Outlook for Gold, Stocks, Economy by Incrementum’s Advisory Board

In March, we released the minutes of the first Advisory Board meeting by Incrementum Liechtenstein, see the summary Will Inflation Make A Comeback In 2014 When The Consensus Worries About Deflation. 

As discussed, Incrementum had launched the “Austrian Economics Golden Opportunities Fund,” a fund that takes investment positions based on the level of inflation based on their proprietary “Incrementum Inflation Signal.” Incrementum Liechtenstein has Ronald Stoeferle, author of In Gold We Trust, as managing partner, and Mark Valek as partner.

The key topics that were discussed at the time:

• The Incrementum Inflation Signal started showing rising inflationary momentum after a period of 19 month of disinflation.
• The usefulness of the CPI as a decision making tool is highly questionable.
• Incrementum’s Advisory Board sees a lot of strength in the gold market.
• Is the stock market topping or in a bubble?

Not much later the inflationary trend stalled and a new disinflationary trend started, leading precious metals and miners to lower prices.

Meantime, the second Advisory Board meeting has taken place, in which all relevant and important topics for gold investors have been discussed.The economic situation and China in particular, a monetary policy update, the geopolitical situation, a stock market review, and precious metals and miners market update.

Incrementum Inflation Signal – via Incrementum, click to enlarge.

The key insights that were put forward by Jim Rickards:

• Draghi played it brilliantly. He is a man, who says little and does less. He understands that currency wars don’t win
• Think of cash as
  • a) a deflation hedge
  • b) something that reduces the volatility in the rest of the portfolio
  • c) something that has enormous embedded optionality.
• The fact that Yellen is the new kid on the block, the fact that Bernanke tied her hands and the fact that you have a very hawkish FOMC, makes it almost impossible for her to pause the taper.
• The Fed will have to come back with QE4 in 2015, because the data is going to be horrendous.
• The US economy is fundamentally weak but the big story in the world today is China is back in the currency wars.
• The Euro has found a floor and will go up again.
• Everyone is screwed! This is the problem with currency wars, this is the problem with depression and this is the problem with deflation. Everybody loses.
• The Japanese are like on a lifeboat surrounded by sharks, and as long as they stand in the boat together and there is enough food, then they don’t have to worry about the sharks.

Heinz Blasnik:

• More and more production is moving to the higher stages of the capital structure. That is actually potentially inflationary, maybe not right away but in the long run it is, because the supply of consumer goods is shrinking.
• At some point JGB’s are going to be a good short. I don’t know when, but I would watch it very, very closely.

Ronald Stoeferle:

• Stagflation is a very realistic scenario for the northern Euro countries.
• I think gold is a very contrarian play and gold mining stocks are probably even more contrarian.
• Monetary policy does not work like a scalpel, but like a sledgehammer.

Related to the precious metals and its prospects, Heinz Blasnik explained the current gold market situation and its expected price driver:

Gold is more sensitive to changes that are in the winds than equities. Equity markets strike me as being very sluggish, having almost become a lagging indicator. The stock markets are in decline once the economy is already in the recession. I mean that’s basically what happened in 2007. The NBR backdated the recession and shows that the recession began in November 2007 and that’s when the stock market started going down. It’s no longer a leading indicator of the economy, it’s more of the coincident indicator.

Gold is a bit different. I think it’s far more sensitive when circumstances change. So I believe that, first of all, there are some people buying gold already because they want some insurance, because they can see there is a bubble on the way and we don’t know how long this bubble is going to last. It could last longer. Most people actually believe that it could last a while longer but I don’t think so. But one never knows.

So you have this contingent of buyers in the market and, of course, that also goes for reservation demand. So the people who already own gold and are thinking about whether they should sell it or not. I think most gold owners are probably not very eager to sell at this point. Should we see some changes like credit spreads getting a bit wider or some other early indicators that show that things are not so smooth anymore as than they were, then you will see gold rising for no obvious reason.

But at some point, gold and equity markets will probably decouple again. In other words: I don’t think it requires a falling stock market, it only needs a certain percentage of people who start seeing that things are changing at the margin. At some later stage, it will probably be the case that equities are going down and gold is going to accelerate in the opposite direction. But I mean we’re not at that point. At the moment, gold it still looking for a bottom.

Jim Rickards looks further in time and shares his expectations going into 2015 and 2016:

The US economy is fundamentally weak but the big story in the world today is China is back in the currency wars. Look at the Yuan collapsing. Let’s go back to the 2002 to 2011 period, a pretty long period. The whole time the United States complained that China was a currency manipulator, that they were keeping the currency too low, promoting Chinese export sales. China didn’t listen. Finally, at the beginning of 2012, they let the Yuan go and it surged from 8.25 to almost 6 to the dollar and then the US stopped criticising them and said: “Well that’s fine! Thank you very much!“ But the Chinese actually don’t care what the United States says.

In the past six months, inflation has collapsed in China. There is a serious danger of deflation in China, so the reason China let the Yuan go down was because the inflation threat was no longer there. They were back to deflation and by letting the Yuan go down, what they are doing is exporting their deflation to the rest of the world. This is what happens in Europe; this is what is showing up in the United States. So we’re back to this deflationary engine of the kind that we saw earlier in the decade. So that is putting enormous deflationary pressure on the US and Europe, which is why we are seeing all this monetary policy over here.

Now picture yourself in early 2015, let’s say February or March 2015: the markets are down significantly and all the data is lousy, and the Fed comes back with QE4 then you would see a correlation between stocks and gold. I agree with Heinz completely, there is a correlation in the long run, but in the short run they can sometimes trade together on the same news. So if the Fed comes back with QE4, and I believe they will, the market is just going to say: You know that proves that they can never stop printing money. It proves that they can never go backwards. 

They tried it three times; they failed three times. They’re back for a fourth time. Gold is going to take off, stocks are going to take off – at least for a while. Now ultimately stocks are a bubble and every bubble crashes. Gold in my view is not a bubble. It’s a real fundamental trade but very, very difficult for people to understand it. I think from now, gold goes sideways, stocks go sideways to down with volatility. In 2015 with QE4 stocks will trade up together very shortly and then beyond that, the stock bubble will burst and gold will have it’s day. 

The full transcript:

Incrementum Advisory Board Conference June 2014