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“Gold Shining Through the Darkening Recession Clouds” Chartbook of the In Gold We Trust report

“Gold Shining Through the

Darkening Recession Clouds”

Chartbook of the

Ronald-Peter Stoeferle Mark J. Valek

October 2019

In Our Partners We Trust 2

In Our Partners We Trust

2

In Our Partners We Trust 2 Media Partner: incrementum AG | Im alten Riet 102, 9494

Media Partner:

In Our Partners We Trust 2 Media Partner: incrementum AG | Im alten Riet 102, 9494
Executive Summary of the In Gold We Trust Chartbook 3

Executive Summary of the In Gold We Trust Chartbook

3

1. Eroding Trust in Monetary Policy and the International Monetary System

As we have forecasted, due to growing recession risks, central banks are about to conduct a big “monetary U-turn”:

Expect more QE, lower rates and MMT-style policies like “QE for the people”.

The erosion of trust in many areas plays into gold’s hands. An end to these crises of trust is not in sight.

The steady buying of gold and the repatriation of central bank gold indicates rising mutual distrust among central banks.

2. Status Quo of Gold

2019 ytd, gold is up in every major currency.

In many currencies (EUR, AUD, CAD) gold trades at or close to new all-time highs!

3. Gold Mining Stocks

Mining stocks are in the beginning of a new bull market. Creative destruction has taken place, and leverage on a rising gold price is higher than ever.

Gold & silver mining stocks are still one of the most hated asset classes these days. The capitulation selling of the last couple of years now offers investors a very skewed risk/reward-profile.

4. Quo Vadis, Aurum?

Gold has entered a new bull market cycle and might become a core asset for generalists again!

1. The Eroding Trust in Monetary Policy and the International Monetary System “Put not your
1. The Eroding Trust in Monetary Policy and the International Monetary System “Put not your
1. The Eroding Trust in Monetary Policy and
the International Monetary System
“Put not your trust in money, but put
your money in trust.”
Oliver Wendell Holmes
Monetary System “Put not your trust in money, but put your money in trust.” Oliver Wendell

@IGWTreport

Monetary Policy Tide Turn: From QE to QT and back? Quarterly CB Flows in USD

Monetary Policy Tide Turn: From QE to QT and back? Quarterly CB Flows in USD bn. (lhs) & S&P 500 (YoY%, rhs)

5

Last year we pointed out that moving from QE to QT poses severe risks. The normalization of monetary policy was abruptly halted by the stock market slump in Q4/2018.

Gold reaffirmed its portfolio position as a diversifier, as trust in the “Everything Bubble” was tested in Q4/2018. While equity markets suffered double-digit percentage losses, gold gained 8.1% and gold mining stocks 13.7%.

Monetary policy was massively asymmetric: While in previous years the Fed had expanded its balance sheet by USD 3.7trn, the Fed has reduced its balance sheet by only 0.7trn in total. Starting in September the Fed has increased its balance sheet by a staggering 200 bn again.

“The time is coming (when) global financial markets stop focusing on

how much more medicine they will get (QEs) and instead focus on the fact that it does not work.”

Russell Napier

3 500 QE turns to QT 3 000 2 500 2 000 1 500 1
3
500
QE turns
to QT
3
000
2
500
2
000
1
500
1
000
500
0
-500
-1 000
2003
2005
2007
2009
2011
2013
2015
2017
2019
FED
PBOC
BoJ
ECB
Total
S&P 500

Sources: Bloomberg, Incrementum AG

0.5

0.3

0.1

-0.1

-0.3

-0.5

The Everything Bubble 6

The Everything Bubble

6

In the years following the financial crisis, global central banks flooded the economy with exorbitant monetary stimulus. Nearly USD 20 trn. of central bank money was created ex nihilo.

Global stock markets were deliberately driven up in order to accelerate the so-called “wealth effect”. However, this did not seem to be having any effect in 2015, and stock markets began to stagger in the wake of fears of low growth.

Alas, commodities remain the exception to the rule and still do not participate in the Everything Bubble.

6.0

5.5

5.0

4.5

4.0

3.5

3.0

Everything

Bubble? Real Estate Dot-Com Bubble Bubble
Bubble?
Real Estate
Dot-Com
Bubble
Bubble

1970

1974

1978

1982

1986

1990

1994

1998

2002

2006

2010

2014

2018

Financial assets of households/Disposable personal income

Sources: Federal Reserve St. Louis, Incrementum AG

Monetary Expansion Decouples from Annual World Gold Production, 1900=100 7

Monetary Expansion Decouples from Annual World Gold Production, 1900=100

7

The gap between monetary expansion and annual world gold production increased further in recent years.

Since 1900, the monetary aggregate M2 has risen

almost 180x faster than annual world gold

production!

“It's all about relative supply curves – the supply curve for bullion is far more inelastic than is the case for paper money. It really is that simple.”

Dave Rosenberg

1 000 000 100 000 10 000 1 000 100 10 1900 1910 1920 1930
1 000 000
100 000
10 000
1 000
100
10
1900
1910
1920
1930
1940
1950
1960
1970
1980
1990
2000
2010
M2
Annual world gold production

Sources: US Geological Survey, Bloomberg, Incrementum AG

Effective Federal Funds Rate, in % and Recessions in the US 8

Effective Federal Funds Rate, in % and Recessions in the US

8

As a long-term chart of the fed funds rate reveals, the vast majority of rate-hike cycles have led to a recession. Moreover, every financial crisis was preceded by rate hikes.

The historical evidence is overwhelming: In the past

100 years, 16 out of 19 rate-hike cycles were followed by recessions. Only three cases turned out to be exceptions to the rule.

„The next recession by definition will happen with income and wealth disparities as their highest levels ever, and the unrest will likely be a tad more forceful than the well-behaved Occupy Wall Street movement was nine years ago.“

Dave Rosenberg

20 12 13 18 16 14 11 12 14 10 10 8 2 15 5
20
12
13
18
16
14
11
12
14
10
10
8
2
15
5
6
16
1 3
4
9
8
4
17?
7
6
2
0
1914 1920 1926 1932 1938 1944 1950 1956 1962 1968 1974 1980 1986 1992 1998 2004 2010 2016
Recession
Fed Funds Rate

Sources: Federal Reserve St. Louis, Incrementum AG

S&P 500 (left scale) and Fed Funds – Upper Bound (in %, right scale) 9

S&P 500 (left scale) and Fed Funds Upper Bound (in %, right scale)

9

The following chart indicates that the Federal Reserve's first interest rate cuts have previously had a negative effect on the American stock market (S&P 500 as proxy).

History shows that when the Federal Reserve starts cutting

rates, stocks decline. When rates stay flat or rise, stocks surge. That is contrary to the fables you hear from many analysts, because declining rates are indicative of economic deterioration.

If this pattern continues, one should analyze and act with special care on the US stock market in quarters to come.

3 100 2 600 2 100 1 600 1 100 Global Financial Crisis Tech Bust
3
100
2
600
2
100
1
600
1 100
Global Financial
Crisis
Tech Bust
600

2000

2002

2004

2006

S&P 500

2008

2010

2012

2014

2016

Fed funds - upper bound

2018

2020

7

6

5

4

3

2

1

0

Sources: Crescat Capital LLC, Federal Reserve St. Louis, Investing.com, Incrementum AG

Recession Forecasts Are Not Among the Strengths of Central Bankers 10

Recession Forecasts Are Not Among the Strengths of Central Bankers

10

“The Fed has through the course of the year seen fit to lower the expected path of interest rates. That has supported the economy. That is one of the reasons why the outlook is still a favorable one.”

“It is not in the baseline to have a recession.”

Jerome Powell, September 9, 2019

to have a recession.” Jerome Powell, September 9, 2019 Christine Lagarde, September 24, 2019 Sources: Bloomberg,

Christine Lagarde, September 24, 2019

recession.” Jerome Powell, September 9, 2019 Christine Lagarde, September 24, 2019 Sources: Bloomberg, CNBC @IGWTreport

Sources: Bloomberg, CNBC

recession.” Jerome Powell, September 9, 2019 Christine Lagarde, September 24, 2019 Sources: Bloomberg, CNBC @IGWTreport

@IGWTreport

Rising US Recession Probability 11

Rising US Recession Probability

11

Based on the probability of a US recession predicted by treasuries spreads (twelve months ahead), we are currently confronted with a 38% chance of a recession within the next 12 months.

Since this level has been reached only two times in the last 30 years (both times in a recession), we assume that we might already be in a prerecession phase. Consequently, crisis-proof assets will again be in greater demand in the coming months.

50%

40%

30%

20%

10%

0%

greater demand in the coming months. 50% 40% 30% 20% 10% 0% 1990 1995 2000 2005

1990

1995

2000

2005

2010

2015

2020

50% 40% 30% 20% 10% 0% 1990 1995 2000 2005 2010 2015 2020 Recession Sources: Federal

Recession

Sources: Federal Reserve NY, Incrementum AG

Recession probability (12 months ahead)

Projected US Debt & Deficit, in USD bn 12

Projected US Debt & Deficit, in USD bn

12

According to CBO forecasts, the deficit of USD 1,370bn in 2029 will be only slightly lower than in the crisis year 2009 (USD 1,413bn). Budget deficits of comparable size were recorded only in the period 2009-2012.

It should also be noted that the CBO forecasts are based on very optimistic, almost naive premises. For example, the CBO assumes that the USA will not slide into recession in the next ten years (!) and that the economy will grow by 3% annually.

From 2020, US government debt will exceed the combined debt of Japan and the eurozone, despite the fact that

absolute US and Japanese debt were at similar levels until

2011, rising almost in step.

35 000 30 000 25 000 20 000 15 000 10 000 5 000 0
35
000
30
000
25
000
20
000
15
000
10
000
5 000
0

1966 1970

1974 1978 1982 1986

1990 1994 1998 2002 2006

2010 2014 2018 2022 2026

500

0

-500

-1 000

-1 500

-2 000

2010 2014 2018 2022 2026 500 0 -500 -1 000 -1 500 -2 000 US Deficit

US Deficit US Total public debt

0 -500 -1 000 -1 500 -2 000 US Deficit US Total public debt Sources: CBO,

Sources: CBO, Federal Reserve St. Louis, Incrementum AG

US Deficit projected US Total public debt projected

Due to the Enormous Debt Pile, High Positive Real Rates Seem Implausible. Negative and Falling

Due to the Enormous Debt Pile, High Positive Real Rates Seem Implausible. Negative and Falling Interest Rates Boost the Gold Price.

13

Real interest rates their direction and momentum are one of the most important drivers for gold!

There are two time periods that were shaped by

predominantly negative real interest rates (blue shading at

right): the 1970s and the period since 2001. Both phases clearly represented a positive environment for the gold price.

One can also discern that the trend of real interest rates is extremely important for the gold price.

2 000 1 800 1 600 1 400 1 200 1 000 800 600 400
2 000
1 800
1 600
1 400
1 200
1 000
800
600
400
200
0

12%

10%

8%

6%

4%

2%

0%

-2%

-4%

-6%

Real federal funds rate Gold
Real federal funds rate
Gold

Sources: Federal Reserve St. Louis, Incrementum AG

ISM Manufacturing Index vs. ISM Non-Manufacturing Index 14

ISM Manufacturing Index vs. ISM Non-Manufacturing Index

14

The recent development shows that the less-volatile ISM Manufacturing Business Activity Index has declined for a year already.

For the ISM Non-Manufacturing Business Index we see a

similar picture. It seems noteworthy that nowadays the service sector reacts very sensitively to declines in asset prices.

As suggested by the ISM and several indicators, recession clouds are getting darker and darker.

70

65

60

55

50

45

40

35

30

are getting darker and darker. 70 65 60 55 50 45 40 35 30 1999 2001

1999

2001

2003

2005

2007

2009

2011

2013

2015

2017

2019

35 30 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 Recession ISM manufacturing

Recession

ISM manufacturing business activity

ISM non-manufacturing business activity

Sources: Investing.com, Incrementum AG

S&P 500 and NBER Recession Dating 15

S&P 500 and NBER Recession Dating

15

It takes 5-12 months before economic data is collected and evaluated in order to officially attest a recession (e.g. in 2007 it took 1 year until NBER made its official call).

Economic Peak

NBER Recession Dating

Monthly Lag

Market Decline Peak-To-Through Pre-Dating

01/1980

06/1980

5

-7%

07/1981

01/1982

6

-11%

07/1990

04/1991

9

-16%

03/2001

11/2001

8

-19%

12/2007

12/2008

12

-43%

3 500 3 000 2 500 2 000 1 500 1 000 500 0
3
500
3
000
2
500
2
000
1
500
1
000
500
0

1979

1984

3 000 2 500 2 000 1 500 1 000 500 0 1979 1984 1989 Recession

1989

Recession

1994

S&P 500

1999

000 500 0 1979 1984 1989 Recession 1994 S&P 500 1999 Sources: Investing.com, NBER , Incrementum

Sources: Investing.com, NBER , Incrementum AG

2004

2009

2014

NBER Recession dating

2019

Duncan Leading Indicator (YoY%) 16

Duncan Leading Indicator (YoY%)

16

The Duncan Leading Indicator is known as a reliable recession indicator. Since the late 1960s, this recession indicator had only one false positive reading, which was in the mid-1980s.

It is calculated as the ratio of consumer durables spending plus residential and business fixed investment to final sales.

Every time the YoY% turns negative, the risk of a recession rises dramatically.

15%

10%

5%

0%

-5%

-10%

-15%

a recession rises dramatically. 15% 10% 5% 0% -5% -10% -15% 1968 1973 1978 1983 1988

1968

1973

1978

1983

1988

1993

1998

2003

2008

2013

2018

-15% 1968 1973 1978 1983 1988 1993 1998 2003 2008 2013 2018 Recession Sources: Federal Reserve

Recession

Sources: Federal Reserve St. Louis, Incrementum AG

Duncan Leading Indicator YoY%

Industrial Production Index 17

Industrial Production Index

17

Another proven recession indicator is the Industrial Production Index (IPI), measuring the real production output of manufacturing, mining, and utilities. It is published by the Federal Reserve Board.

Except for the decline in 2015, which did not lead to a recession, a relatively strong decline always ended up in a recession.

30%

25%

20%

15%

10%

5%

0%

-5%

-10%

-15%

-20%

in a recession. 30% 25% 20% 15% 10% 5% 0% -5% -10% -15% -20% 1949 1959

1949

1959

1969

1979

1989

1999

2009

2019

-5% -10% -15% -20% 1949 1959 1969 1979 1989 1999 2009 2019 Recession Sources: Federal Reserve

Recession

Sources: Federal Reserve St. Louis, Incrementum AG

Industrial Production Index YoY%

Capital/Consumer Goods Ratio 18

Capital/Consumer Goods Ratio

18

The chart depicts the ratio between spending on capital and consumer goods production over time. A rising ratio indicates that relatively more capital than consumer goods are produced.

If interest rates are distorted, market participants receive misleading price signals and invest too much into capital goods relative to consumer goods.

A reallocation of capital (i.e. bankruptcies, liquidation of debt) becomes inevitable, which usually coincides with a recession. At present the illusion of a monetary perpetuum mobile still prevails in the markets.

1.1

1.0

0.9

0.8

0.7

0.6

0.5

0.4

0.3

0.2

in the markets. 1.1 1.0 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 1949 1954 1959

1949

1954

1959 1964 1969 Recession
1959
1964
1969
Recession

1974

1979

1984

1989

1994

1999

2004

Capital/Consumer goods ratio

2009

2014

2019

Sources: Federal Reserve St. Louis, Incrementum AG

What Can They Come Up With Now? Five Ways for the Fed to Further Ease

What Can They Come Up With Now? Five Ways for the Fed to Further Ease

19

QE4 • Each QE program so far has been less effective in terms of raising
QE4 • Each QE program so far has been less effective in terms of raising
QE4 • Each QE program so far has been less effective in terms of raising

QE4

QE4
QE4 • Each QE program so far has been less effective in terms of raising consumer
QE4 • Each QE program so far has been less effective in terms of raising consumer
• Each QE program so far has been less effective in terms of raising consumer

Each QE program so far has been less effective in terms of raising consumer prices (falling marginal utility). An enormous asset price inflation has been caused instead. If markets are confronted with another round of QE, this might trigger a loss of confidence in the USD and more inflation than is welcome…

Zero/Negative Interest Rates •Flawed models led the Fed to hike rates in December 2018 (“tightening
Zero/Negative Interest Rates •Flawed models led the Fed to hike rates in December 2018 (“tightening
Zero/Negative Interest Rates •Flawed models led the Fed to hike rates in December 2018 (“tightening
Zero/Negative Interest Rates •Flawed models led the Fed to hike rates in December 2018 (“tightening

Zero/Negative Interest Rates

•Flawed models led the Fed to hike rates in December 2018 (“tightening into weakness”). •In the coming months, the FOMC might finally have to admit that they do not see only a “mid-cycle adjustment”. •Negative interest rates are increasingly being discussed.

that they do not see only a “mid - cycle adjustment”. • Negative interest rates are
that they do not see only a “mid - cycle adjustment”. • Negative interest rates are
that they do not see only a “mid - cycle adjustment”. • Negative interest rates are
Currency Wars • Cheapening the US dollar could provide some superficial ease. • However, others
Currency Wars • Cheapening the US dollar could provide some superficial ease. • However, others
Currency Wars • Cheapening the US dollar could provide some superficial ease. • However, others
Currency Wars • Cheapening the US dollar could provide some superficial ease. • However, others

Currency Wars

Cheapening the US dollar could provide some superficial ease. However, others are trying the same (i.e. China, Japan, Eurozone). If everyone wants to devalue, the only things left to devalue against are gold and commodities!

Japan, Eurozone). • If everyone wants to devalue, the only things left to devalue against are
Japan, Eurozone). • If everyone wants to devalue, the only things left to devalue against are
Japan, Eurozone). • If everyone wants to devalue, the only things left to devalue against are
Forward Guidance • Possibly the first policy tool: the Fed assures that it won't raise
Forward Guidance • Possibly the first policy tool: the Fed assures that it won't raise
Forward Guidance • Possibly the first policy tool: the Fed assures that it won't raise

Forward Guidance

Forward Guidance • Possibly the first policy tool: the Fed assures that it won't raise rates

Possibly the first policy tool: the Fed assures that it won't raise rates in the foreseeable future. People will reenter carry trades: Short the US dollar, invest in emerging markets for the longer term. This tends to weaken the US dollar and to import inflation.

dollar, invest in emerging markets for the longer term. • This tends to weaken the US
dollar, invest in emerging markets for the longer term. • This tends to weaken the US
dollar, invest in emerging markets for the longer term. • This tends to weaken the US
QE for the People (“Helicopter Money”) •Running larger fiscal deficits and monetizing the debt through
QE for the People (“Helicopter Money”) •Running larger fiscal deficits and monetizing the debt through
QE for the People (“Helicopter Money”) •Running larger fiscal deficits and monetizing the debt through
QE for the People (“Helicopter Money”)

QE for the People (“Helicopter Money”)

QE for the People (“Helicopter Money”) •Running larger fiscal deficits and monetizing the debt through central
QE for the People (“Helicopter Money”) •Running larger fiscal deficits and monetizing the debt through central
•Running larger fiscal deficits and monetizing the debt through central bank action could “likely be

•Running larger fiscal deficits and monetizing the debt through central bank action could “likely be the way forward”. •Contrary to “traditional” QE, QE for the People implemented with tax deductions, would likely be more effective in raising inflation: Money is definitely being spent.

Rising Gold Reserves, in tonnes 20

Rising Gold Reserves, in tonnes

20

After seeing 650 tonnes purchased by central banks in the previous year, the analysts of the World Gold Council expect purchases of around 700 tonnes again this year.

While the gold reserves of developed countries are

stagnating, those of emerging economies have steadily risen since 2009.

“Well, it’s interesting, gold is still significant. I ask myself, if gold is a relic of a long history, why is $1 trillion worth of gold held by central banks worldwide plus the IMF and other financial institutions? If it’s worthless and meaningless, why does everyone still own it?”

Alan Greenspan

34 000 33 000 32 000 31 000 30 000 29 000 28 000 27
34
000
33
000
32
000
31
000
30
000
29
000
28
000
27
000
26
000
25
000
24
000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Developed markets Sources: World

Developed markets

Sources: World Gold Council, Incrementum AG

2013 2014 2015 2016 2017 2018 Developed markets Sources: World Gold Council, Incrementum AG Rest of

Rest of the world

Change in Gold Reserves Held by Emerging Countries, in tonnes 21

Change in Gold Reserves Held by Emerging Countries, in tonnes

21

In recent years, the “axis of gold”* countries have questioned the US-dominated global economic order. Their distrust is reflected in the steady expansion of their gold reserves.

Since Q2/2009 Kazakhstan has boosted its central bank holdings by 415%, followed by Russia (301%), Turkey (171%), China (83%), and India (73%).

The increase in gold reserves should be seen as strong evidence of growing distrust in the dominance of the US dollar and the global monetary and credit system associated with it.

* A term famously coined by Jim Rickards

2 500 2 207 2 000 1 927 1 500 1 054 1 000 618
2
500
2 207
2
000
1 927
1 500
1 054
1
000
618
550
500
375
358
314
116
73
0
Russia
China
India
Kazakhstan
Turkey
Q2 2009
Q2 2019

Sources: World Gold Council, Incrementum AG

Chinese and Russian US Treasuries Holdings, in USD bn 22

Chinese and Russian US Treasuries Holdings, in USD bn

22

Russia and China, the largest foreign holders of US debt, continue dumping US treasuries.

Both countries have sold off US treasuries worth about USD

100bn each in the last two years.

“It seems to me that our American partners are making a colossal strategic mistake [as they] undermine the credibility of the dollar as a universal and the only reserve currency today. They are undermining faith in it…. They really are taking a saw to the branch they are sitting on.”

Vladimir Putin

1 400 1 200 1 000 800 600 400 200 0 2007 2009 2011 2013
1 400
1 200
1 000
800
600
400
200
0
2007
2009
2011
2013
2015
2017
2019
China
Russia

Sources: Bloomberg, US Treasury Department, Incrementum AG

200

160

120

80

40

0

Monetary Base vs. Gold Reserves at Market Prices, in USD bn (log) 23

Monetary Base vs. Gold Reserves at Market Prices, in USD bn (log)

23

Since the end of the classical gold standard, parity between the US monetary base and US gold reserves has been restored on two occasions by an upward revaluation of gold (in the mid 1930s and in the late 1970s).

Whether a potential US dollar devaluation will happen in the framework of an international agreement or in an uncoordinated manner remains to be seen.

To cover the current monetary base of the US with gold, the gold price would have to stand at 12,600 USD!

10 000

1 000

100

10

1

would have to stand at 12,600 USD! 10 000 1 000 100 10 1 1918 1933

1918

1933

1948

1963

1978

1993

2008

Monetary base

Gold reserves at market prices

Sources: Federal Reserve St. Louis, World Gold Council, Incrementum AG

Dollars of Debt Required to Finance 1 USD Real GDP 24

Dollars of Debt Required to Finance 1 USD Real GDP

24

Expanding the money supply in a fiat money system is tantamount to piling up debt and every borrower obligated to service his debt surrenders part of his future autonomy.

In the case of government debt, younger generations are burdened with the debt accumulated by older ones. Decreasing marginal utility of additional debt units can clearly be seen in this chart.

But that is not all: Beyond the servicing of government debt, rising rents and property prices driven by money-supply expansion represent costs that wage earners have to handle

with more or less static real incomes.

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

USD 3.8 required to finance USD 1 of real GDP
USD 3.8 required to finance
USD 1 of real GDP

1954

1959

1964

1969

1974

1979

1984

1989

1994

1999

2004

2009

2014

2019

Total debt/GDP

Sources: Federal Reserve St. Louis, Incrementum AG

Total Credit Market Debt, in USD tn 25

Total Credit Market Debt, in USD tn

25

Total credit-market debt has expanded exponentially since the US dollar’s tie to gold was cut in 1971. This chart impressively illustrates the instability of growth induced by credit expansion.

Since 1954, “total credit market debt” (which is the broadest debt aggregate in the US) has increased from USD 529bn in Q1/1954 to USD 73,433bn in Q2/2019, or 127 times. In every decade, outstanding debt has at least doubled.

There is no reverse gear in the monetary system if money supply and credit don't continually rise, the system's

situation grows critical.

80 70 60 50 40 30 20 10 0 1954 1959 1964 1969 1974 1979
80
70
60
50
40
30
20
10
0
1954
1959
1964
1969
1974
1979
1984
1989
1994
1999
2004
2009
2014
2019

Total credit market debt

Sources: Federal Reserve St. Louis, Incrementum AG

Gold/Monetary Base Ratio 26

Gold/Monetary Base Ratio

26

Over the past decades, the gold backing of the US monetary base has trended down.

The monetary base (M0), has seen its gold backing

dwindle to levels below 10%.

One could conclude that gold became significantly cheaper because of this unrestrained monetary inflation.

160%

140%

120%

100%

80%

60%

40%

20%

0%

Median = 43.1%
Median = 43.1%

1918

1928

1938

1948

1958

1968

1978

1988

1998

2008

2018

Gold/Monetary base ratio

Sources: Federal Reserve St. Louis, World Gold Council, Incrementum AG

2. The Status Quo of Gold “Gold’s Perfect Storm investment thesis argues that gold is
2. The Status Quo of Gold “Gold’s Perfect Storm investment thesis argues that gold is
2. The Status Quo of Gold
“Gold’s Perfect Storm investment thesis
argues that gold is at the beginning of a
multiyear bull market with ‘a few hundred
dollars of downside, and a few thousand
dollars of upside’.
The framework is based on three phases:
testing the limits of monetary policy, testing
the limits of credit markets, and testing the
limits of fiat currencies.”
Diego Parilla
policy, testing the limits of credit markets, and testing the limits of fiat currencies.” Diego Parilla

@IGWTreport

Gold Performance in Various Currencies 28

Gold Performance in Various Currencies

28

In many currencies, such as EUR, AUD and CAD, gold is trading at or close to all-time highs!

The average annual performance from 2001 to 2019 has

been +10.0%. During this period gold has outperformed

practically every other asset class, and in particular every currency, despite intermittent, sometimes substantial corrections.

 

EUR

USD

GBP

AUD

CAD

CNY

JPY

CHF

INR

Average

2001 8.1%

2.5%

5.4%

11.3%

8.8%

2.5%

17.4%

5.0%

5.8%

7.4%

2002 5.9%

24.7%

12.7%

13.5%

23.7%

24.8%

13.0%

3.9%

24.0%

16.2%

2003 -0.5%

19.6%

7.9%

-10.5%

-2.2%

19.5%

7.9%

7.0%

13.5%

6.9%

2004 -2.7%

5.3%

-2.3%

1.8%

-1.9%

5.3%

0.7%

-3.4%

0.6%

0.5%

2005 36.8%

20.0%

33.0%

28.9%

15.4%

17.0%

37.6%

37.8%

24.2%

26.1%

2006 10.6%

23.0%

8.1%

13.7%

23.0%

19.1%

24.3%

14.1%

20.9%

17.2%

2007 18.4%

30.9%

29.2%

18.3%

12.1%

22.3%

22.9%

21.7%

16.5%

21.7%

2008 10.5%

5.6%

43.2%

31.3%

30.1%

-2.4%

-14.4%

-0.1%

28.8%

15.5%

2009 20.7%

23.4%

12.7%

-3.0%

5.9%

23.6%

26.8%

20.1%

19.3%

16.5%

2010 38.8%

29.5%

34.3%

13.5%

22.3%

24.9%

13.0%

16.7%

23.7%

25.2%

2011 14.2%

10.1%

10.5%

10.2%

13.5%

5.9%

4.5%

11.2%

31.1%

11.2%

2012 4.9%

7.0%

2.2%

5.4%

4.3%

6.2%

20.7%

4.2%

10.3%

7.5%

2013 -31.2%

-28.3%

-29.4%

-16.2%

-23.0%

-30.2%

-12.8%

-30.1%

-18.7%

-24.1%

2014 12.1%

-1.5%

5.0%

7.7%

7.9%

1.2%

12.3%

9.9%

0.8%

6.2%

2015 -0.3%

-10.4%

-5.2%

0.4%

7.5%

-6.2%

-10.1%

-9.9%

-5.9%

-3.8%

2016 12.4%

9.1%

30.2%

10.5%

5.9%

16.8%

5.8%

10.8%

11.9%

12.3%

2017 -1.0%

13.6%

3.2%

4.6%

6.0%

6.4%

8.9%

8.1%

6.4%

6.3%

2018 2.7%

-2.1%

3.8%

8.5%

6.3%

3.5%

-4.7%

-1.2%

6.6%

2.6%

2019 ytd

21.7%

16.4%

15.4%

21.4%

12.5%

20.0%

15.4%

18.0%

19.3%

17.8%

Average

9.6%

10.4%

11.6%

9.0%

9.4%

9.5%

10.0%

7.6%

12.6%

10.0%

Sources: www.goldprice.org, Incrementum AG. Data as of Oct 23rd

Average Annual Gold Price, in USD 29

Average Annual Gold Price, in USD

29

Since August 15, 1971 the beginning of the new monetary era the annual rate of increase of the gold price in US dollars has been 10%.

The inflation-adjusted appreciation of the currency gold

against the US dollar averages 4.5% per year.

This long-term context puts the correction of the years 2013-2015 into perspective, as this chart of average annual prices shows. The chart also provides impressive evidence that it is advisable to regularly accumulate gold (“gold saving”) by harnessing the cost-average effect.

1 800 1 600 1 400 1 200 1 000 10% p.a. 800 600 400
1
800
1
600
1
400
1 200
1
000
10% p.a.
800
600
400
200
0
41
58 97 158
161
125
148
194
307
613
462
377 423
361
317
367 446
381
384 438
362
344
360
384
384
332 388
294
279
279
271
310 363 410
445
605 696
873 970
1 225
1 572
1 668
1 413
266
1
161 1 1 1 1 246
258
270 1 357
Average annual gold price
Average annual gold price

Sources: Federal Reserve St. Louis, Incrementum AG

World Gold Price and Gold, in USD 30

World Gold Price and Gold, in USD

30

This chart is one of the classics of every In Gold We Trust report. It shows the so-called world gold price, which represents the gold price not in US dollars or euros but in trade-weighted US dollars.

The chart shows that the world gold price is currently trading at USD 1,995 (monthly average).

2 000

1 900

1 800

1 700

1 600

1 500

1 400

1 300

1 200

1 100

1 000

1 900 1 800 1 700 1 600 1 500 1 400 1 300 1 200

2011

2012

2013

2014

2015

2016

2017

2018

2019

Gold in USD

World gold price

Sources: Federal Reserve St. Louis, Incrementum AG

Gold, in EUR 31

Gold, in EUR

31

The 20th anniversary of the introduction of the euro as book money gives us an opportunity to take a closer look at performance over this period.

Since the euro was introduced as book money on

January 1, 1999, the price of gold in euros has risen by 454%.

The annualized performance from January 1999 to September 2019 is 9%!

1 600 1 400 +454% 1 200 1 000 800 600 400 200 0 1999
1 600
1 400
+454%
1 200
1 000
800
600
400
200
0
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
2019
Gold in EUR

Sources: Federal Reserve St. Louis, Incrementum AG

Milligrams of Gold per Euro 32

Milligrams of Gold per Euro

32

The dramatic loss of purchasing power of the euro against gold is even more impressive if depicted as an inverse. This chart shows how many milligrams of gold correspond to one euro.

Whereas on January 1, 1999 one euro “contained” 124.8 mg of gold, 20 years later the figure was only 28.3 mg. This corresponds to a loss of 82% in the value of the euro against gold.

140 120 100 80 60 40 -82% 20 0 1999 2001 2003 2005 2007 2009
140
120
100
80
60
40
-82%
20
0
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
2019

Milligram gold per Euro

Sources: Federal Reserve St. Louis, Incrementum AG

Purchasing Power of Main Currencies Valued in Gold (log) 33

Purchasing Power of Main Currencies Valued in Gold (log)

33

 

100

This chart clearly demonstrates the fact why gold is often considered as a hedge against inflation. Since 1971 the end of the gold standard era all four stated major currencies have lost drastically in purchasing power relative to gold.

Among the currencies USD, EUR, GBP and CHF, the Swiss franc has lost the least in valuation, by far.

10

1

franc has lost the least in valuation, by far. 10 1 1971 1974 1977 1980 1983

1971

1974

1977

1980

1983

1986

1989

1992

1995

1998

2001

2004

2007

2010

2013

2016

2019

USD

EUR

GBP

CHF

Sources: Federal Reserve St. Louis, Investing.com, Incrementum AG

Currency Value Relative to Gold 34

Currency Value Relative to Gold

34

This chart basically tells us the same story as the previous one, but just with a longer time horizon.

It shows where the erosion of trust in paper money leads in

extreme cases. When paper currencies were not trustworthy

in the eyes of the population anymore, they reverted to their intrinsic value, and that is zero!

120

100

80

60

40

20

0

intrinsic value, and that is zero! 120 100 80 60 40 20 0 1900 1910 1920

1900

1910

1920

1930

1940

1950

1960

1970

1980

1990

2000

2010

Gold

USD

Deutsche Mark

ECU

EUR

GBP

JPY

Mark

Reichsmark

Sources: World Gold Council, Harold Marcuse UC Santa Barbara, Incrementum AG

Gold ETF Holdings, in USD bn (left scale) and Gold, in USD (right scale) 35

Gold ETF Holdings, in USD bn (left scale) and Gold, in USD (right scale)

35

The interest of financial investors in gold is rising again. This is confirmed by the inflows into gold ETFs, which have been on the rise since the end of 2015.

For us, this indicator is representative of Western financial

investors, who choose ETFs as the primary instrument for managing their gold exposure. This is also reflected in the fact that gold ETF inflows follow an extremely procyclical pattern.

Geographical segmentation shows that in recent years European investors have weighted gold ETFs more strongly than their North American peers have done.

3 000 2 500 2 000 1 500 1 000 500 0
3
000
2
500
2
000
1
500
1
000
500
0

2003

2005

2007

North America000 2 500 2 000 1 500 1 000 500 0 2003 2005 2007 2009 Europe

2009 Europe
2009
Europe

2011

000 500 0 2003 2005 2007 North America 2009 Europe 2011 Sources: World Gold Council, Incrementum

Sources: World Gold Council, Incrementum AG

2013 Asia
2013
Asia

2015

Other

2017

2019

Gold in USD

2 000

1 800

1 600

1 400

1 200

1 000

800

600

400

200

0

Gold/S&P Ratio Bottoming 36

Gold/S&P Ratio Bottoming

36

We consider the bull market in equities as the biggest opportunity cost for gold.

Comparing the gold price to S&P 500 development, we can

see that the relative performance of gold vs. the

S&P 500 is bottoming and making higher lows.

After seven years of gold’s underperformance vis-à-vis the broad equity market, the tables may soon be turning in favour of gold.

1.8

1.6

1.4

1.2

1.0

0.8

0.6

0.4

0.2

in favour of gold. 1.8 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 2011 2012 2013

2011

2012

2013

2014

2015

2016

2017

2018

2019

Gold/S&P 500 ratio

Sources: Federal Reserve St. Louis, Incrementum AG

200d MA

90d MA

Gold, in USD (left scale) and Silver, in USD (right scale) 37

Gold, in USD (left scale) and Silver, in USD (right scale)

37

This chart demonstrates the nominal gold and silver price moves since 2000.

The silver price could also be interpreted as a sentiment

indicator for gold. Strong bull markets for silver usually only

happen in the course of rising gold prices, because investors seek higher leverage and end up with mining stocks or silver.

Silver has lagged gold so far but tends to catch up late in cycle.

2 000 1 800 1 600 1 400 1 200 1 000 800 600 400
2 000
1 800
1 600
1 400
1 200
1 000
800
600
400
200
0
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
Gold
Silver

50

45

40

35

30

25

20

15

10

5

0

Sources: Federal Reserve St. Louis, Investing.com, Incrementum AG

Gold in Nominal and Real Terms, in USD 38

Gold in Nominal and Real Terms, in USD

38

The comparison of gold in nominal and real (inflation- adjusted July 2019 USD) prices are demonstrated in this chart.

Inflation began rising tremendously in the mid-1970s and

reached about 14% in 1980. The reason for the Great Inflation was mainly monetary policy that allowed for excessive growth in the money supply. Gold peaked at USD 2,215 at that time.

2 500 2,215 USD 2 000 1 500 1 000 500 0
2
500
2,215 USD
2
000
1
500
1
000
500
0

1970

1974

1978

1982

1986

1990

1994

1998

2002

2006

2010

2014

Gold (nominal)

Sources: Federal Reserve St. Louis, Incrementum AG

Gold (inflation adjusted - July 2019 USD)

2018

S&P 500 (left scale) and Gold/Silver Ratio, inverted (right scale) 39

S&P 500 (left scale) and Gold/Silver Ratio, inverted (right scale)

39

Since 2011, disinflationary forces have provided a tremendous tailwind to financial assets. Since the early 1990s there has been an astonishing synchronization between financial assets and the gold/silver ratio: A rising stock market usually goes hand in hand with a falling gold/silver ratio, i.e. an outperformance of silver compared to gold. However, in 2012 this correlation broke down.

Our interpretation for this phenomenon is that in previous economic cycles reflation was conventionally achieved by expanding credit. This time, reflation was achieved by buying securities, which made monetary assets more expensive but did not sustainably fuel consumer price inflation.

3 000 2 500 2 000 1 500 1 000 500 0
3
000
2
500
2
000
1
500
1
000
500
0

1990

1994

1998

S&P 500

2002

Sources: Federal Reserve St. Louis, Incrementum AG

2006

2010

2014

Gold/Silver ratio (inverted)

2018

20

30

40

50

60

70

80

90

100

3. Gold Mining Stocks “For the first time in my lifetime the gold mining industry
3. Gold Mining Stocks “For the first time in my lifetime the gold mining industry
3. Gold Mining Stocks
“For the first time in my lifetime the gold
mining industry has actually decided to
become an industry rather than a floating
abstraction. This focus on productivity, this
ability to deliver economic results in 2018,
combined with the expectation of
performance in the mining industry, which is
nil, is going to yield surprise after surprise
after surprise in 2018, with damn near all of
those surprises being good.”
Rick Rule
after surprise after surprise in 2018, with damn near all of those surprises being good.” Rick

@IGWTreport

BGMI/Gold Ratio 41

BGMI/Gold Ratio

41

The extent of underperformance of gold mining stocks compared to bullion gold becomes particularly clear when we make a longer-term comparison.

The oldest available gold mining index, the Barron’s Gold

Mining Index (BGMI), is currently at its lowest level relative to gold in 78 years.

In addition, the current value is miles below the long- term median of 1.5.

6

5

4

3

2

1

0

is miles below the long- term median of 1.5. 6 5 4 3 2 1 0

1950

1956

1962

1968

1974

1980

1986

1992

1998

2004

2010

2016

BGMI/Gold ratio

Median (BGMI/Gold)

Sources: Bloomberg, Incrementum AG

BGMI/S&P 500 Ratio 42

BGMI/S&P 500 Ratio

42

The BGMI/SPX ratio currently stands at a similar level as in 2001 and 12/2015, when the last bull markets in gold stocks started.

The recent M&A deal flow might have marked the bottom of

the bear market.

“It's unpriced optionality, then, because there's going to be an M&A wave at some point. There has to be, because the largest companies have been spritzing reserves hand over fist and will have to come to the market.”

Ned Naylor-Leyland

12

10

8

6

4

2

0

to come to the market.” Ned Naylor-Leyland 12 10 8 6 4 2 0 1950 1956

1950

1956

1962

1968

1974

1980

1986

1992

1998

2004

2010

2016

BGMI/S&P 500 ratio

Sources: Bloomberg, Robert Shiller Online Data, Incrementum AG

XAU/S&P 500 Ratio 43

XAU/S&P 500 Ratio

43

If we look at mining stocks in relation to the broad equity market, we clearly see that the gold sector has been met with enormous skepticism since 2011.

The XAU/S&P 500 ratio is currently at a lower level

than it was in 2000, when the last big boom began, and at the same level as in 2016, when a 170% rally began.

1988 1992 1996 2000 2004 2008 2012 2016
1988
1992
1996
2000
2004
2008
2012
2016

1984

began. 1988 1992 1996 2000 2004 2008 2012 2016 1984 0.2 0.0 XAU/S&P 500 Sources: Investing.com,

0.2

0.0

XAU/S&P 500

Sources: Investing.com, Incrementum AG

HUI Index: Bull and Bear Market Cycles 44

HUI Index: Bull and Bear Market Cycles

44

We want to highlight the enormous volatility and inflation sensitivity of the mining sector. As the chart illustrates, gold stocks are anything but “buy and hold” investments and should be actively managed. The following quote confirms

this as well:

“Market and sector forces together typically cause 80% of the price movement in a stock. That means the company fundamentals usually account for less than 20% of a stock’s price movement. This is the reason a company’s stock price sometimes seems to move independently of the fundamentals.”

Benjamin F. King

700

600

500

400

300

200

100

0

Benjamin F. King 700 600 500 400 300 200 100 0 1996 1999 2002 2005 2008

1996

1999

2002

2005

2008

2011

2014

2017

2020

HUI Index

Sources: Investing.com, Incrementum AG

CRB Commodity Index vs. US Dollar Index 45

CRB Commodity Index vs. US Dollar Index

45

Systemic instability in recent years: All industrial commodities and practically all fiat currencies have

massively lost against the US dollar; crude oil declined by more than 50% within a mere seven months. There has been

a disinflationary earthquake in the US dollar-

centric monetary system.

Commodities, as an asset class, are an antidote to the US dollar: Price movements are reciprocal, with causality running from the US dollar to commodities attributable to the US dollar to a greater extent than is generally assumed.

700 60 600 70 500 80 400 90 300 100 200 110 100 120 2001
700
60
600
70
500
80
400
90
300
100
200
110
100
120
2001
2003
2005
2007
2009
2011
2013
2015
2017
2019
CRB Commodity Index
200d MA (CRB Commodity Index)
US Dollar Index (inverted)
200d MA (US Dollar Index (inverted))

Sources: Federal Reserve St. Louis, Thomson Reuters, Incrementum AG

GDX/Gold Ratio & GDXJ/Gold Ratio Confirm Rising Strength of Gold Miners 46

GDX/Gold Ratio & GDXJ/Gold Ratio Confirm Rising Strength of Gold Miners

46

0.07

0.06

0.05

0.04

0.03

0.02

0.01

0.00

Peak: 0.067 Trough: 0.012
Peak: 0.067
Trough: 0.012

05/2006

05/2008

05/2010

05/2012

05/2014

05/2016

05/2018

GDX/Gold ratio

0.14

0.12

0.10

0.08

0.06

0.04

0.02

0.00

Peak: 0.13 Trough: 0.016
Peak: 0.13
Trough: 0.016

11/2009

11/2010

11/2011

11/2012

11/2013

11/2014

11/2015

11/2016

11/2017

11/2018

GDXJ/Gold ratio

Sources: Federal Reserve St. Louis, Investing.com, Incrementum AG

Bull Markets in Mining Shares: Performance Is Way Below Average 47

Bull Markets in Mining Shares: Performance Is Way Below Average

47

The chart shows all bull markets in the Barron’s Gold Mining Index (BGMI) since 1942.

One can see that the current uptrend is still relatively weak

compared to its predecessors. Should we actually be at the

beginning of a pronounced uptrend in precious metals stocks which we assume to be the case then there remains plenty of upside potential.

Moreover, the chart shows that every bull market in the sector ended in a parabolic upward spike, which lasted nine months on average and resulted in prices doubling at a minimum.

800

700

600

500

400

300

200

100

0

10/1942-02/1946 07/1960-03/1968 12/1971-08/1974 08/1976-10/1980 11/2000-03/2008 10/2008-04/2011 01/2016-09/2019
10/1942-02/1946
07/1960-03/1968
12/1971-08/1974
08/1976-10/1980
11/2000-03/2008
10/2008-04/2011
01/2016-09/2019
Current bull market
1
41
81
121
161
201
241
281
321
361
401

Number of weeks

Sources: Nowandfutures, TheDailyGold.com, Barrons, Incrementum AG

4. Quo Vadis, Aurum? “The record of fiat currencies through history, 100%, is eventual failure.
4. Quo Vadis, Aurum? “The record of fiat currencies through history, 100%, is eventual failure.
4. Quo Vadis, Aurum?
“The record of fiat currencies through
history, 100%, is eventual failure. The record
of gold for 5,000 years, 100%, is lack of
failure.”
Simon Mikhailovich
is eventual failure. The record of gold for 5,000 years, 100%, is lack of failure.” Simon

@IGWTreport

Cycle of Market Emotions 49

Cycle of Market Emotions

49

In the early stages of a bull market the enthusiasm of investors is usually very subdued; skepticism and disinterest tend to predominate. This changes gradually as the cycle progresses, until euphoria and buying panics predominate

near the end of the cycle.

“The mind is a fascinating instrument that can make or break you.”

Yvan Byeajee

Euphoria

Thrill Excitement
Thrill
Excitement
Denial Fear Desperation Panic Capitulation Despondency
Denial
Fear
Desperation
Panic
Capitulation
Despondency

Anxiety

Optimism

Relief Hope
Relief
Hope

Optimism

Despondency A n x i e t y Optimism Relief Hope Optimism Depression Sources: Incrementum AG

Depression

Sources: Incrementum AG

The Emotional Rollercoaster Is Turning Upwards 50

The Emotional Rollercoaster Is Turning Upwards

50

Comparing the idealized sentiment cycle to the gold price (360-day moving average), the point of maximum

frustration appears to have been reached at the beginning of

2016.

We are currently in the stage of relief, which means that the gold bull market we are observing right now has just entered the market-emotions cycle.

1 800

1 700

1 600

1 500

1 400

1 300

1 200

1 100

1 000

Euphoria Anxiety Denial Thrill Fear Desperation Relief Panic Excitement Capitulation Hope Despondency
Euphoria
Anxiety
Denial
Thrill
Fear
Desperation
Relief
Panic
Excitement
Capitulation
Hope
Despondency
Desperation
Optimism

2010

2011

2012

2013

2014

2015

2016

360d MA Gold

2017

2018

2019

Sources: Federal Reserve St. Louis, Incrementum AG

Gold Bull Markets Comparison, log scale (indexed 10/26/1970 & 01/04/2000 = 100) 51

Gold Bull Markets Comparison, log scale (indexed 10/26/1970 & 01/04/2000 = 100)

51

The following chart illustrates the similarities between the 1970s bull market and the current bull market.

The analysis reveals the fact that the bear market since 2011

has been following largely the same structure and depth as

the mid-cycle correction from 1974 to 1976.

Supposing that the similarities persist for the next couple of years, gold should continue its upward movement for quite a while.

1970 1971 1972 1973 1974 1975 1976 1977 1978 1 350 450 150 50 2000
1970
1971
1972
1973
1974
1975
1976
1977
1978
1 350
450
150
50
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
2022
2024
2000s Bull market
1970s Bull market

Sources: Federal Reserve St. Louis, Incrementum AG

Gold/Silver Ratio (left scale) and USD 5y5y Inflation Swap, in %, inv. (right scale) 52

Gold/Silver Ratio (left scale) and USD 5y5y Inflation Swap, in %, inv. (right scale)

52

 

100

The gold/silver ratio clearly correlates with inflation expectations.

 

90

Strong bull markets for silver usually happen only in the course of rising gold prices, because investors seek higher leverage and end up with mining stocks or silver.

80

leverage and end up with mining stocks or silver. 80 70 60 • Consumer prices continue
70 60
70
60

Consumer prices continue to show only a restrained upward trend, a trend that central banks use to justify the continuation of their zero- or low-interest-rate policies. Rising price inflation coupled with mounting economic risks would probably mean the perfect storm for gold: stagflation. At the moment, however, the consensus view is that this seems an almost impossible scenario.

50

40

30

Our proprietary Incrementum Inflation Signalhas just switched to a full-blown signal!

2009

2010

2011

2012

Gold/Silver ratio

2013

2014

2015

2016

2017

2018

USD 5y5y inflation swap (inverted)

2019

Sources: Federal Reserve St. Louis, Investing.com, Incrementum AG

1.25

1.50

1.75

2.00

2.25

2.50

2.75

3.00

Commodities vs. Stocks: Lowest Valuation Since 1971 53

Commodities vs. Stocks: Lowest Valuation Since 1971

53

This chart was by far the most-quoted one in last year’s In Gold We Trust report.

It clearly illustrates that the relative valuation of

commodities in comparison with equities is extremely low

by historical standards. Compared to the S&P 500, the GSCI Commodity Index (TR) is trading at its lowest level since 1971.

Moreover, the ratio trades significantly below its long-term median of 4.10.

If we postulate the general tendency of reversion to the

mean, we see attractive commodities investment

opportunities.

10

9

8

7

6

5

4

3

2

1

0

Gulf War 1990 GFC 2008 Oil Crisis 1973/74 Median: 4.10 Dot-Com Bubble Everything (except commodities)
Gulf War 1990
GFC 2008
Oil Crisis 1973/74
Median: 4.10
Dot-Com Bubble
Everything
(except commodities)
Bubble

1971

1975

1979

1983

1987

1991

1995

1999

2003

2007

2011

2015

2019

2023

SPGSCITR Commodity Index/S&P 500 ratio

Sources: Professor Dr. Torsten Dennin, Lynkeus Capital, Bloomberg, Incrementum AG

Index/S&P 500 ratio Sources: Professor Dr. Torsten Dennin, Lynkeus Capital, Bloomberg, Incrementum AG @IGWTreport

@IGWTreport

GSCI Commodity Index/Dow Jones Industrial Average Ratio Since 1900 54

GSCI Commodity Index/Dow Jones Industrial Average Ratio Since 1900

54

Now we want to take a view of the commodities sector over an even longer time span. This chart shows that commodities are currently trading at their lowest level relative to US equities since the 1960s.

Moreover, there were only two other occasions when commodities were similarly undervalued relative to equities:

just ahead of Black Thursday on October 24, 1929, and during the excesses of the dotcom bubble.

1.2 1.0 Commodities radically overvalued 0.8 0.6 Median = 0.41 0.4 0.2 Commodities radically undervalued
1.2
1.0
Commodities radically overvalued
0.8
0.6
Median = 0.41
0.4
0.2
Commodities radically undervalued
0.0
1900
1910
1920
1930
1940
1950
1960
1970
1980
1990
2000
2010
2020
GSCI/DJIA Ratio

Sources: Goldman Sachs Commodity Index until 1970, Goehring & Rozencwajg Commodity Index pre-1970, Bloomberg, Incrementum AG

GSCI Commodity Index (left scale) and S&P 500 (right scale) 55

GSCI Commodity Index (left scale) and S&P 500 (right scale)

55

The extreme relative undervaluation of commodities compared to the stock market becomes evident in this chart. It shows the development of the S&P GSCI and of the S&P 500, as well as their combined long-term trend line.

To return to this trend line which happens on average every 6 to 8 years the S&P would have to fall by 48% and the GSCI to rise by 113%.

This is a scenario that seems highly unlikely, if not impossible, at the moment. However, a glance at this chart or into history books puts this alleged impossibility into perspective.

12 000 3 500 3 000 10 000 2 500 8 000 -48% 2 000
12
000
3
500
3
000
10
000
2
500
8
000
-48%
2
000
6
000
1
500
4
000
+113%
1
000
2
000
500
0
0

1971

1975

1979

1983

1987

S&P GSCI

1991

1995

1999

S&P 500

2003

2007

2011

2015

Linear trend line

2019

Sources: Professor Dr. Torsten Dennin, Lynkeus Capital, Bloomberg, Investing.com, Incrementum AG

Gold/Silver Ratio: Bullish on Gold? Then Consider Silver! 56

Gold/Silver Ratio: Bullish on Gold? Then Consider Silver!

56

Recently the gold/silver ratio traded at the highest level since 1991!

At the moment, it seems as if the ratio has hit a potential

reversal point again after an upward trend of more than

three years. The ratio has peaked at over 90 and is currently trading at 84.

According to the results of our statistical analysis, a sustainable increase in the gold price is unlikely to happen in tandem with an increase in the gold/silver ratio. A falling gold/silver ratio significantly increases the probability of a bull market in gold and silver.

100

90

80

70

60

50

40

30

20

10

Silver Silver +1811% +60% Silver Gold Gold +38% +595% +9% Gold +9% Silver Silver +203%
Silver
Silver
+1811%
+60%
Silver
Gold
Gold
+38%
+595%
+9%
Gold
+9%
Silver
Silver
+203%
+60%
Gold
Gold
Silver
+80%
+8%
+64%
Gold
-21%
Silver
Silver
+371%
+159%
Gold
Gold
+77%
+42%

1971

1974

1977

1980

1983

1986

1989

1992

1995

1998

2001

2004

2007

2010

2013

2016

2019

1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016 2019 Falling ratio Gold/Silver ratio

Falling ratio

Gold/Silver ratio

Sources: Bloomberg, Investing.com, Incrementum AG

Gold/Oktoberfestbier Ratio – Litres of Beer per Ounce of Gold 57

Gold/Oktoberfestbier Ratio Litres of Beer per Ounce of Gold

57

At the Oktoberfest 2019 a Maß of beer (1 liter) costs up to 11.80 EUR.

In 1950 the beer-loving visitor had to put only 0.82 EUR on

the counter. Since 1950, the annual average inflation rate of

Oktoberfestbier has therefore been 3.9%.

How many Maß of Oktoberfestbier do you get this year for an ounce of gold? Currently one ounce buys you 115 Maß of beer. Measured by the historical average of 89 Maß, the “beer purchasing power” of gold is above its long-term average.

Oktoberfest Special

250 1980: 200 227 Beer/Ounce 2019: 2012: 115 Beer/Ounce 137 Beer/Ounce 150 Average: 89 Beer/Ounce
250
1980:
200
227 Beer/Ounce
2019:
2012:
115 Beer/Ounce
137 Beer/Ounce
150
Average:
89 Beer/Ounce
1971:
48 Beer/Ounce
100
50
0
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
Sources: Statista.de, http://www.wbrnet.info/vbhtm/9999-Entwicklung-Bierpreise.html, Incrementum AG
2015 Sources: Statista.de, http://www.wbrnet.info/vbhtm/9999-Entwicklung-Bierpreise.html, Incrementum AG @IGWTreport

@IGWTreport

The In Gold We Trust Report in 8 Bullet Points 58 1. The breakdown of

The In Gold We Trust Report in 8 Bullet Points

58

1.

The breakdown of trust in the international monetary order is manifesting itself in the highest gold purchases by central banks since 1971 and the ongoing trend to repatriate gold reserves.

2.

Gold reaffirmed its portfolio position as a good diversifier as trust in the “Everything

Bubble” was tested in Q4/2018. While equity markets suffered double-digit percentage losses, gold gained 8.1% in USD and gold mining stocks 13.7% in USD.

3.

The normalization of monetary policy was abruptly halted by the stock market slump in

Q4/2018. The “monetary U-turn” that we had already forecasted last year has begun.

4.

Recession risks are significantly higher than discounted by the market. In the event of a downturn, negative nominal interest rates, a new round of QE, and the implementation of

even more extreme monetary policy ideas (e.g. MMT) are to be expected.

round of QE, and the implementation of even more extreme monetary policy ideas (e.g. MMT) are
round of QE, and the implementation of even more extreme monetary policy ideas (e.g. MMT) are
round of QE, and the implementation of even more extreme monetary policy ideas (e.g. MMT) are
round of QE, and the implementation of even more extreme monetary policy ideas (e.g. MMT) are
The In Gold We Trust Report in 8 Bullet Points 59

The In Gold We Trust Report in 8 Bullet Points

59

5.

The Belt and Road Initiative (BRI), a.k.a. One Belt, One Road (OBOR) or New Silk Road, is going to cement China's position as the world's top-ranked gold consumer as well as producer and will keep boosting physical gold trading at the Shanghai Gold Exchange (SGE).

6.

Regarding the process of de-dollarization, more and more countries are looking for alternatives to the US dollar, be it trading in other currencies, accumulating reserves of non-US-dollar currencies, or buying gold.

7.

After several years of creative destruction in the mining sector, most companies are now

on a much healthier footing. The recent M&A wave reinforces our positive basic assessment.

8.

The political and economic tensions between the USA and China are increasing. These and

other uncertainties, such as the worsening situation in Iran, should support the gold price.

These and other uncertainties, such as the worsening situation in Iran, should support the gold price.
These and other uncertainties, such as the worsening situation in Iran, should support the gold price.
These and other uncertainties, such as the worsening situation in Iran, should support the gold price.
These and other uncertainties, such as the worsening situation in Iran, should support the gold price.
Subscribe and download the In Gold We Trust report 2019 by following the link! https://ingoldwetrust.report/igwt/
Subscribe and download the In Gold We Trust report 2019 by following the link! https://ingoldwetrust.report/igwt/

Subscribe and download the

In Gold We Trust report 2019 by following the link!

download the In Gold We Trust report 2019 by following the link! https://ingoldwetrust.report/igwt/ ?lang=en @IGWTreport

@IGWTreport

Addendum Because we care… About our Clients. About the Society. About the Future. @IGWTreport
Addendum Because we care… About our Clients. About the Society. About the Future.
Addendum
Because we care…
About our Clients.
About the Society.
About the Future.
Addendum Because we care… About our Clients. About the Society. About the Future. @IGWTreport

@IGWTreport

About the In Gold We Trust Report • The gold standard of gold research :

About the In Gold We Trust Report

The gold standard of gold research: Extensive annual study of gold and gold-related capital market developments

Reference work for everybody interested in gold and mining

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