Interview with Ronald Stöferle – Part II
Claudio Grass (CG): Looking at the interest rate policy of the last years, it would seem that central banks are backed into a corner. They cannot hike borrowing costs without risking a domino effect, as both government and corporate debt have reached record highs, encouraged by the central banks’ own NIRP and ZIRP policies. In your view, is there a “safe” way out of this vicious circle?
Ronald-Peter Stöferle (RPS): Well, for us at Incrementum, this is precisely one of the main risk factors we’re seeing going forward and it really is quite shocking how little attention it is receiving. In our In Gold We Trust reports, we’ve dedicated roughly 2,000 pages of research and analysis on this topic and as I also explain in great detail in my latest book, “The Zero Interest Rate Trap”, we simply cannot afford higher interest rates.
Since 2007, global debt skyrocketed, from $116 trillion to $244 trillion today. That’s a $128 trillion surge, while global nominal GDP has only risen from $58 trillion to $85 trillion, a mere $27 trillion increase. We saw debt outstripping the income required to support that debt by a factor of five and that just shows there’s a case to be made for diminishing marginal utility of these policies.
Now, with these levels of indebtedness, it’s not a policy choice to keep interest rates as low as possible and for as long as possible, it is a necessity. As for a possible way out, there is none, not realistically anyway. But of course, that won’t stop central bankers and governments from trying. Debt forgiveness, haircuts, defaults… call it what you want, but that’s how this most likely ends.
CG: Retail interest has been revived in gold and silver, as individual investors and savers recognize the strategic advantages in precious metals, especially at a time where no other “good” options are available. Stocks are overvalued and bonds pay nothing, and increasingly often, even less than nothing. Do you expect this trend to continue and to see more ordinary people flock to precious metals to preserve value and protect their savings?
RPS: It is already happening! Only a month ago we saw images out Germany of people literally standing in line to buy physical gold, as soon as the government passed yet another limitation on individual purchases, now only allowing people to buy up to EUR 2,000 in gold without an ID.
It has been clear for some time now that more and more people begin to realize that their savings will not earn any interest for the years to come, while gold’s return is on average clearly positive. Especially in Europe, most savers and soon-to-be pensioners have really felt the impact of negative interest rates, as they have been penalized for years for not spending and for just trying to adopt some common-sense financial responsibility. Even those who never considered precious metals before as an investment are increasingly being forced to do so, as they are no other accessible options left open to them in order to protect their savings.
CG: What of institutional investors? What’s your view on the current demand levels and do you anticipate an increase there too in the coming months?
RPS: There has been an increase in demand, but I think that’s only just the beginning. I think especially central bankers are clearly seeing the need to diversify out of the USD and I’m pretty sure that, despite their official statements, definitely understand and appreciate the excellent portfolio characteristics of gold.
Hence the surge we saw in gold purchases, which last year reached levels unseen since the 1970s. And it’s not just emerging economies that have been stockpiling gold, after all, the rising gold stocks of the Russian and Chinese central banks are not news to most people interested in gold. However, we’ve also seen countries like Poland and Hungary follow suit.
In fact, the case of the Hungarian central bank is particularly interesting, as it recently increased its reserves tenfold, with its first gold purchases since 1986. Even more tellingly, the official announcement stated: “In normal circumstances, gold has a confidence-building feature, i.e. it may play a stabilizing role and act as a major line of defense under extreme market conditions or in times of structural changes in the international financial system or deep geopolitical crises. In addition, gold continues to be one of the safest assets, which can be related to individual properties such as the limited supply of physical precious metal, which is not linked with credit or counterparty risk, given that gold is not a claim on a specific counterparty or country.”
And of course, let us not forget about the wave of gold repatriation, which is also a clear sign of loss of trust. I think this, combined with the central bank buying spree, indicates growing mutual distrust among central banks. We already covered this issue in our In Gold We Trust report 2018, under the heading “A turning of the tide in the global monetary architecture”, and this year we are again dealing with the topic of de-dollarization, which has lost none of its relevance, in a separate chapter.
CG: The de-dollarization trend is indeed a very strategically important topic, with huge investment implications. What is your take on it and what shifts do you expect to see in the coming years?
RPS: As James Steel put it, “Gold goes where the money is; it came to the United States between World Wars I and II, and it was transferred to Europe in the post-war period. It then went to Japan and to the Middle East in the 1970s and 1980s and currently is going to China and also to India“.
Thus, it is not surprising to see that more and more countries are looking for alternatives to the US dollar, whether they are trading in other currencies, accumulating reserves of non-US dollar currencies, or purchasing gold. Major players, like China, Russia and now also Europe, are taking steps to undermine the US dollar system, such as the establishment of alternative payment systems.
Many politicians and central bankers have been complaining for a long time that the US is using its currency as a weapon and indeed, this weaponization of the USD can be observed increasingly frequently. However, now there is a growing opposition, with the means to practically challenge the dominance of the USD. Just one look at the Shanghai Cooperation Organisation, led by gold-friendly China and Russia, suffices to realize that this opposition actually represents roughly half of the world’s population.
CG: Overall, given the unstable ground we’re standing on going into the new decade, what are your expectations going forward and what would be your advice for investors who wish to protect their wealth?
RPS: I‘d venture to say that gold is very likely to shine. The demand is well supported, mainly driven by physical buying, especially bearing in mind the record purchases by central banks and gold ETFs. Of course, the recent level of uncertainty has also helped, as the record highs in speculative futures position suggest, which may point to macro hedge funds building positions.
As far as political crises go, I’d advise investors not to put too much emphasis on them. Their impact on gold is always very short-lived and basing one’s investment decisions on such news and headlines is not a wise strategy. Instead, it much more important to pay attention to the direction of real interest rates and central bank policy.
As we know, Job of central bankers is printing money. And business has been booming recently: Between the 4th of September 2019 and January 1st 2020, the Fed has printed $413 billion, to appease Wall Street’s trading houses and their trillions of dollars in interest-rate derivative bets…. Just to put this figure into perspective, this is 50% more aggressive than QE3, which once again clearly demonstrates the diminishing marginal utility of central bank interventionism.
Therefore, when people talk about a remarkable recovery and about sustainable expansions and healthy rises in equity markets, it is important to remember that, as Dave Rosenberg highlighted, there is only a 7% correlation between the S&P 500 and GDP in this cycle, but a 70% correlation between the S&P 500 and the movements in the Fed balance sheet.
Finally, it is key for investors to understand that central bankers and governments will not just stop their interventions and admit defeat. If anything, we can expect even more aggressive policies and experiments as the economic and financial system comes to a grinding halt.
There’s already a variety of ideas on the table, being seriously discussed on mainstream platforms. “QE for the people”, which is very similar to Milton Friedman’s “helicopter money” has gained traction, while Modern Monetary Theory has actually entered policy debates in the US Presidential election campaign. The promotion of a “green new deal” in the US and all the virtually identical initiatives in the EU are also an attempt to justify additional public spending, which in countries with historically low unemployment like Germany will increase inflationary pressure nearly 1:1. Of course, all these policies are very popular, as they include all the promises that voters want to hear, so we shouldn’t really be surprised if they come to pass in one form or another.
Amid all this madness, I think gold really is the 7th sense of financial markets, especially when it comes to sniffing out inflation. The price gains are early indicators that there’s more QE in the pipeline, more fiscal stimulus thinly disguised as “green policies” and that very likely there’s recession on the way.
Claudio Grass, Hünenberg See, Switzerland
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