The Global Mining Symposium continued apace on the second day of the three-day event with Alisha Hiyate, editor at The Canadian Mining Journal, interviewing Ronald-Peter Stoeferle, managing partner and fund manager at Incrementum AG.
Stoeferle has co-authored two books: Austrian School for Investors, published in 2016, and the In Gold We Trust report, an annual report he started in 2007 that has become one of the benchmark publications on gold, money and inflation.
Hiyate kicked off the conversation by referring to this year’s In Gold We Trust report, which comes in at a massive 350 pages, asking Stoeferle to explain why he started the publication and how he first got interested in gold.
“It’s a long story,” he said. “First of all, in Austria, and I think it’s the same in Germany, we have gold in our monetary DNA — it was normal for me to get those little gold coins from my grandparents for every big occasion, like my birthday or Christmas.”
His grandparents, he added, lived through hyperinflation and four currency reforms. So, for them, he continued, it was a form of monetary insurance. It felt natural for them to have part of their savings and investments in gold.
“I started investing in the equity markets when I was 12 years old,” he noted. “I went through the dot.com boom and dot.com bust, and then tried to learn something about financial markets and investing in university but didn’t seem to learn too much.”
He then joined a bank in Vienna and developed a passion for investing in companies with small market capitalizations and low market valuations.
A friend then told him to look at mining stocks.
The first mining company that he took an interest was called Osisko Exploration, he said.
“As you know, Osisko has been one of the biggest success stories in Canadian mining over the past couple of decades. It turned out as a forty-bagger, and I didn’t know if that was a blessing or a curse. So, I thought ‘investing in junior miners is pretty easy and pretty rewarding.’”
“Because of that, I went to my boss in the research department and asked if I could write a special report about gold over the weekend, and he said ‘yes, go ahead.’ So, in 2007, I wrote my first In Gold We Trust report.”
This first report, he said, was a fundamental supply and demand analysis, but his research allowed him to learn more about Austria’s monetary history, hyperinflation, stock-to-flow ratios, the importance of gold to the Austrian monetary system, and the Austrian School of Economics.
From then on, the reports just got bigger and bigger, he said.
In 2012, he founded Incrementum AG.
The company, based in Switzerland, invests in mining companies, especially those operating in the gold and silver sectors.
“It’s really my passion,” he said. “We continued to publish the In Gold We Trust reports and, as you said, it’s quite a brick at 350 pages, but there is just so much to analyze, and there are so many angles, including the whole macro-picture, inflation, essential bank standards, and the whole mining space is so interesting.”
Stoeferle and his team are already working on the 2021 report.
Hiyate then shifted the conversation to the Covid-19 pandemic, noting that, six months into the outbreak, there has been a lot of strength in the gold price due to its safe-haven status, recently setting a new nominal all-time high of US$2,089 per ounce.
Hiyate noted, however, that the gold price had started to move up even before the pandemic, and asked Stoeferle to describe some of the most important drivers behind gold’s ascent.
“In short, silver and gold miners are in a stealth bull-market at the moment,” he said. “Gold is rising in every currency. It is rising relative to the bond market, shows relative strength to the stock market, and juniors are outperforming large-cap mining companies, which are all confirmations, from my point of view, of a strong bull market.”
He noted that, in 2019, there were already all-time high gold prices in nearly every currency, except the U.S. dollar.
The public participation phase, as he referred to it, of the current bull market began with the breakout last year and the consolidation phase. However, these failed to break the US$1,360 to US$1,380 per oz. price several times, but once they did, the “real momentum kicked-in.”
“The second stage of this bull market started when the institutional investors, who had until then been on the sidelines, decided to get their allocation of gold,” Stoeferle said.
He noted that it was not the price of gold rising but the purchasing power of fiat money that is falling, which is happening in nearly every currency.
The second driver, he said, is the prevalence of stressed global interest rate policies, noting that U.S. ten-year yields are at an all-time low, as well as the global push for liquidity.
“So, the monetary and fiscal stimuli that we are seeing due to the Covid-19 crisis are a big additional catalyst for the price of gold,” Stoeferle said.
Hiyate noted that one of the strong drivers for gold outlined in the In Gold We Trust report is inflation.
“The discussions around inflation or even stagflation is a little like talking about dessert just as we are being served the appetizers,” Stoeferle said. “However, I think both inflation and stagflation must be taken into account in the future, and, in this environment, gold will benefit as a classic store of value.”
He pointed out that debt, which is already extremely high, got even higher, with the International Monetary Fund forecasting debt in the U.S. will rise from 109% in 2019 to 141% of GDP this year. In the Eurozone, it will increase from 84% to 105%.
He added the higher the debt, the bigger the desire for inflation, and the bigger the fear of deflation, which, he said, will benefit gold.
“The triggers for inflation, according to the Austrian School of Economics, is monetary expansion, and rising prices are only a consequence of this expansion,” he explained. “We must not forget that we’ve already seen massive asset price inflation over the last couple of years, such as in the real estate, equity and bond markets.”
Inflation will become a significant concern for financial markets over the next few years, he added.
Hiyate noted that this year’s In Gold We Trust report predicts a price of US$4,800 per oz. by the end of the decade.
“It sounds like a pretty high estimate,” Stoeferle said. “I’m not an economist, and so I don’t work with complex economic models. The problem with these models, however, is that they don’t work in stressed situations.”
He added that by using a prediction model based on monetary growth and the backing of gold by the U.S. dollar, they came up with a gold price of US$4,800 per oz. by the end of this decade based on a compound annual growth rate of 10.1% until 2030.
Hiyate said that one of the significant drivers of gold prices was institutional demand, noting that Warren Buffett, who has never been a fan of gold, made a recent investment in Barrick Gold (TSX: ABX; NYSE: GOLD).
“One of the biggest drivers in the large capitalized companies is the huge volumes that have been traded over the last couple of weeks,” Stoeferle said. “Most of the mining stocks look fantastic.”
The market capitalization of all miners is US$550 billion, which is a little over one-quarter of Apple’s market capitalization, he noted.
As generalists enter the market, they see that the mining space has a lot of momentum, with mining companies offering the best absolute and relative returns compared with other industries, he added.
“For example, Newmont (TSX: NGT; NYSE: NEM) returned US$2 billion to shareholders through dividends and share buybacks since 2019,” he said. “Kirkland Lake Gold (TSX: KL; NYSE: KL) said they were returning US$600 per ounce of gold that they produce through share repurchases and dividends.”
These companies, he added, have barely engaged in share-dilution over the past few months.
In aggregate, he noted, the top 50 gold and silver miners by market capitalization only issued US$266 million in equity over the last 12 months, which is the second-lowest amount of 12-month equity issuances in the previous three decades.
He added that the companies have also paid down US$200 million in debt in the last quarter.
“These are all very encouraging developments,” Stoeferle said.
Returning to the subject of Warren Buffet, he felt that this should not be overemphasized as his investment in Barrick was less than 0.2% of Berkshire Hathaway’s equity capital.
“It’s also important to note that Buffett didn’t buy gold, he bought a gold miner, and there’s a big difference,” he continued. “And last week, the Ohio Fire Pension Fund announced a 5% allocation in gold.”
“These are all signs that gold is becoming mainstream and is being reconsidered as an important part of the institutional portfolios,” he said.
Hiyate then concluded the conversation by asking Stoeferle to comment on silver’s potential in the future.
“When we published the report at the end of May, we said silver ‘is unloved, is unwanted, and is mocked’, but for a prudent or contrarian investor, now has never been a better time to invest in silver,” he said. There has been a lot of momentum in silver and it is “basically gold on steroids.”