Incrementum Liechtenstein is constantly challenging the consensus view. To cultivate this philosophy, the firm has established an advisory board that discusses market developments and opportunities on a quarterly basis.
The 9th Advisory Board meeting took place on April 10. Regular members include Jim Rickards, Heinz Blasnik, Frank Shostak, Mark Valek and Ronald Stoeferle. During the latest session, they discussed the following three topics:
- Turning tides: have we seen the end of the dollar bull market?
- Jim Rickards’ new book: “The New Case for Gold”
- Equity markets: Are we going to see a classical sell in May?
Moreover, they discussed an impeding US recession, our inflation outlook and the very tight correlation between rising gold prices and Jim Rickards’ book releases.
- In the beginning of February our proprietary Incrementum Inflation Signal gave a full inflation signal. The first one, since we launched our fund.
- When it comes to gold, institutional clients and bankers and that like tell us that they’re waiting for a correction. So there’s quite a lot of institutional money on the sidelines. They are buying every dip, as they have not participated in the gold rally in Q1.
- We’ve launched our new fund, that is based on the concept of the Permanent Portfolio.
- We’ve published a chart book called “Who’s Afraid of Recession?”, in which we pointed out a lot of recessionary developments in the world and discuss some recession indicators that are at critical levels right now.
- What I feel while talking to a lot of asset managers in the gold space, which really suffered during the last 4-5 years, is that many of them are still extremely cautious and most of them don’t really believe that we’ve seen the end of the correction and have entered a new bull market. But the price behavior and the development of mining stocks make me pretty convinced these days that this is the beginning of the next stage of the bull market of gold.
- I do believe that the counterparty risk issue is very, very important for gold. For instance, if you look at European bank shares and also US bank shares, they all have fallen very steeply against the broad market – and during this time gold shares started to accelerate upwards.
- To keep the system going, central banks must print – people are probably realizing that by now. So there’s plenty of reasons to buy gold as insurance.
- About the gold-silver ratio: if you look at the beginning of the gold bull markets generally, you will always see a pattern like the current one, because gold usually starts to outperform other assets when economic confidence declines.
- For me a higher or lower dollar price is more a dollar story than a gold story. So I’m thinking about the currency wars and what’s happening to the dollar and then one has to think about the dollar price of gold, the euro price of gold, and the yen price of gold separately.
- For the last three years we’ve seen a weaker yen and a weaker euro with a fairly strong dollar, and that was designed to help the European and Japanese economies.
- But the problem is: the theory was that the US economy was strong enough to bear the cost of a strong dollar and we could give Europe and Japan the benefits of a weak currency. However, the US economy was not strong enough to bear a strong dollar, the US economy slowed down significantly and might have entered a recession. “Shanghai Accord” (something that was agreed by the central banks during the G20 meeting in Shanghai on February 26): “Let’s have tightening in euro and tightening in Japan and ease by the Fed, and China would do nothing.”
- March 10: Draghi did the 10&10 – the 10 basis point more negative interest rates, ten billion more QE –, which, relative to expectations, was a form of tightening.
- Two days later Kuroda also tightened relative to expectations by not increasing QQE in Japan. And then Yellen and the Fed on March 16 didn’t raise rates (which was priced in) and the press conference was extremely dovish. On March 29, Yellen gave a speech to the Economic Club of New York, which was extraordinarily dovish.
- This is a major turning point in the currency wars – this is the reversal of the strong dollar.
- I regard the gold rally to simply have 3 vectors: (1) One is simply reciprocal of the dollar, so a weaker dollar means a higher dollar price of gold. (2) The second vector is the fear trade: it does seem that there’s a loss of confidence in central bankers. It’s not that they’re out of tools, it’s just that the markets no longer are impressed by them. It’s very clear that monetary policy is not working, will not work, that that won’t change and this confidence is being lost. Money printing has very little to do with inflation, inflation is primarily a socio-psychological phenomena, having to do with confidence and velocity. (3) And the third vector is simply scarcity of supply relative to demand.
- The US is hanging by a thread, recession is a clear and present danger and we need a weaker dollar to avoid that. That’s why the president summonsed Janet Yellen to the White House today. The politics and the body language are unmistakable – they’re basically warning the Fed not to raise rates. The solution will be to cheapen the dollar. And that’s extremely bullish for gold.
- Chinese money supply shot up strongly. This is probably on account of stimulating policies like the lowering of the required reserves from the banks, the lowering of interest rates. All our indicators were quite good in China relatively speaking, as opposed to what the media projects or presented. Of course it’s still a subdued economy, but with a slight improvement that must be on account of strong monetary pumping.
- We observe some softening in the American economic activity. The CPI including food and energy stood at 2.2% in March against 2.3% in February and 1.8% in March last year, so it’s basically around the magical number of 2% that they’re using as a target.
- The Europeans were pumping much faster money than the Americans. That should be positive for the American dollar and negative from a money growth differential perspective.
- The main problem that I see is that the pool of funding or net wealth in America is not very strong. And if the pool of real wealth is stagnating or declining, then obviously monetary funding is not going to help, it’s just going to make things much worse.
- If we look at the price of oil, the model continues to show a downward tendency for some quarters. It won’t surprise me, if we reach next year around $20 a barrel.
- In gold, there is an underlying general uptrend. However, there will be quite a lot strong swings around this general uptrend.
- In particular in Europe, the net wealth is probably very precarious and not in very good shape. So it’s a Goldilocks scenario on very thin ice. This thin ice, namely the pool of wealth, may collapse any moment and then the whole thing would just fall apart.
Brent Johnson (Special Guest):
- I think most people that come into the gold world, come in it for the inflationary purpose. They see the system can’t survive, the Fed will have to create ever more dollars to support the system – eventually that will be inflationary, the dollar will lose value and therefore you need to be in real assets. I do however happen to think that before that happens we will see another big deflationary move.
- I’m of the opinion that we may have a few months of a soft dollar, but I still believe that in the months and years ahead, there will be a strong dollar that creates the problem which then leads to the full on printing by all the central banks.
- I still think that we may get one more test, one more big test in the gold world to the downside, before we get the final runaway gap to the upside.
- The monetary system as it’s currently designed can’t continue, it can’t go on forever. It’s designed to get bigger, it’s designed to inflate and it doesn’t have a neutral gear in it – it certainly doesn’t have a reverse gear in it. So I do believe in the long-term inflationary effect. But I also think that so much debt has been created that they will have to print a lot more than they have already printed to counteract those deflationary forces.
- The outside reversal days put in by the miners on heavy volume in late January is one of the most encouraging signs I have ever seen.
- Commitment of Traders: The commercials are now as net-short as anytime in the last three years. Caution is warranted…
- It’s not without risk, but we believe that Reservoir Minerals is among the companies that could deliver the attractive high returns of a miner at a reasonable risk.
- I’m of the opinion that negative rates at the level at which they currently are, are actually a deflationary force for the economy and not an inflationary force. Policymakers understand that negative rates would be inflationary, as nobody wants to pay tax on their bank account, so they think they will take it out and do something productive with it. I doubt this. I think rather it gets taken out of the economy as a tax paid to the bank, which would be deflationary.