Monetary Climate Change and its implications for investors – Part II

Interview with Ronald-Peter Stöferle: Part II of II

Claudio Grass (CG): Even before the pandemic, there was a clear trend towards the politicization of central banks and monetary policy. Over the last year, however, we saw this accelerate considerably, to the point where the supposed independence of the Fed or the ECB looks like a thing of the past. Should investors, savers and ordinary citizens be concerned about this development?

Ronald Stöferle (RS): Yes, for several reasons. For one thing, central bankers increasingly see themselves as active supporters of political programs, and thus as financiers of the state, rather than as monetary guardians. Additionally, central banks raise their inflation targets. The Federal Reserve has already switched to average inflation targeting, and the ECB is currently reviewing its strategy. Finally, an increasing intertwining of monetary and economic policy can be clearly observed. Janet Yellen and Mario Draghi personify this development, but at the practical level, the trillion-euro support measures have led, among other things, to the politicization of lending. 

Another example: ECB president Christine Lagarde, against all norms and precedents, recently made a public statement in support of the Green Party’s top candidate in the upcoming German federal election. And that wasn’t an isolated incident. Christine Lagarde, along with an increasing number of high-ranking officials, have made it clear that they at least as much concerned with climate change and gender equality as with their actual area of responsibility: monetary policy.

The combined effect of all this is that opposition to higher inflation rates can hardly be heard in the public debate. However, this is not a short-term episode, but precisely the fundamental change we have noted, which investors and savers must take into account as they make medium- and long-term investment decisions.

CG: All these factors, from reckless printing and borrowing to mass stimulus checks and blind spending, are very much in line with the “teachings” of Modern Monetary Theory. Do you think its popularity and political appeal have played a part in the adoption of these policies and what are the main dangers you see ahead if we continue on this path, apart from inflation?

RS: “Whatever it takes”— that was not only Mario Draghi’s maxim in 2012, but also the maxim of countless governments in combating the economic consequences of the Covid-19 pandemic. And the next “Whatever it takes” is already around the corner, one that is likely to dwarf the orgy of spending during the Covid-19 crisis: the fight against climate change. Modern Monetary Theory has certainly laid the economic-theoretical ground with its highly questionable assertion that “deficits do not matter.” 

In addition to the expected higher inflation rates, the further politicization of lending is likely to pose another major threat. A new form of dirigisme is emerging, which is basically just another rehash of what Friedrich A. von Hayek aptly termed the “pretense of knowledge.”

CG: While the future seems rather troubling for the economy at large and for stock markets, there are many good reasons for precious metals investors to feel confident in the months and years to come. What is your own outlook on gold? 

RS: The most important medium- and long-term determinant of the gold price is real interest rates. Negative or falling real interest rates support the gold price. Positive or rising real interest rates increase the opportunity costs of gold investment and therefore depress the gold price.

At present, there is much to suggest that real interest rates will remain in negative territory for a long time. Therefore, we maintain our forecast of USD 4,800 for gold at the end of the decade based on our proprietary gold price model presented in last year’s In Gold We Trust report. 

Based on an analysis of the implied distribution density function of the gold options market, there is a probability of almost 45% that we will see a new 52-week high – USD 2,100 or higher – in December 2021 and thus also a new all-time high for the gold price at the same time. On the other hand, the probability that we will see a new 52-week low, i.e. USD 1,650 or lower, is less than 5%.

CG: What about silver? It had an interesting year in 2020, but since the start of this year, it appears to have stalled somewhat. Why do you think that is and what do you expect to see next?

RS: A healthy, long-term rally requires cooling-down phases, but the trends are in silver’s favor from a supply, demand, investment and inflation perspective. Silver’s rally is likely to last the rest of the decade, on the increasingly reasonable assumption that the world has exited a disinflationary era and entered an inflationary one.

Silver’s relative outperformance of gold since March 2020, as indicated by the gold/silver ratio’s fall from a record high of more than 120 to below 70, demonstrates silver’s relative strength. At the same time, a falling gold/silver ratio significantly increases the probability of a gold bull market. A downward trend in the gold/silver ratio would signal a positive outlook for gold on the one hand and rising inflation dynamics on the other.

With the gold/silver ratio averaging 68.6 since the beginning of 2021, there remains much profitable territory to traverse. As noted in last year’s In Gold We Trust report, in the climactic final year of previous inflation eras, the gold/silver ratio reached 16 in 1980 and 31 in the year 2011.

CG: For conservative investors and for those of us who understand monetary history, these are very uncertain times, despite the fact that mainstream analysts and official figures keep celebrating the “great recovery”. What would be your advice for the long-term investor looking to protect and preserve their wealth going forward?

RS: Gold can serve an investor in two ways, either as performance gold or as security gold.

Performance gold offers the opportunity to participate in certain price movements. The range of investment opportunities is large. For example, you can buy futures, mining stocks, exchange-traded funds (ETFs) or gold certificates. Although one does not come into the physical possession of gold, one can still actively trade, because of the low trade and storage costs and, for example, speculate on inflationary tendencies. Since gold correlates little or even negatively with most other asset classes, the addition of gold, such as gold certificates, to a portfolio can significantly improve its performance. 

Mining stocks mostly move in line with the price of gold, but are more volatile on the way up as well as on the way down. This makes mining stocks a more appropriate choice for professional investors. But caution is also necessary with gold certificates. Although they are used to acquire a claim to physically deposited gold, considerably more certificates are issued than the gold that actually lies in vaults. This means that the same game is played here as that played by a Fractional-Reserve Bank.

Those who are buying gold for the reason of hedging against a major crisis in our monetary system should buy security gold, i.e. physical gold, and keep it safe outside the banking system. Security gold is a buy-and-hold investment, an insurance against a system collapse. The big advantage of buying physical gold is that it has neither a maturity risk nor a commodity risk, and above all, no counterparty risk.

And yes, the coming years will see significant changes at many levels. At the individual level, investment decisions will have to be taken in a more inflationary environment. At a global level, a reorganization of the monetary order is quite likely, which will reflect the tremendous shift in political and economic power that has been going on for many years already. Gold will be instrumental in helping any portfolio successfully weather the coming turbulence. 

Claudio Grass, Hünenberg See, Switzerland