become part of everyday (economic) policy in one industrialized country or another. The crucial question is whether the response will be in the form of (nominal) payment defaults or currency devaluation.
“The age of the Great Moderation is over” has been a central message of our keynotes and studies in recent years. Due to the increasing fiscal dominance, it is unlikely that the monetary authorities will be able to consistently combat inflation. We continue to expect structurally higher inflation rates and persistently high inflation volatility. The last few months have shown just how persistent inflation can be. Looking back at the three waves of inflation in the late 1960s and 1970s, the similarity to the current development is indeed striking.
Source: Andreas Steno, Reuters Eikon, Incrementum AG
Will price stability now be sacrificed to ensure the financial viability of government debt? In his remarkable paper for the Federal Reserve Bank of St. Louis, entitled “Fiscal Dominance and the Return of Zero-Interest Bank Reserve Requirements”, Prof. Charles Calomiris paints a clear picture of this scenario. As soon as a bond auction fails, i.e. no creditors can be found at an interest rate acceptable to the US Treasury, the government would resort to non-interestbearing bonds, i.e. the printing press, instead of interest-bearing bonds, and finance itself via the inflation tax.
Fiscal dominance leads governments to rely on inflation taxation by ‘printing money’ (increasing the supply of non-interest-bearing government debt). To be specific, here is how imagine this occurring: When the bond market begins to believe that government interest-bearing debt is beyond the ceiling of feasibility, the government’s next bond auction „fails“ in the sense that the interest rate required by the market on the new bond offering is so high that the government withdraws the offering and turns to money printing as its alternative.
Even if history never repeats itself one-to-one, another wave of inflation is definitely within the realm of possibility. This is also due to the fact that the base effect with its double distortion – initially upwards for a year and then downwards for a year after the one-off price shock has subsided – will soon be completely removed from the inflation calculation. The elimination of the negative base effect in energy and food prices will no longer pull the inflation rate down any further.
The playbook has also changed on the central bank policy side. The world’s central banks appear to have an increasingly asymmetrical view of inflation. The following chart illustrates this asymmetry well. After inflation rose above 2% in 2021, the Federal Reserve hesitated for a whole year due to its misjudgment that inflation was merely “transitory”. By contrast, according to the FOMC minutes of March 2024, the Federal Reserve intends to cut interest rates three times this year, even though inflation has not yet fallen to the 2% target. It is obvious that this pro-inflation bias of the central banks can also be explained by the continuing rise in debt levels and the marked increase in financing costs, even if the central banks are careful not to answer any questions about the sustainability of the debt burden, under the guise of maintaining an apolitical stance.
Source: Canaccord Genuity, Reuters Eikon, Incrementum AG
Against the backdrop of structural over-indebtedness, further adjustments to monetary policy targets, including adjustments to inflation targets, are quite likely. Olivier Blanchard, former chief economist at the IMF, has suggested, for example, that an inflation target of 3–4% could be more effective than the traditional 2% target.
Many of the leading central banks have already adapted their inflation targets in recent years. In 2020, the Federal Reserve changed its inflation
target by switching to an inflation target of “2% over the long run”. Shortly afterwards, the ECB followed suit and revised its inflation target in 2021 from “below, but close to, 2%” to a target of “symmetric 2% over the medium term”. This superficially minor-sounding change was nevertheless significant, as it generally classifies inflation rates above 2% as tolerable and therefore allows for faster currency devaluation on average.
Remarkable detail in passing: When inflation began to rise in spring 2021, the central banks of the emerging markets reacted much earlier and more decisively than those of the industrialized countries, which had long been under the illusion that inflation was just a “hump”. The reason for this divergence is that inflation and therefore the fight against inflation were nothing new for the emerging markets, while the industrialized countries were lulled into a false sense of security by the Great Moderation. Applied to the world of central banks, it seems as if emerging markets are aware of the dangers of running the printing press too hot, while their Western counterparts are not.
Source: Gainesville Coins, BIS, Reuters Eikon, Incrementum AG
We have seen a gradual erosion of the definition of price stability in the industrialized countries in the recent past. It is quite likely that Western central banks will allow further implicit or sometimes even explicitly higher inflation rates. What would this mean for the population’s inflation expectations, real interest rates and, by extension, gold?
Monetary climate change, the escalating geopolitical showdown, and rising financing costs, exacerbated by “higher for longer” interest rates, have far-reaching consequences. Reaching the limits of debt sustainability provides a strong systemic incentive for further inflation. In an age of immanent over-indebtedness and therefore a permanent latent risk of inflation, there is one big loser among all asset classes: bonds.
“Anything but bonds” (ABB) – this pointed phrase reflects the growing skepticism towards fixed-interest government bonds in particular. Even if the zero interest rate terrain has been left behind and it is indeed possible to earn notable nominal yields on bonds again, we believe that one should not uncritically succumb to the lure of nominal interest rates. Especially when you think about investments with longer maturities, which currently continue to yield significantly less than short-term investments. Following the disastrous 2022 bond year, in which 30-year US government bonds suffered losses of over 30%, another negative performance is on the horizon this year. At the end of April, long-dated Treasuries were down almost 10%. Falling confidence in government bonds is ultimately nothing other than increasing mistrust in the value of the government currency. Such a loss of confidence has only occurred in part so far. The stakes remain high.
Source: Reuters Eikon, Incrementum AG
This declining confidence in bonds is of course no coincidence. Our esteemed friend Lyn Alden summarizes the current fiscal situation as follows: In an era of fiscal dominance, the supply of bonds is steadily increasing. Deficits of USD 1.5 to 2.5trn – with an upward trend – are to be expected in the US in the future and will therefore also have to be financed via bonds. This means that in the coming decade alone, in addition to maturing US government bonds, a further USD 20trn or so of new US government bonds will be issued.
In contrast, it is estimated that the amount of newly mined gold will only reach a value of USD 2.5trn at constant prices over the next 10 years if the production rate remains constant. The supply of bitcoins calculated on the basis of the current Bitcoin price will increase at an even lower rate. In the next 10 years, which corresponds to 2.5 halving cycles, exactly 1,025,390,925 bitcoins will be mined. At current price levels of around USD 60,000, this corresponds to a value of just under USD 62bn. Strong price increases in gold and Bitcoin are therefore to be expected, especially if investors start looking for alternative bond classes on a large scale. According to Alden, selected quality stocks are also suitable as an alternative.
Source: Lyn Alden, Reuters Eikon, World Gold Council, Incrementum AG
There is also the growing impression that trust in the political elites is clearly waning in many countries. This is not good news, because fundamental institutions such as the law, media, science, but also the monetary and market economy in particular, are dependent on a high minimum level of trust. We already addressed this issue in the In Gold We Trust report 2019, “Gold in the Age of Eroding Trust”, and the issue has unfortunately become increasingly relevant. However, we could also change our perspective and ask how many politicians still trust their people or the voters of other parties.
Another indication of eroding confidence is the fact that more and more market participants prefer physical delivery of gold. In 2020, investors increasingly began to demand physical delivery of gold when their gold futures matured. If we compare physical deliveries since before the outbreak of the pandemic, we can see that although deliveries have fallen again significantly after the explosion in physical deliveries at the beginning of the pandemic, they are still at a significantly higher level. The identity of the buyers often remains uncertain. However, we assume that they are mainly family offices, HNWIs, and government buyers who are not very price-sensitive but are critical of „paper gold „. In other words, the higher proportion of physical delivery is a further consequence of dwindling confidence in the robustness of the financial and monetary system.
Source: Reuters Eikon, Incrementum AG
In addition, the central banks of those countries with export surpluses are tending to reduce the recycling of their US dollar reserves, i.e. (re-)investing less heavily in US government bonds. To a certain extent, de-dollarization is also accompanied by de-bondization. Conversely, however, this also means that investors are looking for alternatives to government bonds – alternatives that are liquid, have a similar volatility profile to long-dated government bonds, and ideally also protect against inflation. Gold exhibits similar volatility to long-term government bonds but has the major advantage that it has no counterparty risk.
Source: Reuters Eikon, Incrementum AG
Given our skepticism towards government bonds, we assume that an increasing number of market participants will consider a higher weighting of both safe-haven gold and performance gold in the future. Specifically, in a portfolio with a longer-term investment horizon, we consider a ratio of up to 15% safe haven gold and up to 10% performance gold to be advisable. In view of the current situation, we view this as a prudent balance between stability and growth.
While the purpose of safe haven gold is to act as a nest egg with stable purchasing power, the purpose of performance gold is to achieve a higher return than physical gold. Performance gold includes asset classes as diverse as gold mining shares, silver and silver mining shares, and possibly also Bitcoin. Investments in performance gold are therefore more volatile and correlate less with traditional investments. Consequently, performance gold should be actively managed.
The performance of gold and silver mining shares has been disappointing for in recent years. The divergence between the development of the gold price and gold mining shares has been truly remarkable. As the next chart shows, the shares of gold mining companies have performed significantly worse than gold. The main reasons for this were the sharp rise in costs (AISC) in 2022 and 2023 and the general lack of interest from Western financial investors. The divergence between gold and mining share performance can also be explained by the fact that investors in Asia do not usually invest in mining companies. They prefer to hold physical gold and silver. Western financial investors, on the other hand, have cut their allocations to mining stocks in line with their reductions in gold ETF holdings.
Source: Reuters Eikon, Incrementum AG
Within the equity spectrum, other topics such as AI have recently stolen the show from gold miners. Nevertheless, there is no doubt that mining stocks are undervalued on a fundamental level. In recent months, this undervaluation has attracted the attention of well-known investors who are famous for contrarian investments. Stanley Druckenmiller sold technology stocks in Q4/2023, including Alphabet and Amazon, and invested in Newmont and Barrick. Shortly thereafter, the Financial Times reported that Elliott Management, led by Paul Singer, is launching a fund called Hyperion to invest in precious and base metals, led by the former CEO of Newcrest Mining.
The gold mining sector is unique in many respects. While fundamental bottom-up research is essential for careful stock selection and sensible diversification, macro-specific top-down influences play a particularly important role.[4] As far as sensitivity to monetary policy is concerned, a look at the past shows that investment times around the last interest rate hike have usually been excellent entry points.
Source: Reuters Eikon, Incrementum AG
Silver can also play a significant role as “performance gold”. Silver is experiencing a supply deficit for the fourth year in a row. At 215.4 Moz, the deficit will reach a new record level in 2024. The main reason for this is the ongoing PV boom. This key sector of the energy transition, which is dominated by China, is now the largest demand category for silver, with consumption of 232 Moz. In addition, silver has outperformed gold in 6 of the last 7 bull markets since 1967. However, the price performance of the white metal is still below average to date.
Source: Reuters Eikon, Incrementum AG
Historically, it was increased investment demand that was decisive for pronounced silver bull markets. In the event of a second wave of inflation, a wave of FOMO could set in, and silver would probably be one of the biggest beneficiaries.
Source: BofA Global Investment Strategy, Reuters Eikon, Incrementum AG
For many years, we have believed that incorporating Bitcoin into traditional portfolios enhances the risk-reward profile. The approval of Bitcoin spot ETFs by the SEC and the associated increase in legal certainty reinforces this view. A Bitcoin ban is therefore off the table. One practical way of integrating Bitcoin exposure into a traditional portfolio is to use portfolio components that combine gold and Bitcoin. Here, volatility can be used to the investor’s advantage through rebalancing and possibly also through an option overlay. However, such investments require extensive specialist knowledge.
Traditional securities portfolios are currently still characterized by a 60/40 mix of equities and bonds. This portfolio construction has undoubtedly been able to deliver attractive risk-adjusted returns in recent decades. However, the macro environment necessary for positive performance is history with the end of the Great Moderation.
Around half a century ago, Harry Browne presented the permanent portfolio as an alternative to the conventional 60/40 portfolio.[7] This is made up of 25% equities, 25% bonds, 25% cash and 25% gold. It is striking that this portfolio became popular after the high-inflation period in the 1970s, during which the 60/40 portfolio would have performed poorly, while the 25/25/25/25 portfolio would have achieved significantly better results.
Even though the permanent portfolio can still be an interesting alternative today, we believe that there is a more contemporary implementation within the framework of the new gold playbook. Our interpretation of a new standard portfolio for long-term investors envisages the following allocation:
Source: Incrementum AG
Of course, we do not see this allocation as a rule set in stone. Rather, it is intended as a guideline derived from the current monetary, fiscal and geopolitical realities. In our view, the new gold playbook applies as long as we are in a phase of currency instability, characterized by high debt levels and geopolitical instability. A simple quantitative measure of currency stability are inflation rates. If average inflation rates remain below 3% over a 24-month period, this would be a good indication that the situation has stabilized.
Source: BofA Global Investment Strategy, Reuters Eikon, Incrementum AG
Until we return to stable monetary waters, a significant proportion of noninflationary, default-proof hard currencies, real assets and commodities in the portfolio seems advisable.
The meta-theme of the new gold playbook could be summarized as follows: The reorganization of the international economic and power structure, the dominant influence of the emerging markets on the gold market, the reaching of the limits of debt sustainability, and possibly multiple waves of inflation are causing gold to appreciate. This phase will continue for some time, until a new equilibrium has been established.
And just as new styles of play in sport are refined and adapted over time, so too is the gold playbook. The In Gold We Trust reports will keep you up to date on refinements and adjustments year after year.
The new gold playbook suggests that a positive trend for gold is likely. However, there are of course also situations in which the gold price will suffer setbacks. The following developments are likely to have a negative impact in the short and medium term:
Loyal readers will remember our gold price forecast model that we published in the In Gold We Trust report 2020.[8] At that time, we calculated a price target of just above USD 4,800 by the end of 2030, using the gold coverage ratio as a key input factor.
In particular, the Federal Reserve’s rigorous interest rate hikes and the temporary slowdown in inflation have kept the rise in the gold price in check over the past two years. The recent surge in the gold price is probably a harbinger of the imminent turnaround in interest rates and possibly also of an increasingly stagflationary environment in the US. We feel that the recent price action confirms our price target, and we continue to adhere to the target of around USD 4,800 for 2030 that we postulated at the beginning of the decade.
Source: Reuters Eikon, Incrementum AG
If this price target sounds too ambitious to some readers, we would like to put the return derived from this target into historical perspective. Based on a current gold price of USD 2,300, this would mean a price increase of just under 12% p.a. by the end of the decade. By comparison, the gold price rose by over 14% p.a. in the 2000s and over 27% p.a. in the 1970s.
Louis-Vincent Gave argues that US government bonds were the all-star asset class for a generation. That all-star has now had its day, and portfolios find themselves in the same plight as the Chicago Bulls without Michael Jordan, the French national soccer team without Zinedine Zidane, or the England rugby side without Jonny Wilkinson. A new playbook had to be written, a new difference maker around whom the rest of the team would be built had to be found. Gold has already warmed up and is just waiting to be substituted, as he can easily fill that role.
In the context of the new gold playbook, we believe the outlook for gold is brighter than ever. However, any significant upward movement will inevitably be interrupted by setbacks or sideways markets. However, these unavoidable phases should not cloud the positive long-term outlook for gold. For those who invest in safe-haven gold, i.e. hold it as a safe haven with purchasing power, such setbacks are certainly annoying. Those who invest in performance gold, on the other hand, should try to recognize these setbacks early on and adjust their investment decisions accordingly in order to benefit from short-term fluctuations. We have developed the Incrementum Active Aurum Signal to determine the right time to enter or exit mining stocks.[9]
Regina Costello once so astutely remarked that our language is a mirror of time, a window through which we view the spirit of our era. The fact that in 2022 the Collins English Dictionary chose the term permacrisis, defined as “an extended period of instability and insecurity, esp. one resulting from a series of catastrophic events,” as the word of the year speaks volumes. However, this linguistic reflection of the omnipresence of crises also conceals an opportunity.
Like a chess player in distress who is looking for the saving move in a seemingly hopeless position, we must learn to see opportunities as well as threats in the growing uncertainties. Only then will we be able to take action and intervene in the course of events, sometimes more actively, sometimes more passively, depending on the respective investment environment. Like the queen on the chessboard, gold is ready to be used both defensively and offensively in the portfolio with caution and foresight.
In our confrontation with the current permacrisis, the best inner attitude is not rigid resistance but active adaptation to the current circumstances and the courageous pursuit of creative solutions, inspired by the timeless wisdom of the game of chess to think several moves ahead and, after careful consideration, to consistently implement the decision made. This is why it’s more vital now than ever before that:
IN GOLD WE TRUST
[1] See, among others, “Exclusive Interview with Russell Napier: Save Like a Pessimist, Invest like an Optimist,” In Gold We Trust report 2023; “Yield Curve Control, the Biggest Mistake of the ECB So Far! – Exclusive Interview with Russell Napier,” In Gold We Trust report 2021
[2] See chapter “The Akuma Afterglow: Japanification of the West?” in this In Gold We Trust report
[3] See “Gold Storage: Fact Checking Germany, Canada, and the UK,” In Gold We Trust report 2022; “Gold Storage: Fact Checking Austria, the USA, and the Cayman Islands,” In Gold We Trust report 2021; “Gold Storage: Fact Checking New Zealand, Australia, and Dubai,” In Gold We Trust report 2020; “Gold Storage: Fact Checking Liechtenstein, Switzerland, and Singapore,” In Gold We Trust report 2019
[4] See chapter “Mining stocks – Fundamental and technical situation” in this In Gold We Trust report
[5] See chapter “Mastering the New Gold Playbook” in this In Gold We Trust report
[6] See “Capex Comeback: A Raging Bull Market for Commodities Beckons,” In Gold We Trust report 2023
[7] See “Gold in the Context of Portfolio Diversification,” In Gold We Trust report 2016
[8] “Quo vadis, aurum?,” In Gold We Trust report 2020
[9] See chapter “Mastering the New Gold Playbook” in this In Gold We Trust report
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