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The general market, as well as gold and the gold mining stocks, firmed up in December. Gold bullion was up 7.0% and the gold mining stocks did modestly better than that. For the full year, gold bullion was up about 25%, the second  strong year in a row but nowhere as strong as we expect to be the case in the future. The gold mining stocks had another strong year but continue to be close to all-time lows relative to the gold price, so the multiplier effect on the upside is very much intact.

We discuss below the following: (1) The ongoing explosion in deficits and debt (2) Central banks’ balance sheet expansion accelerates (3) Unprecedented sovereign debt yielding less than zero (4) Improved balance sheets of the gold mining group (5) Overview of one major gold mining stock. (5) Conclusion

Quoting the most recent Congressional Budget Office (CBO) update:

“At 14.9 percent of gross domestic product (GDP), the deficit in 2020 was the largest it has been since the end of World War II. Much of that deficit stemmed from the 2020 coronavirus pandemic and the government’s actions in response—but the projected deficit was large by historical standards ($1.1 trillion, or 4.9 percent of GDP) even before the disruption caused by the pandemic. In the CBO projections, deficits as a percent of GDP fall between 2021 and 2027 (from 8.6 percent of GDP to 4.0 percent), and then increase to 5.3 percent of GDP by 2030—more than one-and-a-half times the average over the past 50 years.”

It is worth noting that the CBO has consistently overestimated the projected growth and underestimated the deficit. However, the 8.6% deficit as a percent of GDP would amount to about $2 trillion so the US will pass the $30 trillion round number in calendar 2022.

No matter what “Modern Monetary Theory” tells you, the debt matters because it is a proven drag on growth. Even if interest rates continue to be suppressed, 1% interest expense on $30 trillion is $300 billion so that’s a guarantee that the deficit will continue to be a problem. It’s also a guarantee that interest rates will not go up much from the current average interest rate under 2%, if the Fed can control it. When they cannot, it will indicate that inflation is about to take off, and all bets are off in terms of the economy and capital markets.


Governments don’t “print money”. What the governments do is spend more than they take in, requiring lenders to buy their bonds. The central banks, worldwide, create the currency out of thin year and lend it, in our case to the US Treasury. The politicians can then satisfy the presumed needs of their constituents. They run up enormous deficits that require interest rates to be artificially suppressed, destroying the normal supply and demand relationship of capital and encouraging investors to “reach for yield”. The result, now in play, is “misallocation of capital”, enabling ridiculous valuations of all sorts of asset classes. When you hear that “valuation doesn’t matter”, history and common sense dictate that we should step aside.

This process has now reached the parabolic stage, as the chart just below on the left shows. Though central banks were established to control inflation, and were supposed to be independent of the governments, they are admittedly working together now to create inflation which they expect will stimulate consumer spending and eventually reduce the size of the debt relative to the GDP. In the long run, for 4,000 years, for 200 years, for 100 years, for twenty years (though not between 2012 and 2018) the price of gold has protected purchasing power, closely correlating most recently with the size of the central bank balance sheets. As the charts just below show, the catch-up phase for gold is ahead of us.


New records are being set as $18.4 trillion of global sovereign debt is now priced to yield less than zero, up from less than $8 trillion in March and a five-year average of $10.3 trillion. As noted monetary historian, Jim Grant, points out: “nominal negatIve yielding debt had never been seen in material size in 4,000 years of interest rate history prior to the current cycle, and recent happenings suggest that upside-down debt may grow larger still”.

Negative “real” yields, which subtract the inflation rate from the stated “nominal” interest rate create a strong incentive for investors to reach for yield in the capital markets, no matter what form that risk might take.  This TINA (There Is No Alternative) approach to investing is why $60 or $70 billion worth of SPACs are trading where they are and ridiculous valuations of many individual stocks are commonplace. It also means that savers not willing to play the TINA game are being screwed, forcing senior citizens to continue working when their conservatively invested funds are earning nothing. Negative interest rates also improve gold as an investment because the absence of interest or dividends on gold bullion is better than the negative yield on government debt.


It is increasingly difficult for gold mining companies to discover new sources. Major new discoveries have become increasingly rare, and can take a decade or more and billions of dollars, to satisfy local permitting requirements. Normally, in commodity markets, the cure for a high price is a high price, because new production is stimulated. In this case, however, even at $5,000/oz. or higher, major new production will not come onstream for years, and existing miners will continue to be at a huge advantage. While currently owned low grade ore would become more attractive to mine, this would do no more than offset the reduction in reserves that the chart below shows.


The gold mining industry has not historically been very well managed. It is expensive to find gold and requires substantial capital investment to mine it. Until recently most gold mining companies carried leveraged balance sheets, hardly ever generated free cash flow and too often made unproductive acquisitions. The period ten to fifteen years ago disillusioned investors because the gold mining companies did not reap the rewards they should have from 2000 to 2012 as bullion rose from $300 to $1900/oz. However, properly incentivized new management is often in place and cash flow and earnings are sharply higher over the last two years as the price of bullion has risen. The miners, as a group, are generating free cash flow, which is virtually unprecedented. The chart just below shows that the collective balance sheet of the gold mining industry is the least leveraged within the Russell 3000 index. In line with that, dividends are being increased and some companies are even buying back their own stock. Overall, management has become far more prudent and productive.


We provide a few facts, supported by the charts below, relative to Barrick Gold (GOLD), one of the largest publicly held gold miners and one of our larger positions. GOLD is led the last several years by highly credentialed CEO, Mark Bristow. The charts, over the last seven quarters, just below, show the dramatic improvement in operating cash flow, free cash flow, the increase in the dividend and the reduction of debt to a minimal level. GOLD generated $1.3B of free cash flow in Q3 alone, so will shortly be debt free. GOLD’s earnings per share will more than double this year from $0.51 to $1.15/share, even though production and profit was hindered by Covid related issues.

GOLD mines almost 5M oz. of gold annually, so every $100 increase in the price of gold generates half a billion dollars more in revenues. It works out that a 25% increase in the price of gold would increase earnings by 75% or more. The Enterprise Value is only 5.6x trailing EBITDA, generating a 14.1% Return on Equity and 6.7% Return on Assets, admirable performance within any industry. GOLD seems like a compelling investment, especially to those of us that believe that the price of their end product could rise substantially. GOLD is only one of our holdings, representing about 4% of our portfolio. We could describe many others in a similar fashion and chose GOLD largely because they provided charts recently, and we like charts.


We have pointed out again that negative “real yields”, along with lots of other current indicators, have strongly supported higher gold prices. We have also kept you posted relative to the buildup of deficits and debt, increasingly financed by central banks’ unbacked currency creation. While the currency debasement has continued over the last decade, the gold mining companies, as we have described above, have been improving their balance sheets and earning power.

We are admittedly surprised that the gold price retreated from August through November and gold mining stocks gave back about half of the mid-2020 gains. We attribute this “consolidation” to (1) The group had become a little too popular in the middle of the year and technically needed a correction to  shake out the weak holders and set the stage for the next leg up (2) The stock market strength has precluded a perceived need for a safe haven (3) The next trillion dollars of government fiscal stimulus was put on hold until after the election (4) The Federal Reserve balance sheet, above $7 trillion, is “only” growing by $150B/month, no longer a shock to the capital markets. We cannot predict how far TINA  will take the stock market, but the other influences, including those described above, should help to drive the gold price higher.

This point in time happens to coincide with gold bullion and the gold mining stocks trading just at the 200 day moving average price support level. As we have discussed above, the gold mining industry is very attractive by many measures, especially when so much financial, political and social disruption continues to be a fact of life. We reiterate our belief that the gold price will increase by several times in value over the next three to five years and the gold mining stocks by a multiple of that.

Roger Lipton

P.S. Our Investment Partnership, RHL Associates, LP., (as you might suspect, 100% invested in gold mining stocks) is open to new investors. An offering can only be made by way of an Offering Circular.