Ronald Stöferle: The Big Long - Pullback or Peak?

Key Concepts

• Fiat Era: The current monetary system characterized by currencies not backed by a physical commodity like gold.
• Modern Portfolio Theory (MPT): A financial framework that suggests investors can construct portfolios to optimize expected return for a given level of risk.
• 60/40 Portfolio: A traditional investment portfolio allocation of 60% stocks and 40% bonds.
• Safe Haven Gold: Physical gold held as a strategic monetary reserve, offering stability and minimal counterparty risk.
• Performance Gold: Gold and silver equities, managed actively for momentum and leverage.
• Debasement Trade: An investment strategy that benefits from the devaluation of fiat currencies.
• De-dollarization: The process of reducing reliance on the US dollar in international trade and finance.
• Monetary Base: The total amount of a currency that is in circulation and in the commercial bank deposits held in the central bank's reserves.
• Shadow Gold Price: A hypothetical valuation of gold based on its backing of the entire monetary base.
• Gold Silver Ratio: The ratio of the price of gold to the price of silver, used as an indicator of relative valuation.
• GDX (VanEck Gold Miners ETF): An exchange-traded fund that tracks an index of gold mining companies.
• GDXJ (VanEck Junior Gold Miners ETF): An ETF that tracks an index of junior gold mining companies.
• Quantitative Easing (QE): A monetary policy whereby a central bank purchases predetermined amounts of government bonds or other financial assets in order to inject money into the economy.
• Quantitative Tightening (QT): The opposite of QE, where a central bank reduces its balance sheet by selling assets or letting them mature.
• Systemic Distrust: A growing lack of faith in established institutions and systems.
• Public Participation Phase: A stage in a bull market where the general public begins to invest, often driven by rising prices and media attention.
• Contrarian Phase: A stage in a market cycle where investors take positions opposite to the prevailing sentiment.
• Accumulation Phase: The initial stage of a bull market where informed investors begin to buy assets before widespread public awareness.
• Distribution Phase (Mania Phase): The final stage of a bull market characterized by excessive speculation and irrational exuberance.

Gold's Performance and the Breakdown of Traditional Portfolios

The speaker begins by acknowledging the significant rise in gold prices over the past year, from $2,700 to $4,000. He contrasts this performance with the prevailing view within the financial establishment, which often dismisses gold as a "barbarous relic" due to its perceived inefficiency according to Modern Portfolio Theory (MPT). The speaker argues that MPT's assumption of perfectly efficient markets fails to account for historical realities like inflation cycles and the fundamental question of "what is money," which is better understood in high-inflation countries.

A key argument presented is that the traditional 60/40 portfolio is breaking down. This classic allocation relies on the assumption that bonds hedge equities. However, in the current inflationary environment, bonds are no longer a stabilizer but a "dead weight." Data shows that over the last 100 years, stocks and bonds have moved together 70% of the time, making their negative correlation over recent decades an anomaly driven by the "great moderation" (a period of consistently falling inflation). This era, the speaker asserts, is over.

Future Demand for Gold and a New Portfolio Allocation

The speaker posits that future demand for gold will not primarily come from equities but from the massive fixed income market ($160 trillion). Even a small shift of capital from this market into gold could have a significant impact.

Based on this outlook, Incrementum proposes a new portfolio allocation for 2024:

• 45% Stocks
• 15% Bonds
• 15% Safe Haven Gold
• 10% Performance Gold
• 10% Commodities
• 5% Bitcoin

Gold's role is bifurcated into "safe haven gold" (physical gold in secure jurisdictions, requiring no active timing) and "performance gold" (silver and gold equities, requiring active management due to volatility and leverage). This dual approach aims to provide both stability and momentum. The speaker notes that larger institutions like Morgan Stanley are also recognizing gold's portfolio diversification benefits, with some suggesting a 60/20/20 allocation (60% equities, 20% bonds, 20% gold).

Current Gold Market Dynamics and Volatility

Despite gold reaching new all-time highs, the speaker observes a surprising amount of pessimism in the gold industry. He recounts the significant 5.7% move in gold on October 21st, a 4.5 sigma event, which, while statistically rare, has occurred 35 times since 1971. This highlights that gold is not a low-volatility asset. The October surge was driven by FOMO (fear of missing out) and momentum chasers, leading to the clearing out of short-term players and "weak hands."

Statistically, after such high-volatility days, calmer periods usually follow. The speaker advises against panic and encourages prudent allocation building, though he does not yet see the end of the current correction.

Volatility in Mining Stocks

The volatility in mining stocks is described as "brutal," with drawdowns of 60-70% being normal during bull markets, as seen in the 1970s and 2000s. Miners are characterized as "gold on steroids" and a "leveraged speculation on insurance," which will test investors' conviction. The speaker anticipates a choppy, sideways trading period for gold, potentially until Christmas, with a target of around 3850, viewing this as a healthy pullback, not the end of the bull market.

Key Drivers of the Gold Bull Market

The current gold bull market is driven by three main factors:

1. Monetary Excess: Gold performs well when governments over-rely on the printing press. While M2 growth has stagnated recently, it is now rising again, largely driven by China's quantitative easing. The speaker predicts a return to quantitative easing (QE) in the Western world, likening it to "more rounds of quantitative easing than Rocky movies."
2. Geopolitical Shifts: The US's dominance as the world's payment back office is being challenged by countries building alternative financial rails. Central banks have been significant gold buyers for three consecutive years, purchasing over 1,000 tons annually, representing a third of annual production. A record 43% of central banks plan to increase their gold holdings, indicating a "remonetization" of gold. Gold has now surpassed the euro as the second-largest monetary reserve.
3. Systemic Distrust: Trust in institutions (science, politics, media, society) is eroding. This distrust is manifesting in the gold market, with surging demand for physical gold and rising COMEX gold deliveries, signaling a preference for "real bullion, not paper claims."

Stage of the Bull Market and Institutional Allocations

The speaker places the current gold market in the "public participation phase" of a bull market, citing increased attention from major financial institutions like Jamie Dimon and Goldman Sachs predicting higher gold prices. However, institutional allocations to gold remain low. A UBS study shows family offices holding only 2% of their assets in gold and precious metals, which the speaker considers "pocket change." Despite significant inflows into stocks, cash, and bonds since 2020, gold has received a comparatively small $100 billion.

Valuation of Gold

Gold is considered expensive when measured against commodities like oil, but not when valued against things that can be printed or compared to other asset classes. The market cap of gold is currently 38% of the S&P 500's market cap, which is the long-term median since 1925. The speaker argues that major bull markets end at extremes, not median values, citing historical periods where gold's valuation relative to equities was much higher (e.g., 160% in 2011).

The "shadow gold price" concept illustrates that if the monetary base were backed by gold at current levels, the price would be $5,400, and at 100% backing, it could reach $21,000. This suggests gold remains deeply undervalued as a monetary asset. History shows a pattern of gold coverage of the US monetary base surging to par roughly every 40 years, suggesting a potential for this to happen again. The speaker points to figures like Scott Bessant (Treasury Secretary) and Steven Mirren (former advisor to Trump) who are aligned with gold playing a significant role in future global financial restructuring.

Performance Gold: Silver and Miners

The speaker emphasizes that the second half of the gold bull market will be characterized by "performance gold," with silver and gold/silver mining equities outperforming.

• Silver: Silver is up 67% year-to-date, driven by a 140% increase in photovoltaics over the last decade, leading to five consecutive years of supply deficits. Investment demand for silver is expected to surge, especially as investors notice its relative undervaluation compared to gold, which has had a significant run. The speaker believes the current triple-top pattern in silver is unlikely to hold. The gold-silver ratio is currently 82, significantly above its historical median of 60 (since 1970) and 52 (since 1900), indicating silver is extremely undervalued. Projections suggest silver prices could reach $82 at a gold-silver ratio of 65, or $148 at a ratio of 52. A hypothetical scenario of a gold-silver ratio of 10 could lead to a silver price of $890.
• Miners: Relative charts show large-cap gold miners are starting to show strength against gold, and junior miners are outperforming large caps. However, despite the strong performance of mining stocks in 2024, capital has been exiting GDX and GDXJ ETFs. The speaker concludes that miners are "underowned, misunderstood, and disbelieved," which is not typical of the end of a bull market. He believes that when capital finally returns, the impact will be significant.

Timing the Market and Future Outlook

As asset managers, the speaker's firm uses a monetary, quantitative approach based on scenarios to time the market. Their base case forecast for gold was $4,800 in 2020, and they are now on track for their inflationary scenario of $8,900 by the end of the decade. This implies a 16.8% annual increase in gold prices until 2030, which the speaker considers realistic.

For managing mining stocks, their active fund's signal switched to "offensive" in December 2023, capturing a significant portion of the bull market. However, on October 10th, the signal switched to "neutral," leading them to raise cash (25-30%). This is a profit-taking measure, not an indication of a peak, and the signal is expected to turn bullish again in a few months.

Conclusion and Advice

The speaker's advice for the current gold market is to:

• Hold onto strategic positions.
• Do your homework.
• Focus on high-conviction positions.
• Reduce high-beta and momentum stocks.
• Buy quality companies.

He views the current market as a "pause" and a "healthy correction," with potential for sideways trading or continued correction over the next few weeks. Drawing an analogy from "The Big Short," he emphasizes that success involves not only spotting opportunities but also knowing when to step aside. He advises the gold, silver, and mining communities to enjoy this generational opportunity but to avoid greed, not to hold forever, and to recognize the final stage before the "music stops." His firm will be available to assist with timing when that moment arrives.