Podcast Transcript
Ed Coyne: Hello and welcome to Sprott Radio. I'm your host, Ed Coyne, Senior Managing Partner at Sprott. With me today is one of our returning guests, Ronnie Stöferle, Managing Partner of Incrementum AG who is responsible for research and portfolio management. Ronnie, thank you for joining us today on Sprott Radio. 

Ronnie Stöferle: Hi, Ed. Thanks for having me again.
 
Ed: Ronnie, we're going to get right into this. This year's In Gold We Trust report is titled Showdown. Walk us through what led you and your team to this title. 

Ronnie: Coming up with a good title or light motive of the report is always a pretty intense discussion. We said, actually, there's so much going on in the world when it comes to geopolitics, when it comes to central banks, to interest rates, when it comes to financial markets, when it comes to the price of gold. How can we come up with a term or a title that actually combines all those various topics? 
If you have a look at the dictionary at what showdown means, it says it's a conclusive settlement of an issue or a difference in which all resources, power, or the like are used.It’s a decisive confrontation. I think that perfectly sums up three showdowns that we're seeing. We're seeing a monetary policy showdown; we are seeing a geopolitical showdown that is associated with de-dollarization, a topic that we are writing about for quite a while and that is now becoming mainstream; and then we're seeing the showdown in the gold price. 

We're pretty happy to have chosen this title. I think it's a very good fit. Throughout the whole report, we try to explain why we are moving into an environment where there's probably going to be some sort of a final showdown happening. 

Ed: You're in your second decade of doing this report. I think if I read it correctly, your first report came out in 2007, and so you've got a lot of information and a lot of research. Let's go into the radical monetary tightening that we've been seeing out there. Seems extremely stubborn when you talk about inflation even with all the stuff that the Fed has done. Is there a way for that to finally cool? What's your view on that? What do we need to see happen? 

Ronnie: Short answer, recession. Actually, the recessionary clouds that are getting darker and darker, that's a core topic of this year's report where we, first of all, make the case for a recession that is really becoming more and more of our base-case scenario. Then we crunch numbers and analyze what asset classes work best in the various stages of a recession. 

From my point of view, one year ago if you would have told me that interest rates will go above 5% in the United States and that we are not in a recession and that equity markets are close to all-time highs, and that the gold price is trading close to all-time highs, I would have said, "No, not going to happen." Here we are. 

I think that the time lags that are involved are always underestimated by central bankers, so we call this the tequila theory of money. Thank God I'm not of the age where I'm drinking tequila shots anymore, but I was a student and I had my days or evenings. If you have a couple of tequila shots, you're starting to go wild, you have a good time, you've got fun, and then the next day you wake up and don't remember anything. 

The analogy that I want to make is that the time lags are completely forgotten with drinking tequila shots, but also when it comes to central bank policy. We are now only slowly seeing the consequences of this enormous rise in interest rates. First of all, it is historic. It's the most aggressive rate hike cycle basically of the last 40 years, and it was totally unexpected. I have to tell you, Ed, I didn't see it coming. I don't know any strategist, any analyst, any economist who actually forecasted this brutal move on the rate side. 

Therefore, I think we're now starting to see more and more signs that this rapid rise in interest rates has negative consequences., By looking mostly at economic indicators that basically tell us what has happened in the past, I think the Federal Reserve also completely underestimates those time lags involved. They over-ease, and then they have to over-tighten and then it starts again, so we are seeing that. 

Therefore, my scenario is that I think we're very, very close to the point where the market will realize the emperor has no clothes. We will see that they hit the pause button, they will have to reverse their policy pretty quickly, and this will probably be the point when gold really takes off. 

Ed: You talk about the resiliency of the economy, and I guess now we're probably about a month or two into it. The banking crisis--or was it a crisis?-- happened, and it seems like that's been yesterday's news already. Do you think that was simply just a blip or a byproduct of this, or do you see this as something longer-term? Are the real issues starting to present themselves in the market? 

Ronnie: I think it's a little bit too simplistic to just blame the collapse of those regional banks, Silicon Valley and then Signature andFirst Republic just to poor management and their exposure to the stumbling technology sector. We know that technology is a basically high-duration asset class, so they are suffering from those rate hikes pretty quickly and are extremely rate-sensitive. 

Actually, three of the four largest U.S. bank failures in history took place over the last couple of weeks. When it comes to seeing the impact on markets, I think the Federal Reserve—also with the whole administration--reacted pretty quickly, and we could tell that actually now the Federal Reserve is facing, not a dilemma, but a trilemma. It's, first of all, killing inflation, then on the second hand, avoiding a major recession, and then the third thing is the stability of financial markets and the stability of our banking system. 

Crises always start at the periphery, pockets of the market where everybody says, "Wow, this is just poor management. This is a scam. This is a Ponzi scheme," whatever. "This is just because of the nature of this country," whatever, but those are all signs that actually, those business models that were basically addicted to low interest rates, they don't work at 5% anymore. We're seeing it in the banking space, we're seeing it in technology, we're seeing it in the crypto space. We're seeing it in real estate. Therefore, I think the longer the Federal Reserve tries to stay on the hawkish side, the worse it will be. 
Ed: We talked a lot about the financial risk out there. Let's shift gears for a second and talk about geopolitical risk. A lot of stuff has been happening both here and abroad. What are some of the risks you're seeing out there, and also does it present some opportunities going forward? 

Ronnie: When it comes to this growing political self-confidence of the BRICS [Brazil, Russia, India, China and South Africa] nations, I think it's just a logical consequence of their increasing economic importance. Measured in purchasing power parity, these countries have had a higher aggregate GDP than the G7 countries since 2021. It's not only the BRICS countries, there's I think 17 countries that now want to join the BRICS. We are seeing the SCO, the Shanghai Corporation Organization, getting more and more important. 

I think that those are the countries where the majority of the growth is, where demographics are much more favorable than in the Western world. Obviously, China is a big exception because they've got the same demographic problems like we do. Those [BRICS countries] are the countries where 87% of all currency reserves are, the countries where actually productivity and capital formation is happening, and where gold obviously also has a higher importance than in the Western world. 

The fact that last year we saw a new all-time high in central bank gold buying, I think that's no coincidence because last year we wrote about that, and we actually forecasted the fact that the Western world with the stroke of a pen basically said the Russian currency reserves, they are worthless. Of course, this changes the view that other nations have on holding their reserves in U.S. dollars and U.S. Treasurys. 

I think gold will play a major role in that game because you want to have a reserve currency that is highly liquid, that doesn't have any counterparty risk, that is accepted all over the globe, and that has quite a sophisticated infrastructure for trading. I think that gold qualifies pretty well for those requirements. 

We always think that the price of gold is being made in the Western world. If you have a look at the numbers, if you go to Dubai, if you go to Shanghai, if you go to Mumbai, you actually can tell that, for those nations, gold is much, much more important than in the Western world. 

If you have a look at consumer demand, if you have a look at central bank demand, but also if you have a look at gold production where China and Russia are the two leading producers of gold, I think you can tell that the center of the gold world is actually going more and more into the emerging markets. 

Ed: Can we talk a little bit about commodities in general? You do a really nice job in the most recent report, talking about other metals besides just gold and/or silver. Talk a bit about commodities. What are we seeing in that part of the market, and what's your outlook there? 

Ronnie: For commodities, I think we're in a secular bull market. The basis of my positive outlook is, first of all, the CapEx [capital expenditure] cycle. If you understand this lack of investment that has happened over the last couple of years…what's the saying, the cue for high prices is high prices. I would say that this lack of investment in new projects, in exploration, and also in manpower, I think that's one of the main cases for higher commodity prices. 

Then we're seeing, obviously, this increasing focus on fiscal support measures is also having an impact on commodity prices. I think that's clearly the big difference compared to 2008/2009, where the new big thing was quantitative easing. It worked with a timeline, but in 2020, we saw over the course of the COVID crisis, it wasn't only monetary stimulus, it was also massive fiscal stimulus. I think that fiscal stimulus will continue to be a major driver. 

The next thing is that institutional investors are highly underweight or not invested at all in the commodities. If my case for structurally higher inflation plays out, then I think those large institutional players will have to start allocating capital in the commodity space again. We're seeing that, to some degrees, when it comes to critical metals, I think it was a wake-up call last year that we in the Western world realized reliable access to commodities is necessary for our industry. There was a paradigm shift in thinking about the importance of commodities. 

Then the next thing--and this is probably not a thing that we want to hear--but during times of war and during times of de-globalization, during times of friendshoring, and so on, this also usually positively affects the commodity space because we have to re-arm, we have to reshore, we have to restock and invest, and we also have to rewire the grid when it comes to the energy transition, for example. 

Ed: Yes. That's something I think that's not going away, particularly if we want to get to a carbon-neutral future by 2050. All these metals are needed. As you say in the In Gold We Trust report, we're going to need more of all of them, right? All of a sudden, mining has become top-of-mind with a lot of investors in the market and in the economy. 

Ronnie: To achieve the net-zero emissions goal, the world would need 54% additional copper by 2030. There was a study by the International Renewable Energy Agency--and of course, they're somewhat biased--but they calculated if we want to achieve the 1.5 [degrees Celsius] target by 2050, investments of $150 trillion are necessary. 

I know that the topic of commodities is a controversial one, but I think, clearly, if we want to achieve those goals, we would need much, much more mining and not less mining. I think that's a very, very important message. Therefore, we always write about the ESG developments that we are seeing in the mining space. I think all those people just criticizing commodities and mining, most of them have never been to a mine. 

Ed: I think that's the reality. Even if you cut those numbers and estimates in half, they're still staggering numbers. I think we're somewhere in between maximum capacity and none. I think that will be interesting to see how that plays out. I want to do what I like to call now a speed round and give you a couple of words and then get your reaction to those words. If you're game for that, I'd love to do that with you. For example, when I say the word inflation, what comes to mind? 

Ronnie: Central bankers. 
Ed: Perfect. How about debt? 

Ronnie: Too much. 

Ed: How about de-dollarization? 

Ronnie: Happening. 

Ed: You just mentioned this one, ESG. 

Ronnie: Important. I think it's really, really important to communicate what mining companies do for the infrastructure, for hospitals, building schools, access to clean water, providing very high-paying jobs. I think that's really, really important, especially these days. That's something that I really care about. 

Ed: That's something mining companies have been doing forever, right? It's not just a popular thing. 
This is something they've done for decades. How about silver? 

Ronnie: A little bit too soon now, but it's going to have its day. We've got a brilliant chapter about silver again, and I think, if my recession call plays out, then it's probably still a bit too early because, in the earlier parts of a recession, silver tends to underperform. Once this reflation happens, there will be a fantastic opportunity in the silver space especially as the demand side is becoming that attractive with the solar industry being a significant driver on the demand side. 

Ed: At the risk of really changing the term speed round, I have to ask you also, mining stocks. What going on with mining stocks? 

Ronnie: Volatility. Just the last 12 months were just a perfect example of this enormous volatility that we're seeing in the mining space. Volatility can be your enemy, but it can also be your friend. I think if you treated that cycle well, you could make staggering performance in the mining space. I think what's important now is that, if you have a look at risk appetite, the large royalty and streaming companies like Wheaton, like Franco [Franco-Nevada Corporation], they're trading pretty close to their all-time highs. While the larger names, the top three producers, they're still trading way below their all-time highs. Then when it comes to the developers, when it comes to the juniors, they are way underwater. 
This clearly tells me actually there's no risk appetite in the mining space at the moment. This will probably change, but what's most important for a longer-term investor is the fact that, actually, the mining space, the valuation, and let's say the balance sheets that I'm seeing in the mining space, they're pretty attractive. I'm seeing pristine balance sheets. I'm seeing free cash flow generation. I see that companies got the costs under control. 

We've seen massive deleveraging in the mining space. We are seeing pretty stable margins. Actually, this in combination with extremely negative sentiment and with the price of gold that seems to be breaking out at some point due to the showdown, I think that's a pretty interesting setup. 

Ed: That gets me to my last question, which is the one that I think everybody wants to know. At Sprott, we're always reluctant to give forecast because, let's be honest, they're very hard to do. In In Gold We Trust, you've done a phenomenal job of really breaking down the potential outlook for gold in the short-term, mid-term, and more importantly, the longer term. Most investors invest in gold for decades, not days. I'd love to hear your view and close out this podcast with your view on gold in the short term as well as over the long term. What are you guys anticipating? Based off all the research you've done, what are you seeing from a price standpoint? 

Ronnie: Today we're trading around $100 below all-time highs. I can tell you, Ed, people couldn't care less about gold at the moment. Prices being only a little bit below all-time highs and not too much interest. From a contrarian point of view, that's an exciting setup. I don't see that central banks really will be able to continue this hawkish stance that they have. I don't buy into the narrative that Jay Powell is the new Paul Volcker. I think he would like to be. I would also like to be, I don't know, Lionel Messi or Tom Brady or whatever, but it's just not- 

Ed: He's not tall enough. Let's start with that. 

Ronnie: The thing is, just when it comes to the level of debt, not only for private individuals, but also when it comes to businesses, the financial space, and then most importantly government debt, Jay Powell is just in a completely different position compared to Paul Volcker back in the days. I would also argue that Paul Volcker had the full support of the White House. Paul Volcker caused two nasty recessions, back-to-back recessions, basically. I'm not sure if Jay Powell will really have the full support of the White House once unemployment goes up significantly and once the U.S. enters a recession. 
Now, to answer your question, we crunched the numbers regarding our recession model, and based on that, we will see over the next 12 months gold trading at around $2,300. Based on our long-term price forecast, we would have to hit $4,800 by the end of this decade. Now, this might sound like a really wild forecast, but that's on average I think 12.4% per year until 2030. 

Now, actually, from the year 2000 until now, the average yearly performance of gold in U.S. dollar terms was 9.3% and in Euro terms 8.9%. It's not that outlandish. I think, if you compare it to the previous big bull market in the 1970s, we saw this massive mid-cycle correction from 1974 till 1976, which was disinflationary, and which also went hand-in-hand with a major recession. Back then, the price of gold in 1976 ended up at $100. I think if you would have called $850 within four years, people would have said, "Not going to happen. That's like a mad max scenario." It happened. 

Obviously, I don't want to rule out my forecast. I think it is realistic, actually, especially in an environment where inflation is becoming much more of the topic. In the financial markets, I think there are very, very few people that actually know how to navigate in an inflationary environment because we're all so used to this great moderation: four decades of falling inflation, four decades of low inflation volatility. Actually, for portfolio construction, inflation has never been the main essential issue. It's never been really a central point when you allocated capital. 

Now, if you talk to people from Turkey, for example, if you talk to people from high-inflation countries, for them actually, having a high allocation in gold and in real assets in commodities is just natural because, for them, probably the first view that they want to have when it comes to portfolio construction is the topic of inflation. I think that we will come back to this environment where, for asset allocators, inflation will become more and more important. In this environment, I just don't see gold not being a major diversifier for your portfolio. 

Ed: We've certainly seen it in the last couple of decades relative to the S&P [500], relative to bonds. Even in the face of a strong dollar, gold has done very well for the last few decades, so I think you're right. It'll be interesting to see. I guess for those investors or those listeners out there who want to learn more about what you do at Incrementum, how can investors access In Gold We Trust, read all these great research reports you've done? What's the best way to find you and get the information you provide to all of us? 

Ronnie: It's fairly easy. We've got a web page, ingoldwetrust.report where you can find the In Gold We Trust report in the normal version, which is 420 pages. I know that not everybody is keen on reading 420 pages about the topic of gold, so there's also a compact version. There are videos, we've got infographics, we've got In Gold We Trust nuggets where we just publish small parts of the report. I'm pretty active on Twitter. I'm tweeting out lots of charts and thoughts on, not only gold, but also markets in general, and then odd things like soccer over here in Austria. Yes, just have a look at ingoldwetrust.report. 

Our company is called Incrementum. We're a boutique asset manager based in Liechtenstein. We manage funds primarily, I would say, in the real asset space, commodity space, gold. That's where we feel comfortable. I have to thank Sprott and all our other premium partners because we try to make a difference. We want to educate people about sound money, about topics like inflation, financial repression, stuff like that. 

We've got a team of 20 people working on this report, so it's also a massive investment. It wouldn't be possible without the support of our premium partners to publish such a report totally for free, so thank you very much to Sprott, to the whole team. It's overwhelming the amount of positive feedback that we get, so thank you very much for the support of Sprott. 

Ed: I always enjoy reading it. It's one of the few reports that you start your day reading with a coffee, and by the time you're done, you're having a cocktail because it is over 400 pages. I'll tell you, it's a lot of great stuff, and I live the next year off of this report with all the talking points that you provide. I encourage everybody to go on the website, take a look at In Gold We Trust, and read it at your leisure. It's a really great read. 

Ronnie, it's always great to have you on Sprott Radio. We really appreciate you taking the time. I think very highly of you and all the work you do, so once again, thank you for being on Sprott Radio. 

Ronnie: Thank you very much, Ed. 

Ed: Once again, I'm your host, Ed Coyne, and you'relistening to Sprott Radio,