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We discussed last month how gold bullion and the gold miners were swept up in the panic of March ‘20, just as in the fall of ’08, irrational as it might have been for this supposedly uncorrelated, and safe asset investment class. We described how gold bullion and the gold miners led the markets higher from early ’09 through ’11-‘12 once the dust settled, and suggested that this might be the case again. In the month of April just ended, gold bullion was up  about 9% and the gold mining stocks did 4-5x as well.  Since the gold miners are still so depressed relatively, as shown in the chart just below, we expect the miners to far outperform the bullion price in the future, just as they have in April. Again we say: we expect the price of gold bullion to go up by 4-6x times in value over the next several years and the gold miners could go up by 2-4x that. Add the two multipliers together and we get potential of 8-24x the current price for the gold mining stocks. April was an excellent month, but we view it as just the bottom of the first inning of this baseball game.


This chart above shows vividly that since 2008, the relative valuation of gold mining equities to gold bullion has fallen 75% from the prior 25-year average. While the industry has recently suffered health-related mine shutdowns affecting something like 15% of worldwide production, gold not produced today should grow in value and be sold at higher prices with lower costs in the future. Earnings for almost all the publicly held operating mines were very good in Q4’19 when gold bullion was about $200 higher year to year. Q1’20, which is yet to be reported, will have gold bullion closer to $250 higher and Q1’20 has started off closer to $300/oz. higher. Importantly, energy prices, which account for something like 15% of mining costs (pushing around heavy equipment to process ore) have come down sharply, so mining companies will increasingly have the twin advantages of higher gold prices and lower mining expenses. It is relevant that in the deflationary depression of the early 1930s, Homestake Mining not only went up about six times in value from 1929 to 1935, but paid out almost twice its 1929 stock price in dividends. FDR did raise the price of gold from $20.67 to $35.00 (devaluing the dollar relative to gold) but that wasn’t until 1934. Sharply increased earnings and dividend payouts were largely the result of lower mining costs. The manufacturing “leverage” is the reason why mining stocks have historically delivered outperformance 3 to 5 times that of the metal itself in a favorable cycle for bullion prices.


As you know, we have long held the view that the worldwide economy has been built, for forty years but especially over the last ten years, on an increasingly dangerous foundation of credit and debt. The necessary financial measures to deal with the current health crisis are being imposed on a system that is already loaded down with far too much debt, short term and long term. With interest rates artificially suppressed, many trillions of dollars have been mis-allocated as investors in both equity and debt have reached for yield in increasingly risky ventures. Governmental deficits, after ten years of steady, if tepid, worldwide growth, were already approaching record levels. The US Federal Reserve asset base, which expanded from $1T to $4.5T to cope with the last financial crisis in ’08, had been reduced by mid-2019 to only $3.7T. In the current crisis, the balance sheet has gone from about $4.1T to $6.5T in just six weeks. So much for Keynesian economics, where the central bank stimulates the economy in bad times, and removes the stimulus in better times. The result, predictably, is that there is now no margin for error.

Less than six weeks ago, on March 3rd, when the coronavirus crisis was just emerging, we said:

“It is important to note that the monetary stimulus that supported the worldwide economy ten years ago……will of necessity be dwarfed by today’s needs.

“Today’s starting point for the Fed balance sheet is just over $4T and the ending point could be $10T. It always takes more (financial) heroin to maintain the (monetary) high.

”Our conviction is that the Fed, and the other Central Banks around the world have become impotent. Each round of stimulus the last twenty years has been increasingly less effective in stimulating growth. It is called a “diminishing marginal return on investment”. Monetary stimulus has run its course. It then falls back to the need for more fiscal stimulus, in the form of tax cuts, etc. That will have a limited effect, also, but will explode the deficit.”


The US government (followed by others  worldwide) are throwing trillions of dollars around like confetti. We are together watching the daily news as everybody, large and small, is being supported for an indefinite period. (Turns out that Bernie Sanders didn’t have to get elected.) The Fed assets are already over $6.5T, up about $1.5T in the last 3-4 weeks. Ten trillion dollars was the consensus for a week or two, but is constantly moving higher, and our bet is at least $15T within a year.  The Fed has to purchase most of the US Treasuries that will be sold to finance a US operating deficit that will be something like $4-5T this year ending September 30. They are also buying securities of all types, including High Yield Debt, Mortgages and Municipal Bonds. Since capital gains tax receipts are important to cities, states, and the Federal government, their absence will compound the problem for all. We have yet to see discussion of the $6T of underfunded pension liabilities, which the Fed will have to backstop in the absence of a constantly rising stock market.


It’s been said that “In every crisis, you can look like a fool either before or after”. The fiscal/monetary trends we have been “foolishly” describing “before”, along with the predictable consequences, are now being all too vividly demonstrated.  However, there is an important unexpected consequence.

The long term trends of increasing deficits and increasingly sluggish growth (burdened by the higher debt) are now being compressed in time and very substantially magnified. What might have played out over ten years is now taking place in a matter of months. The Fed balance sheet, for example, which we always believed would get to $10T, perhaps in 5-7 years, will now get there late in 2020.  Operating deficits, scheduled to grow steadily in the 2020s from comfortably over $1T this year to $2T or more by 2030, will now have a much higher baseline. Just as we have said, however, the economy will be far too burdened by debt to grow strongly, if at all. There may well be a short term rebound when the cabin fever breaks, but it will be short lived. Consumers will have been traumatized. Businesses will be trying to rebuild balance sheets, and there will be new rules for all to play by. As Warren Buffet famously pointed out: “When the tide goes out, you see who is swimming naked.”

As we said at the beginning of this letter, we believe that gold bullion will go up 3-4x or more and the gold mining stocks by a multiple of that.  We cannot think of any other asset class that offers nearly as much opportunity, and protection at the same time. We had previously thought that this would play out over perhaps five years but we now believe that it could be a much shorter time frame.

Roger Lipton