Ask The Expert - Ronald Peter Stoeferle - January 2023
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Ronald-Peter Stöferle is Managing Partner and Fund Manager at Incrementum AG, where he manages a fund that invests based on the principles of the Austrian School of Economics. A lecturer at the academy of the Vienna Stock Exchange as well as at the Institute for Value Based Economics, he is co-author of a book on investing titled Austrian School for Investors – Austrian Investing between Inflation and Deflation.
Since 2007, Ronald has written the annual In Gold We Trust report, now considered the industry standard publication on gold, money, and inflation. It provides a “holistic” assessment of the gold sector and the most important factors influencing it, including real interest rates, opportunity costs, debt, central bank policy, etc. The latest report can be found here: https://ingoldwetrust.report
In this edition of Ask the Expert, Ronni answers several of your listener-submitted questions, including:
• When will the Fed start cutting rates?
• How should someone start buying into gold right now?
• Plus: Could commodity demand ripple into gold and silver in 2023?
For the answers to these questions and more, listen here:
Announcer: You're listening to "Ask The Expert" on Sprott Money News.
Craig: Well, welcome to 2023. It's a brand new year and it's time for your first "Ask The Experts" segment from Sprott Money. Remember, these are these videos we put out once a month with an expert in the field of precious metals and the economy, and give you a chance to ask questions off said expert, and see what they think about the big issues affecting the metals going forward. I'm your host, Craig Hemke, and joining us for the first "Ask The Expert" of 2023 is my old friend Ronnie Stoeferle. Ronnie, a managing director, I think, Ronnie, and partner at Incrementum, is that the right way to introduce your title?
Ronnie: That's pretty right. Hi, Craig. Happy New Year.
Craig: Happy New Year to you. And you're famous for a lot of things, my friend, an alpine skiing legend, that's for sure, but also one of the, if not the principal author of the "In Gold We Trust Report" that comes out every May. If you're interested in the precious metals as a retail investor, institutional investor, high-net-worth individual, I mean, this is...that report every May is something that everybody reads and everybody looks forward to. So, Ronnie is a internationally known expert in the precious metals, it's fun to visit with him. Ronnie, before we get started, tell everybody about what you do and your firm, and if they're based in Europe or wherever, how they can access your firm's services.
Ronnie: Well, actually, the question of what I'm doing is a really good one. And sometimes I really don't know because there's so many different things that I'm doing. Primarily, I am a managing partner at Incrementum, which is an asset management company in Liechtenstein. We're managing six investment funds. I'm managing, for example, one inflation protection fund that has done very well over the last couple of years. Besides that, also for 15 years now I'm publishing the "In Gold We Trust Report." It's published in German, English, in Mandarin, and also in Spanish. Probably one of the most widely followed publications on gold. And then I'm also on the board of directors at Tudor Gold and Gold Star Metals. So I'm also very active in the mining space. And yeah, that's basically it. And Craig, I can tell you, we are already starting to write In Gold We Trust 2023. And I think there will be many, many topics to discuss this year again.
Craig: No doubt about that. Gosh, you just wonder, by the time you publish that thing. It's gonna be in May, correct?
Craig: Heck, what will the world look like by then, Ronnie? Well, I've got a number of things I wanna discuss with you. Again, before we get started, these videos are always brought to you by Sprott Money. Sprott Money, a company you should always keep in mind whenever you're in the market for precious metals or storing that metal. I was just on the site this morning and saw they've got a great deal on 10 ounce Royal Canadian Mint Silver Bars. Never a bad time to add to your stack. So go to sprottmoney.com, or call them at 888-861-0775.
Ronnie, let's start with kind of the macro. This is that time of year where I always write my annual forecast. And, you know, I try to focus on that big-picture stuff. You really get caught up in the trading sometimes, you get wrong-footed if you get too cute watching price. But if you get the macro direction right, like you often do at your firm, and that fund you had last year, had a tremendous year, if you can get the macro right, you're gonna be okay.
There's a lot of questions about the macro situation, as we begin 2023, there's all this talk of a soft landing and the Fed keeping rates elevated all through the year. Where do you think this is headed, the data seems to be pointed downward, but what are your projections as we go through this year?
Ronnie: Well, I mean, it's been a terrific start into the new year. It almost feels like the everything bubble is back again. But I'm slightly cautious, I would say, I think it's primarily due to the reopening of China. And of course, there's an enormous amount of pent-up demand after the Chinese economy was basically locked down for three years. But I think, you know, if we have a look at markets, the markets aren't really buying what the Fed is selling because the Fed continues trying to sound very hawkish. And I said in a couple of interviews, I think that Jay Powell will be nominated for the Academy Awards. Because the whole market really believes in this narrative of the newfound hawkishness of the Federal Reserve. I don't really see.
And if we have a look at market developments, recently, I think that the markets are currently believing in several outcomes simultaneously, but I think they cannot all be right. So, actually, the market thinks that the Fed Funds rate will peak at 5%, that we will only see a shallow recession or a soft landing, whatever you wanna call it, the market sees a rapid decline in inflation over the next couple of months. But on the other hand, it also sees very strong earnings growth and stable margins.
So, from my point of view, that doesn't really add up. We're seeing based on Fed Funds futures, actually, they're pricing in nearly 200 basis points in cuts between June 2023 and December 2024. So, you know, cuts of this magnitudes doesn't really rhyme with a soft landing. So, on conscious, we are seeing that earnings are expected to grow by 9%, which basically means that equity, analysts see that a recession will be avoided, because typically, during a hard landing earnings declined by roughly 20% to 25%.
So, something's gotta give from my point of view, we will see strong disinflationary forces over the next couple of weeks. Bear in mind, Luke Roman pointed that out, that the BLS will implement an improvement in the calculation of the CPI. So, starting in February 2023, they will update the spending weights in the calculation of the CPI. I don't know. Perhaps this will have a further effect on the disinflationary trend that we're seeing.
So, my game plan, Craig, is basically disinflation for the next couple of months, this will also imply that the Federal Reserve will have less pressure to be hawkish. So, actually, due to the recessionary risks and the disinflation, I think they will become less hawkish and less restrictive over the next couple of months, I think the gold price is already smelling that. But this will also coincide with the next inflation wave.
And as you know, we manage our Inflation Protection Fund based on our inflation signal, it's a proprietary signal. And in June last year, it told us that the momentum of inflation has peaked out, so we actually saw based on our indicator that the worst is over for now. So we went, basically, we got stopped out most of the mining positions, most of the commodity positions, which was fantastic for our performance. And now, just recently, a couple of days ago, we got the full rising inflation signal. So, this signal is really looking through the rear...how do you say, rear-view mirror. So it's basically telling us already a couple of months in advance what's gonna happen. And I think that the next inflation wave is already building up. So, that's kind of our macro picture that we're having.
Craig: So, to that end, do you expect the global economy, the U.S. economy to slow here in the first half of the year and allow the Fed to declare victory? You know, we're gonna lose in that year over year inflation data as those first 6 months of 2020 to come off the board and are replaced by the first 6 months of this year, that year-over-year number is gonna come down pretty quick and pretty soon gonna be well under Fed Funds. Do you think the Fed will declare victory by summer and then start saying, "Look how slow the economy is, we gotta start cutting."
Ronnie: Absolutely. I think we shouldn't forget that there are elections coming up next year in the United States. So, therefore, I think everybody wants to see lower rates. We already kind of see what's happening to the housing market. We know that the real estate industry is essential for U.S. consumer sentiment. And we all know how mortgage rates exploded. So, I think in the most interest rate-sensitive economy ever, I think it would be naive to think that in an environment of one of the most aggressive rate hike campaigns ever, that this doesn't have any consequences for the economy.
And, you know, we keep hearing that Jay Powell is the new Paul Volcker, just, you know, two numbers to have in mind. In 1980, total U.S. nonfinancial credit was 3.9 trillion. Currently, it's 67.6 trillion. And the Fed balance sheet in 1980 was 154 billion. Currently, it's around 9 trillion. So, I think, you know, if you compare Powell to Volcker, perhaps he wants to be the new Paul Volcker, but the fundamentals are so different and the rate sensitivity is enormously higher than back then. So, therefore, I think that the time leg of those rate hikes is vastly underestimated by the Federal Reserve and most economists, and we are already seeing how it's playing out, have a look at the composite index of leading indicators, just have a look at the ISM, it's clearly showing that the U.S. economy is slowing down dramatically, and it doesn't look like a soft landing to me.
Craig: Or a hard landing. Exactly. Ronnie, one of the Sprott Money customers wrote in and said, "Okay, we've had this great rally of, you know, gold, obviously looking forward and anticipating all of this." What do you think about price, if someone is looking to average in, buy themselves some more gold or start buying gold for the first time? Is it something that you just start doing on a regular basis? Is it, you know, you catch highs and catch lows, you wait for a pullback? Are you optimistic about where price is headed over the next 24 months? What do you think about gold?
Ronnie: Well, actually, you know, it's in a bit kind of world, everybody's talking about DCA, dollar cost averaging. And this is something that I think makes totally sense in the gold world as well. From my point of view... Well, actually, I think many people were a bit dissatisfied with the performance of gold last year. On the other hand, I would say people tend to forget that, you know, not only equities were down significantly, the S&P was down 18% last year, but also the bond market was down significantly last year.
So, for example, the iShares 20+ Year Treasury ETF was down 32%, the NASDAQ was down 35%. So, in that year, gold actually, I think it did its job quite okay. So in dollar terms, it was down 0.3%. On the other hand, in Euro terms, gold was actually up 6%, and in basically all other currencies, be it the Euro, be it the Japanese Yen, the British Pound, and so on. Gold made several new all-time highs last year.
So, actually, it hasn't done so poorly. And I think that therefore, my take would be that this year, we will also see new all-time highs in the dollar price of gold. From my point of view, it's now for the time being, we saw this pretty strong rally. So, I would see gold perhaps taking a breather over the next couple of weeks. But actually, now we're flirting with the levels of the old all-time high at 1,910, 1,911 that we've made in the year 2011. And I think, you know, from here to the big all-time high it's only slightly more than 100 bucks left. And from a technical point of view, obviously, once we go above that level, there are no resistances anymore.
So, I think we're not too far away from a major breakout in gold and, you know, having a look at the ETFs having a look at sentiment, talking to institutional players over here, I think most people don't really recognize that gold is flirting with new all-time highs, yeah. So over here, I would say most of the, let's say, financial players couldn't care less about gold.
Craig: Yeah, there's nothing new in that, right? Our friend Grant Williams always used to call it that nobody cares. Remember that from years ago? And you remind me, you know, I've been writing a lot, so far this year about how economically and monetarily this year looks like 2010 and 2019. And I also remember in 2019, Ronnie, was the same kind of setup, gold was making new all-time highs, and all these other currencies except the dollar. And I remember sitting back and telling people, "Just, it'll be the dollars turn soon enough, just give it time." And I hadn't thought about it, as that is another parallel to this year.
Ronnie: Yeah. And perhaps another parallel would be 2018. We remember the pivot back then, I think there was this emergency meeting on the 24th of December. And because the fourth quarter was a disaster for almost all asset classes, while gold held up pretty well. And then in 2019, and 2020, gold was up, I think, 18% and then 20% in U.S. dollar terms. And I think, also obviously, this pivot will be different than the last one, because inflation numbers, obviously are significantly higher, but I think that gold is already kind of smelling this pivot, this peak hawkishness and we made a chart with a couple of pivots. And actually, it was fascinating to see that gold always discounts those paradigm changes earlier than commodities, earlier than equities, for example, earlier than silver. And I think it's just, you know, the fact that gold is traded all over the world, in every culture, in every part of society, gold is something special. And I think this is this collective wisdom that the price of gold holds.
Craig: Ronnie, in our remaining time, I wanna ask you about commodities in general, because I know that's a big part of what you follow in your daily work, too. One of the things I wrote about, and if anybody wants to read it, you can go to sprottmoney.com and check the Insights tab, and you'll find what I call a Macro Cast, I write in the first week of every January, and one of the features again, this year was that Chinese demand you talked about, you know, we've watched that Chinese credit impulse, and it finally looks like it's really gonna surge this year with that zero COVID policy going by the wayside.
And this all comes at a time when, Ronnie, I've seen charts of global stockpiles of all the industrial metals, you know, copper, zinc, lead, nickel, aluminum, and they're all trending down dramatically. Again, not just in London, but, you know, in Shanghai, and if you wanna count what there is in the U.S., and now all of a sudden you've got all this surging demand, do you think we could be in a... I don't wanna call it a crisis. But could we reach a point here in 2023, where this commodity demand surge is so strong that it really ripples through all the way into gold and into silver?
Ronnie: Yeah. Well, I think that this commodity bull market is still in its, let's say, kind of the first inning of the supercycle, and I think it will primarily be driven by the capex cycle. We wrote about that last year already, basically saying that, over the course of this brutal bear market in commodities, there was very, very little incentive to invest capital into new projects, into existing projects, into infrastructure, and so on. So, now where we see basically, this paradigm shift when it used to be, I think, Saltan Poza [SP] wrote that, it used to be the U.S. dollar is our currency, but your problem, we know that quote from John Kennelly, but now it seems our commodities, your problem.
And I think that 2022 was really the point in time when governments actually realized, "Well, this commodity thing, that's not something dirty or something bad, actually, this is the foundation of our society, is the foundation of our industries." And I think there was, really people started rethinking actually the supply, the stable and reliable supply of commodities, at whatever costs. Just have a look at the natural gas prices, we know that European governments completely panicked in late summer last year, and they bought natural gas at prices, you know, whatever it takes just to fill up the storage facilities. And I think we could see similar developments also in other commodities, in other strategic commodities.
We're seeing that, for example, when it comes to copper, when it comes to, as they're being labeled now green metals like nickel, like lithium, also, to a certain degree silver, it's absolutely astounding how much new demand will come from the solar industry. We're seeing actually, you know, that the supply is not really elastic, so it doesn't really react to rising prices. And I could expect spikes in these commodities.
From my point of view, also, in the energy space, I would say that the price of crude has probably made its lows for this cycle. So, in a nutshell, I'm seeing that commodities are kind of celebrating some sort of a renaissance, there is a rethinking coming from bureaucrats, we will see much more of direct offtake agreements between, you know, governments and companies, obviously, with mines, we will see much more investment being financed by governments, just have a look at what has been decided recently in the European Union. Sorry.
And then, on the other hand, we are seeing that, obviously, it's still a very much under-invested pocket of the market. Even though the price performance was pretty significant recently, most institutional players don't have any allocation in commodities yet. Why? Because it's not easy to ESG policies. So, therefore, I think that, of course, it will not be a straight line, but I expect the next couple of years in the commodity space to be very, very, let's say, interesting and probably rewarding.
Craig: Great stuff, Ronnie, it is always so much fun to visit with you. I always say, you know, if you're gonna follow gold, you gotta follow everything. It's not just a dot on a screen, and you definitely follow everything. I mean, you're gonna have to with the job that you've got, but also in this ongoing project that you have every year of writing the "In Gold We Trust Report." Again, we'll look forward to that by what, end of May, something like that, is that about the usual publication date?
Ronnie: Yeah, I think 24th of May is the big date.
Craig: Oh, boy, oh, the deadline is counting down [inaudible 00:23:02.542]. What are you doing talking to me? You got work to do.
Ronnie: I know, I know. But now, you know, actually, we expanded our range of products for In Gold We Trust. So, we now also have our monthly gold compass, which is a fantastic publication, the best charts published every month at the beginning of each month, it's available totally for free on our webpage ingoldwetrust.report, then there will be a preview chart book. And then 24th of May as you as we said, that's the big date for In Gold We Trust 2023.
Craig: And as you said, it's all free and always the updates are very, very helpful. And again, probably, anyone can just search In Gold We Trust into Google or something like that and go straight to that website. Do you just put in your email address or something, you're gonna get notified or you just need to check it every once in a while?
Ronnie: No, no, no. You can register for the report. Otherwise, just download it without having to submit your email address or anything on the 24th of May.
Ronnie: It's important for us really to put out solid research about gold, not in a gloom and doom, everything will go to hell, point of direction, but just a sober analysis and make a solid case for gold, not only for institutional players but also for high-net-worth individuals, for retail investors. I think that's really important for us to perhaps make a little difference and helping people to protect their hard-earned savings.
Craig: You bet. Yeah, you guys do a great job. And I get it, so you're a wonderful advocate for sound money, a big ally in our fight. I know Eric really appreciates and reads all that you do as well. And again, so thank you so much for your time. For everybody on the way out, again, please remember this, all of this comes from sprottmoney.com. Check out their site anytime you're in the market for precious metal. If anything, give them a like or a subscribe on whatever channel that you're watching this, so that they can help cast a wider distribution net, every little bit helps. And then check back next month for another "Ask The Expert." For now, though, we'll sign off. Ronnie, thank you so much for your time. I hope you have a great rest of your day.
Ronnie: Thank you very much, Craig. All the best. Take care, my friend. Bye-bye.
Craig: You do the same. And from all of us here at Sprott Money News and sprottmoney.com, thanks for watching. We'll have another video for you sometime very soon.
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