THE MATTERHORN INTERVIEW – Jul/Aug 2016: Ronald Stoeferle
Gold is back and the party in mining stocks is only getting started
On behalf of Matterhorn Asset Management, Lars Schall spoke with Ronald
Stoeferle who is Austrian as well as an advocate of the Austrian School of
Economics.
Ronald and his partner Mark Valek are co-authors of the extensive and
detailed investor report named ‘In Gold We Trust’; see the download links at
the bottom of this page.
[Video/Podcast] 28 mins
Gold is back and the party in mining stocks is only getting started
Transcript
Lars Schall: Good day, ladies and gentlemen. This is Lars
Schall on behalf of Matterhorn Asset Management in Zurich, Switzerland. The
person I will interview today is Ronald Stoeferle in Vienna.
First of all, congratulations Ronni for this is the 10th ‘In Gold We Trust’
report that you have just published.
Ronald Stoeferle: Thanks a lot, Lars. I’m really glad
that it’s already the 10th anniversary of our report, and I think this year
we found quite some new and interesting things about gold. It’s been quite a
lengthy publication again, more than 150 pages, and I’m honestly really happy
that it’s finally out because it’s been a lot of work.
LS: Before we talk about the latest edition of the ‘In Gold We Trust’
report, let us talk about the history of your reports. How did it all begin?
RS: Well, I worked at Erste Group in Vienna as a research analyst and I
was trading gold stocks for quite a while on my private account, and then I
went to my boss and said, “You know, I’m pretty interested in gold and
everything around, would it be possible to write a short special report?”,
and my boss said, “Yeah, go ahead”, so that’s when I started researching gold
and, as you know, it’s definitely… it’s not about gold itself, it’s about
everything: it’s about our monetary system, it’s about our society, it’s
about politics. It’s about everything and that makes it fascinating. So, I’ve
written more than 1,000 pages about gold in the last few years and I still
get so many new ideas, new perspectives, new charts to create, so I’m already
having ideas for ‘In Gold We Trust 2017’.
LS: Okay, but let’s talk about the latest edition, and the main message
is; gold is back.
RS: It is back. I think we have seen quite a brutal correction. As I often
tend to say, the market is a maximizer of pain and we have seen maximum pain
last year. It’s been a classical cycle. It ended with, I would say,
desperation, depression, panic. We have seen that analysts all became
extremely bearish and, as you know, being a contrarian is tough and lonely,
but in general it’s the right way to go.
I think that we have seen the bottom in gold last December, when everybody
was kind of getting nervous regarding four or five rate hikes in the US.
Everybody thought the US economy is doing so well and therefore Janet Yellen
will hike interest rates several times in 2016. We all saw that markets pretty
quickly showed the Federal Reserve that they don’t appreciate rate hikes
because our whole system is dependent on cheap liquidity nowadays, and so
markets sold off in January and February quite dramatically and gold started
rising and gold mining stocks started rising in January.
There is also a pretty interesting chapter in the report. We are in a bull
market again. Gold is trading like in a bull market and we have seen this
accumulation phase in the last few months. You can tell that people like very
successful macro investors – Stanley Druckenmiller, Carl Icahn, Paul Singer,
George Soros –, they all have recently bought gold related positions, miners,
ETFs, etc. And now I think we will enter the next stage pretty soon which is
the public participation phase. When market participants wake up and say, you
know, “The fed is basically out of ammunition. They cannot raise rates.
Perhaps it makes sense to buy some of this strange shiny metal that doesn’t
pay any interest” (laughing).
LS: Yeah, but is this nowadays a disadvantage for gold that it does not
pay interest?
RS: No. Gold doesn’t have to pay any interest. That was always the most
ridiculous argument that gold doesn’t pay any interest. tt doesn’t have to
pay interest because it doesn’t have any counterparty risk but a couple of
years ago, we had at least interest rates and nowadays, gold doesn’t pay any
interest. Now it can be said that gold doesn’t cost any interest, and I think
we’re seeing negative interest rates now in five different currency areas.
This will continue so the opportunity costs of gold are falling, and that’s a
great environment for gold. I think that institutional players will be
probably the marginal buyers that really make an impact on prices. We have,
for example, seen that Munich Re, the second biggest reinsurance group, they
are hoarding physical gold and they are also storing cash, actual cash, in
their vault. So, I think we will see much, much more big institutional
players starting to buy physical gold.
LS: Now, taking a look into your report, in chapter two, there is a
subchapter D which is entitled ‘Anecdotal evidence of three world views’. Can
you talk about this please?
RS: Of course. We are mostly doing asset management and wealth management,
so we’re meeting quite a lot of clients, we’re meeting institutional market
participants, other asset managers, private bankers, etc. So, we’ve kind of
found out that there are basically three different world views with respect
to the assessment of the overall economic situation.
First of all, there are the believers. They believe in the system. That’s
financial analysts, market pundits and so on. They all believe that the
Keynesian economic policy that was implemented after 2008 was correct and
that it was necessary. They believe that everything central bankers and
politicians did helped to solve the crisis and now we are on the way back. Of
course, there is this secular stagnation or the new normal and so on, but
that’s just how it is and they don’t see any systemic crisis. So, those are
the believers in this system. Their gold allocation is basically zero.
Then there are the skeptics. This camp comprises people who already have
some doubts about the sustainability of the very extreme economic policy
measures that have been taken. So, they know that what the central bankers
did, that those are big experiments that nobody really knows how they’re
going to develop. They are concerned about the future of the financial
system. And those are, from my point of view, the most interesting market
participants. I think they are the marginal buyers and you can tell, having a
look, we’ve got one chart in the report showing the total amount of bullion
held by ETFs, by exchanged traded funds, and you can see that it’s a very
pro-cyclical behaviour. So, every time gold rises, ETF holdings also rise.
Every time gold falls, people are selling those gold ETFs. So, what we have
seen since 2013 was a big exodus out of ETFs, and now since the first quarter
of 2016, they are already starting to pile up still on a pretty low level,
but I think those skeptics, they will play an important role as they are the
marginal buyers for gold. Of course those are… yeah, it’s a pretty large
group because I think there are people out there who question all those
interventions by central bankers and by politicians, and they know that we
basically are just kicking the can further down the road. So, that’s an
important group and probably this is the largest group.
And then thirdly there are the critics of the system. They are convinced
that the monetary architecture is systemically flawed and my partner, Mark
Valek, once said, “Once you become an Austrian, you remain an Austrian”. So,
most of those people have got their world view based on the Austrian School
of Economics, so they know that we’re in a systemic crisis and that our
financial and monetary system is the root cause for all those problems that
we’re having and I think the interesting thing about that is that it’s
basically a one-way road. Once you get that, once you believe or you know
that we always need more debt, more inflation to keep everything alive then
you won’t go back and become a believer into the system again. That’s
basically a one-way road and the growth of this group is kind of
pre-determined. So, I think it’s really interesting to differentiate between
the motivations and the gold allocations also of those three groups. And this
is something that I think is pretty unique and that’s why we are pretty proud
that we wrote this chapter in the report.
LS: You’ve talked about different camps. When it comes to gold, there is
the camp of the so-called “conspiracy theorists”, and in your new report,
there is a chapter entitled ‘financial repression’ and it has a subchapter E,
‘The fix in gold price manipulation exposed’. Now, what did it expose and is
it still a theory?
RS: No, it’s not a theory. I mean I’ve been writing about those
manipulations or interventions for a couple of years now and I’m quoting
Chris Powell, the Secretary of GATA, and he brilliantly said, “There are no
markets anymore, just intervention”, and I think that’s a great quote. So,
basically every price is manipulated. It’s bond markets, I mean via
quantitative easing, central banks are massively disturbing and manipulating
bond prices. Currencies are managed, so why shouldn’t gold be managed? Ed
Yardeni, who is definitely not a tin foil hat or a gold bug, he said, “These
markets are all rigged and I don’t say that critically, I just say that
factually”.
We have seen so much evidence in the last year. We had the Deutsche Bank
settlements, for example, then before there was already the study by Rosa
Abrantes-Metz, and her husband. It’s just so obvious that the price of gold
is also managed but we also know that… I think this underlying market force is
so strong that it cannot be manipulated forever.
LS: Is it like when you have a ball and you go into the water and you
suppress the ball under the surface, the deeper you go and once you lost
control of the ball, the higher it will jump out of the water?
RS: Exactly. That’s a great analogy, yeah.
LS: We always talk more or less about three things every time we talk
about gold, and these are three ratios. The first is what information do you
get these days from the silver/gold ratio?
RS: Well, as you know in our investment process, the gold/silver ratio is
really important. So, for us, it’s, I would say, an indicator for inflation
versus deflation. One main takeaway of the report is that inflation dynamics
are currently changing and you can tell that from the gold/silver ratio that
peaked above 80 and is now heading downwards, so silver is outperforming
gold, and that’s a very good sign.
We already researched that in our last report saying if you want to see a
really strong bull market in gold, silver has to outperform gold. Another
important topic is if you want to see rising inflation rates, normally silver
also outperforms gold. So, that means a falling gold/silver ratio, and we’re
having that now.
We also did some technical analysis on the ratio itself and it really
looks good, so perhaps going forward if our assumption is right that gold is
in a bull market, then you want to be long silver especially. Of course,
silver is much more volatile, not everybody can live with this volatility,
but I think it’s a great idea now being long silver.
LS: Another ratio that we like to talk about is the gold-to-oil ratio.
What do you make of the gold-to-oil ratio these days? Which of the two is
going to break, gold cheaper or crude higher? And moreover, if the
gold-to-oil ratio moves back to anything showing stress levels in the oil
market, what sort of price do you see?
RS: Well, first of all, the gold/oil ratio is extremely high these days so
the average is around 15 and now we’re roughly at 30; so one ounce of gold
buys 30 barrels of oil. I think with the normalization… I mean my long term
target for gold is $2,300, as you know, so in combination with the
normalization of the gold/oil ratio to around 20, the price of oil would be
at $115 per barrel. I think that’s a price level that most participants don’t
even consider as an extreme tail risk anymore. You know, with all the
political situation going on in the Middle East, I wouldn’t rule out oil
trading above $100 again. In fact, I’m one of the most bullish analysts when
it comes to oil, first of all from a sentiment perspective. Nobody really
cares about oil at the moment. We’re always hearing the same arguments that
there’s so much supply coming out of fracking and so on but I think this is a
flawed argument. And from my point of view, in some sort of a stagflationary
environment, we might see definitely higher oil prices and I think
stagflation is one of our strongest calls going forward and I think we’re
already kind of in the middle of a stagflationary development at the moment.
LS: As for gold equities, the report says, “As a result of this, we expect
that in coming years, mining stocks will once again become the kind of
leverage on gold that investors crave”. Now, what kind of result?
RS: Well, you know that we have seen a brutal bear market in mining
stocks. Gold bucks index was trading above 600 and then it collapsed within a
few years to 200, and I think this short intraday dip below the 100’s at the
gold bucks index, the HUI, this was probably one of the greatest bear traps
in history. Since then, gold mining stocks rose I think 150%, but nobody
really believes in this rally and I’ve got a great chart showing bull markets
in mining stocks and you can see that those are actually quite a ride. At the
moment, we’re only at the beginning of this party probably. It’s like if you
join a party at eight or nine, that’s not the time when the party really
kicks in. Around two or three, that’s probably the time when the party is
really going on, and then you should be smart and leave the party a bit too
early probably, and it’s the same in investing.
So, this party in mining stocks is only getting started and I think the
reasoning for that is that there’s been some creative destruction going on in
this sector. We have seen that, you know, the companies, they are taking care
of cost discipline now. They became more transparent. They wrote off big
projects. They focus on reserve grades, so they’re really focused again on
profitability, and we have seen their margin actually, we’re pretty stable.
In fact, I think that the leverage on a rising gold price is much higher
nowadays than a couple of years ago because those companies that really
survived this massive bear markets, they’re now resting on a really solid
foundation. Therefore, I think, yeah, we’ve got great investment
opportunities especially in the developer segment, but also in single mining
stocks, and that’s what we’re focusing on nowadays in our investment process.
LS: With regard to BREXIT, you say in your report that more economic and
monetary stimulus programs to counter the disintegration of the EU should be
expected. Now, this is also a bullish indicator for gold.
RS: Definitely, but one should not forget that we wrote that in the last
report, those geopolitical events; they usually don’t have a huge impact on
the price of gold. That’s basically the icing on the cake normally. Most of
the time, we are seeing… the most important driver for gold is inflation
dynamics and real interest rates. Those geopolitical events are, yeah, often
what journalists use as their reasoning, “So there is a crisis, gold is
rising, okay. The reason for rising gold prices is this crisis”. I think
that’s a bit too naïve from my point of view.
LS: But is this only a geopolitical event? I mean this is perhaps very
interesting seen from a financial point of view because of the City of
London.
RS: It is, but I think it’s not going to be that dramatic. They will
probably negotiate for the next two years and they will come out with some
sort of compromise. I don’t think it’s that bad and you can already see, you
know, the British pound gained quite significantly the last few days. I don’t
think it’s going to be that bad. I think what we can expect is there will be
further downgrades of economic growth going forward. We will see, sooner or
later, a recession. Everybody will blame the BREXIT as the reason for the
recession. I think that central banks will step in. I mean right on the day
of the BREXIT, all central banks said they will provide enough liquidity to
the system and that’s basically the trigger for gold going forward. They will
stay lower for longer, they will implement more monetary, let’s say,
steroids, and we will have negative interest rates perhaps also in the US sooner
or later. There will be Keynesian fiscal interventions and that’s going to
have an impact on gold but not the BREXIT itself. I think that’s a bit
overstated.
LS: Yeah. Now, there is the third ratio that we like to talk about and
that is the stock to flow ratio of gold. Why is this interesting vis-à-vis
other commodities?
RS: Well, the stock-to-flow ratio, as you know, I’ve been writing about
this topic for years now – I think that’s really crucial to understand as an
investor. Gold is not consumed, it’s hoarded, so therefore gold has got
different aspects, different characteristics compared to commodities, and
that’s the reason why we, for example, in the whole report we really don’t
care about classical supply and demand dynamics like most of the mainstream
publications regarding gold analysis. So, for us, it’s much more important to
analyze factors like the trend and inflation expectations, interest rates,
trend of the US dollar and other fiat currencies, commodity prices, credit
spreads, opportunity costs, and confidence in the political system. Those are
the most important drivers for gold but not supply/demand statistics but this
is something, for some reason, that nobody really cares even in the gold
scene, and that’s why we are not getting tired of emphasizing that this
stock-to-flow ratio is so crucial.
LS: Okay, thank you very much for this interview.
RS: Thank you very much, Lars. It’s been a pleasure, as always.
Ronald-Peter Stoeferle, who is a Chartered Market
Technician (CMT) and a Certified Financial Technician (CFTe), was born
October 27, 1980 in Vienna, Austria. During his studies in business
administration and finance at the Vienna University of Economics and the
University of Illinois at Urbana-Champaign in the USA, he worked for Raiffeisen
Zentralbank (RZB) in the field of Fixed Income / Credit Investments. After
graduating, Stoeferle joined Vienna based Erste Group Bank, covering
International Equities, especially Asia. In 2006 he began writing reports on
gold. His benchmark reports on gold drew international coverage on CNBC,
Bloomberg, the Wall Street Journal and the Financial Times. Since 2009 he
also wrote reports on crude oil. In 2013, Stoeferle and his partners
incorporated Incrementum AG in Liechtenstein, where he manages a fund that is
managed based on the view of the Austrian School of Economics. Moreover, in
2015 he published the book ‘‘Austrian
School for Investors’’, co-authored with Mark Valek and Rahim
Taghizadegan.
Download extended version of „In Gold We Trust 2016“(English) (pdf)