Tag Archives: GLD

SEMI-MONTHLY FISCAL/MONETARY UPDATE – MAY WAS GOOD FOR GOLD – NOT SO GOOD FOR BITCOIN, BUT YOU CAN EARN INTEREST ON YOUR CRYPTOCURRENCY

SEMI-MONTHLY FISCAL/MONETARY UPDATE – MAY WAS GOOD FOR GOLD – NOT SO GOOD FOR BITCOIN, BUT YOU CAN EARN INTEREST ON YOUR CRYPTOCURRENCY!

MAY WAS GOOD FOR GOLD

The general market was basically flat in May but gold bullion and the gold miners had a good month. Gold bullion was up about 7.7%, gold mining stocks did approximately double that, and our Partnership’s portfolio mirrored that. The result is that gold bullion has now retraced its earlier loss, is now virtually flat for the year, while the gold mining stocks are now ahead for the year. There is every reason to believe that the last three months for gold related securities are a harbinger of even better performance to come.

GOLD AND BITCOIN

It might not be a major factor, but bitcoin, which has likely attracted some potential gold buyers to the “digital gold, as bitcoin enthusiasts like to say, retreated from a high of $64,000 to a low around $30,000. We don’t view bitcoin as anything other than a symptom of the fiscal/monetary folly that has engulfed the civilized world the last ten years, but some speculators who might have “played” with gold or the gold miners have no doubt been seduced by bitcoin. We think, as we have repeatedly suggested, that gold is the real money, a durable and unique store of value and unit of exchange, as demonstrated over thousands of years. For what it’s worth, bitcoin is only one of 10,000 cryptocurrencies, and its dominance among them is being steadily diluted.

GOLD PROVIDES NO RETURN IN TERMS OF INTEREST OR DIVIDENDS, HOWEVER…….

The absence of a steady return, in the form of interest or dividends, puts gold bullion ownership at a distinct disadvantage to bonds or stocks. These days, however, there is virtually no return in safe short term fixed income securities. One year US Treasures pay 0.14% and 5 years only gets you 0.79%. The dividend return on the S&P 500 index is only 1.38% and there is a natural risk within stock ownership. With inflation running about 4% in the last twelve months, stocks and bonds have a negative “real return” of about 3%, so gold bullion is not at such a disadvantage. It is worth noting that many of the high quality gold mining companies are now paying dividends of 2% or more, allowing the gold mining stocks to be even more competitive. This is why the performance of gold bullion and the gold mining stocks have correlated strongly with the level of “real interest rates”. The more negative the “real” return on stocks and bonds, the better gold related securities do.

YOU CAN NOW EARN AN INTEREST RATE RETURN ON YOUR OWNERSHIP OF BITCOIN, HOWEVER…..

You will be hearing more about the opportunity to earn interest on your holdings of bitcoin or other cryptocurrencies.

At first blush, how can this be? Who is paying this interest, especially since bitcoin cannot be possessed physically?

This is a brave new world. Bitcoin and many of the other (10,000) cryptocurrencies are traded on a variety of exchanges. Some of those exchanges are allowing traders to “short” cryptocurrencies, just as investors have been allowed to short stocks and bonds for ages. To allow this, the exchange has to offer a cryptocurrency “savings account” to owners, in turn allowing the short seller to “borrow” the asset from the exchange, which appropriates it (temporarily) from the true owner. That means the exchange has to “remove” it, somehow segregating it from the owner’s account, providing it to the short seller, allowing for “delivery” to whomever is buying it from the short seller.

Just as when scarce stocks are lent by third parties (such as Fidelity, Schwab, etc) the short seller pays a fee for the “borrow” (can range from a couple of percent to upwards of 50% annually) and 40-50% of that is rebated to the true owner, who allows their stock to be “taken” temporarily by Fidelity or Schwab, and lent out. This can generate a very attractive “return” to the true owner. However, the risk to the lending owner is that the speculative security, which is “hard to borrow” and that’s why the short seller pays the interest charge, may be as risky as the short sellers believe, and decline sharply in price, more than offsetting the interest rebate to the owner. Parenthetically, the true owner can call for a return at any time if they want to sell the stock for any  reason. That in turn, can create a “short squeeze”, when the short seller is forced to buy back the stock, to return it to Fidelity or Schwab, who returns it to the selling true owner.

All of this negates one of the original advantages of bitcoin and the other cryptos, which was to prevent access by  third party agencies.

It also puts the cryptocurrency owner at the mercy of the “exchange”, on which cryptocurrencies are traded and within which ownership is maintained. Coinbase Global, Inc. (COIN) is the largest “exchange”, which came public recently and trades with its own Market Capitalization of about $50 billion. It is a “regulated” (sufficiently?, who knows?) cryptocurrency company that provides customers with a platform for buying, selling, transferring, and storing digital assets. Many exchanges offer a variety of interest rates on many cryptocurrencies. The interest rates vary widely, depending on the exchange and the cryptocurrency, and can sometimes provide even double digit yields.

However…..to earn that return you subject yourself to “third party” exposure, adding the exchange risk to the price risk of the crypto. How much do you really know about the exchange (depository) you have chosen, and what recourse do you have in the event of default?

THE BOTTOM LINE

I asked a good friend of mine, who has a substantial ownership of bitcoin, if he is earning any interest on his holding. He responded that he buys and sells bitcoin through Coinbase. He does not want to allow even Coinbase to appropriate his holding, let alone one of the other exchanges that are willing to pay a high interest rate. As of today, June 2, 2021, Coinbase does not show any interest rate offered on bitcoin, but the BlockFi exchange is paying 5%, Nexo is paying 6%, and Celsius is paying 3.5%, to name just a few.

There is no free lunch. Be careful out there!

Roger Lipton

SEMI-MONTHLY FISCAL/MONETARY REPORT – DEFICITS EXPLODING, INFLATION UPTICKING, CRYPTOCURRENCIES LOSE THEIR LUSTER, WHILE GOLD RESUMES ITS UPWARD RUN

SEMI-MONTHLY FISCAL/MONETARY REPORT – DEFICITS EXPLODING, INFLATION UPTICKING, CRYPTOCURRENCIES  LOSE THEIR LUSTER, WHILE GOLD RESUMES ITS UPWARD RUN

I cannot resist commenting on, and correcting the latest version of revisionist economic history.

Just yesterday Maria Bartiromo was interviewing Peter Navarro, President Donald Trump’s Director of Trade and Manufacturing and a frequent economic spokesperson. After predictably predicting a weak stock market, burdened by the poor policies of President Biden, his description of the last ten years went like this: “Under President Obama, coming out of the 08-09 crash, the GDP grew by a meager 2%, and the debt doubled. Under Donald Trump, we grew at 3% and the economy was roaring before the pandemic hit.”

Not quite:

Under President Obama, the GDP grew by an average of 1.6%, held down by a negative 2.5% in ’09, coming out of the crash. Excluding ’09, GDP grew at an average of 2.2% over seven years.

Trump’s four years went +2.3% in ’17, +3% in ’18, +2.2% in ’19 and -3.7% in pandemically driven 2020. Excluding the last year, out of Trump’s control, just as Obama’s first year, Trump’s economy grew at an average of 2.5%.

So: A reasonably fair comparison would be that Trump’s economy, buttressed by lower taxes, a trillion dollars of overseas corporate capital repatriated, less legislative burden, and a friendlier business climate, grew three tenths of one percent faster than Obama’s. If one wants to include the first year under Obama and the last under Trump, under control of neither, the average would be 0.95% under Trump and 1.6% under Obama.

As far as the debt is concerned, under Obama the debt went from $10.6 trillion at 1/20/09 to $19.9 trillion at 1/20/2017, an increase of $9.3 trillion over EIGHT YEARS. The debt under Trump increased to $27.8 trillion at 1/31/21, an increase of $7.9 trillion over FOUR YEARS.

Don’t believe anything you hear and very little of what you read!

With that off my chest, the fiscal/monetary chickens are coming home to roost. The factors that we have been discussing for years are becoming too obvious for the financial markets and policy makers to ignore.

The table just below shows the monthly deficit numbers. For the month ending April, the deficit was “only” $226B, down from the explosion of $738B in the first full month of the pandemic last year. Still, we are running 30% ahead of a year ago, which finished in a $3.1 trillion hole, and there is huge spending ahead of us this year. With the trillions that are being thrown around, it seems likely that the deficit for the current year will be over $4 trillion. Keep in mind that our Federal Reserve is buying the majority of the debt that we are issuing to fund this deficit, so we are literally “monetizing” the debt by paying for the deficit with freshly printed Dollars. It is in this context that we have suggested that there is no need to raise taxes on anyone, rich or poor. None of it will supply more than a few hundred billion dollars per year, and there is much less aggravation for everyone if one of Jerome Powell’s hundreds of PHDs pushes a computer button and produces the US version of a digital currency. Of course, inflation will be the cruelest tax, especially on the middle and lower class citizen, but they will likely never understand the cause.

Inflation in consumer goods, rather than the asset inflation we have seen in the last ten years, is finally rearing its beautiful (as far as the Federal Reserve is concerned) head. Post pandemic demand, along with looser purse strings as pandemic relief checks are distributed, is replacing the pandemic induced reduction of demand that has suppressed the economy over the last year. As we wrote last month, some very bright economists are agreeing with Jerome Powell that inflationary indications are “anchored” and “transitory”, but we believe transitory may last longer and not so well anchored as expected. The last twelve months of the CPI are now above 4%, and the CPI is widely considered to be understating the inflationary facts of life.

We consider that there has been an undeniable bubble in all kinds of assets, from Tesla to Bitcoin, to collectible homes worth a hundred million dollars to crypto-art and lots of individual stocks that trade for 50x sales instead of a more modest multiple of earnings or cash flow. Investors of all stripes are reaching desperately for a “return”, as evidenced by the historically low yield spread between high yield debt and US Treasury securities, as well as the asset classes referred to above. As we write this, a number of these upside distortions are in the process of being corrected. Tesla is down from over $900 to under $600. Bitcoin is $43k, down from $64k three weeks ago, the bloom is coming off the SPAC rose, and GameStop is down well over 50% from its ridiculous high. However, the process has just begun and will no doubt play out over a number of years.

Gold and gold mining stocks seem to have consolidated adequately since last August, when interest rates went modestly higher, and have just now established new bullish chart patterns. Negative “real interest rates”, subtracting the inflation rate from the yield on short term treasuries, has a strong correlation with the price of gold. The more negative the “real” interest rate, the more attractive is gold bullion, with no dividend or interest. Almost to the day, last August, when interest rates moved higher, reducing the degree of negativity, the gold price started drifting lower. Real treasury rates never turned positive, but the smaller degree of negativity reduced the urgency for ownership of gold. While interest rates have not gone back down to levels of nine months ago, inflation has picked up substantially, so short term treasuries yield several points less than the 4.2% trailing twelve month inflation rate and gold therefore protects purchasing power very well without paying interest or a dividend. The result is that gold bullion, as well as gold mining stocks have now broken out above their 200 day moving average price lines, so technicians will reprogram their algorithmically driven computers. While gold bullion is still down a percent or two for the year, gold mining stocks are positive for the year and have never been fundamentally cheaper.

It continues to be our conviction that gold mining stocks, in particular, are the single best place to protect one’s purchasing power over the long term, and our investment partnership is invested accordingly. Since there seems to be an increasing interest in this subject, in very quick summation:  I am personally the largest Limited Partner, by far, as well as the Managing General Partner of RHL Associates LP, as I have been for the 28 year life of the Partnership. The minimum investment is $500k and the fee structure is “1 and 10”. Funds can be added on the first of any month and withdrawn at the end of any quarter with 30 days written notice. We remain open to new investors, keep our investors apprised on a monthly basis as to our performance, and can be contacted through this site or by email at lfsi@aol.com.

Roger Lipton

SEMI-MONTHLY FISCAL/MONETARY UPDATE – THERE IS NO GRACEFUL WAY OUT OF THIS MESS!

SEMI-MONTHLY FISCAL/MONETARY UPDATE – THERE IS NO GRACEFUL WAY OUT OF THIS MESS!

The capital markets were quiet in June compared  to April and May, but still productive for owners of gold related securities.  The general market was up slightly in June, but all indexes except Nasdaq are still down for the year. Gold bullion was up 2.7% (now up 17% for the year. The gold mining stocks, with their cash flow and earnings leveraged to the price of gold, are still cheap statistically and are moving at a dramatic rate. Most impressively, in the last three month, from the low point, gold bullion is up 13% and the gold mining stock indexes are up well over 50%.   As our discussion below shows, the trends are more than adequately clear, all supportive of much higher prices for gold bullion and especially for the gold mining stocks .Moreover, there is no graceful way out of this fiscal/monetary mess.

Pictures can efficiently provide a summary of what has been going on from a fiscal/monetary standpoint over many years, leading us to a considered opinion of what the financial world will look like in the future.

The chart just below shows the current 30 year yields in various countries around the world. It is an axiom that the bond market supposedly prices in some sort of a “real” yield on top of allowing for inflation.  With the US 30 year yielding close to an all time record low of 1.44%, hardly anybody expects inflation to be zero over the next 30 years, which would provide a 1.44% “real yield”. It is a better assumption that the pricing represents expectations of a weak economy as well as the US Fed’s intention to increasingly support the long end of the yield curve.  The 30 year is “bid” to represent a safe haven as well as a short term trade, rather than a 30 year investment.

We can also assume that interest rates will stay very low, if the US Fed has anything to say about it (and so far they have), because it is only the ultra low rates that allow the US to carry the sharply increasing debt load.  The charts below show the ongoing annual budget deficits as well as the increase in the Federal Reserve’s balance sheet, whereby the Fed has been financing an increasing amount of the US operating deficit. Lest you think that this will all change once the economy gets going, and the operating surplus will reduce the cumulative debtt: Since 1981 there have been a grand total of four surplus years, the last three under Bill Clinton and the first under GW Bush, before the two wars started. The total surplus in those four years was about $760B, so you can judge for yourself how much of a dent  a stronger economy will make in the current $26 trillion growing debt federal debt burden.

We can also assume that interest rates will stay very low, if the US Fed has anything to say about it (and so far they have), because it is only the ultra low rates that allow the US to carry the sharply increasing debt load.  The charts below show the ongoing annual budget deficits as well as the increase in the Federal Reserve’s balance sheet, whereby the Fed has been financing an increasing amount of the US operating deficit. Lest you think that this will all change once the economy gets going, and the operating surplus will reduce the cumulative debtt: Since 1981 there have been a grand total of four surplus years, the last three under Bill Clinton and the first under GW Bush, before the two wars started. The total surplus in those four years was about $760B, so you can judge for yourself how much of a dent  a stronger economy will make in the current $26 trillion growing debt federal debt burden.

You have now seen how the bond market is predicting slower growth, at least in part due to the growing debt burden (around the world), which has been financed largely by worldwide Central Banks.

The last chart shows the steady decline in GDP growth in almost every post-recession expansion since 1981. The most recent ten years is fresh in our mind. A business friendly outsider passed one of the largest tax reductions in history, allowed for repatriation of almost one trillion dollars that had been frozen overseas, reduced the legislative burden on businessmen and encouraged the Federal Reserve Bank to print trillions of new dollars and keep interest rates near zero. The result was a grand total of 2.3% real annual GDP Growth over the last ten years, perhaps 0.1% to 0.2% more in the last three years under President Trump than under President Obama. This can be best described as a minimal “marginal return on investment”.

The coronavirus pandemic will be in the rear view mirror at some point in the next six to twelve months. The trends as described above will not. Rates will still be low, as signaled by Jerome Powell just recently, through 2022. This is because (1) the economy needs the support and (2) the US budget cannot afford higher rates on $26 trillion of growing debt. The annual deficits and cumulative debt will continue to step up by record amounts because that is essentially baked in the cake at this point. Just yesterday Fed Chairman, Jay Powell, reiterated the intention to invest a trillion dollars in all kinds of corporate bonds and ETFs. Also under active discussion is a trillion dollar infrastructure program.

As a result of the domestic debt burden, amplified by similar trends in every major worldwide trading nation, our expectation is that, after the sequential improvement from depression level economic activity, average real GDP growth will be no better, most likely materially worse, than the meager 2.3% average real GDP growth of the last ten years.

We fully expect that gold bullion will outperform equities in the next ten years, just as it has in the last decade. The bond market has outperformed both, as the entire yield curve was repriced downward, but that is less likely, from current levels, in the future.  Gold mining stocks have substantially underperformed the price of gold bullion over the last ten years and we continue to believe that they will be the best performers of all.

Roger Lipton*

*Roger Lipton is the managing General Partner of RHL Associates, LP, a Limited Partnership  that is 100% invested in gold mining stocks.

SEMI-MONTHLY FISCAL/MONETARY UPDATE – THE CORONAVIRUS, EVEN SOCIAL UNREST, WILL PASS, ECONOMIC RAMIFICATIONS WILL BE FAR LONGER LASTING

SEMI-MONTHLY FISCAL/MONETARY UPDATE – THE CORONAVIRUS, AND EVEN THE SOCIAL REST, WILL PASS, BUT THE ECONOMIC RAMIFICATIONS WILL BE FAR LONGER LASTING

PROLOGUE

We wrote most of this update a couple of weeks ago, before the horrific situation in Minneapolis triggered protests, often with accompanying riots, in major cities all over America. There is no doubt that the growing wealth and opportunity gap in America, in and of itself,  is adequate justification for protest and rebellion. The stage was set, on top of that, by the social and economic tension from several months of restricted activity due to the coronavirus pandemic. While we cannot claim to be an authority regarding social trends, the recent developments, unfortunately, magnify  and accelerate even further the trends we discuss below.

THE MONTH OF MAY

While the general equity markets were strong all month, as investors seem to assume that the Coronavirus pandemic is in the rear view window, gold bullion strengthened a bit as well, up 2.6% for the month. The gold mining stocks continued their strong relative performance of April, up by low double digits in May and now comfortably positive for the year. As we have suggested, the gold miners should move at a multiple of the gold price because of their operating leverage and that is happening. Most impressively, since March31st, the low point, gold bullion is up about 9.9% and our gold mining stocks are up over 5 times that, measured by an average of GDX and GDXJ, the two major gold mining ETFs.

We continue to point out that the miners are down a lot more from their highs of 2011-2012 than gold bullion. Bullion, at $1730/oz. is down about 10% from the high and the gold mining stocks are still down well over 50%. Theoretically, then, if gold bullion moves up by 10%, the miners could double. That might be a “reach”, but the seven times move over the last two months could be indicative of what is ahead. Let’s hope so.

The following update is longer than we like to provide. However, since there is so much misinformation about the role of gold and the prospects for the gold miners, we want our readers to  be as well informed as possible.

THE STIMULUS IS MIND BOGGLING –THERE IS NO END IN SIGHT, AND IT IS A WORLDWIDE PHENOMENON

The coronavirus will pass, but the economic ramifications will be far longer lasting.  You don’t get out of a fiscal/monetary hole by continuing to dig. The current health crisis has brought forward, accelerated, and magnified the economic trends that were already in place. The monstrous buildup in debt is important because economic history has clearly shown that the higher the debt burden the bigger the drag on productive growth. This is why the longest (and falsely promoted as “the strongest”) economic expansion in US history only provided 2.3-2.4% annual real GDP growth from ’10 through ’19. You heard it here first: there is no chance in hell that future growth (after the “dead cat bounce” from current levels) will be higher than 2% or so, likely to be materially lower, with the new debt burden that the world will be carrying. 

We all know that the Fed balance sheet is exploding, as it finances the monstrous government spending. It is instructive to look at the pattern of growth over the last dozen years, as the supposedly apolitical Fed ignores the conservative side of the Keynes economic equation. John Maynard Keynes suggested, in the late 1920s and early 1930s,  that the Fed should provide stimulus in hard times and pull it back in better times, presumably muting potential booms and busts. Unfortunately, economic conditions never seem to get good enough to remove the previous accommodation.

Recapping the last dozen years: The Fed Balance sheet was under $1T in early ’08. It grew to about $2.2T by late’08, stayed around that level until mid ’09 when it started moving to about $3T by late ’11. From late ’12 to late ’14 it moved to $4.5T where it stayed until early ’18. The economy apparently never got quite good enough to pull back between ’10 and late ’17. In early ’18 the Fed announced a program of “automatic” reduction, with the implied objective to get back to perhaps $2.5-3.0T. It got back (only) to $3.7T by the end of ’19, but with the economy softening and distortions in the short term “repo” bond market, the Fed backed off and built its asset base to $4.2T, clearly on the way to a new high by mid’20.

Which brings us to the current “new world”. Since March 4, 2020, the Fed has taken its balance sheet from $4.2T to $7.0T, and Chairman, Jay Powell, has indicated that he will do “whatever it takes”. We expect it to be $10T or more in a matter of months. Folks,, this does not provide organic, productive, sustainable economic growth. This only provides an addictive high (not so high, in this case), supportive by always increasing doses of fiscal/monetary drugs.

The money printing, as the Central Banks finance their respective deficits, is not limited to the United States. Just this week, the European Common Bank announced a $2T stimulus package and The Japanese Central Bank weighed in with $1T. While the European economy, in total, is larger than the US, the Japanese economy is only 1/6 our size, so these are huge numbers in any context.

The debt and deficits that require the Fed’s intervention are likewise exploding. The US debt, excluding unfunded entitlements like Social Security, is now approaching $26T, up from $22.7 at 9/30/19. The operating deficit which was supposed to be about $1.2T for the full year ending 9/30/20 is now expected to be at least $4.0T. The deficit in April alone was $738B. At this junction, after trillions of dollars have already been provided, it is clear that there is much more fiscal/monetary stimulus to come and nobody knows the ultimate magnitude or duration. Most importantly: virtually everyone, fiscal hawks and doves alike, bipartisan in nature, agree that the support must be provided, and we can all worry about the ramifications later.

 THE PRICE OBJECTIVE FOR GOLD BULLION

The price of gold has shown a strong long term correlation with the federal US debt. The buildup of the Federal Reserve balance sheet over the last fifteen years has also strongly correlated with the gold price. The above discussion therefore supports a materially  higher price of gold related securities.

We believe that gold has proven itself for thousands of years as a store of value, is the ultimate currency, and this is the single most important reason that it is worth owning. It competes with paper currencies as the supply and demand of one currency (gold) must relate to the supply and demand of unbacked colored paper. The following chart shows the value of the gold held by the United States, since 1918 (shortly after the Fed was established in 1913), relative to the adjusted monetary base. A chart looks similar on a worldwide basis. You can see that from 1913 until just before the end of WWII, the value of the gold was about 35% of the monetary base. After the Bretton Woods agreement in 1944 whereby the US Dollar was established as the reserve currency, the percentage drifted down. The monetary base was growing steadily, and the US gold backing was declining, but the world was relatively unconcerned during a postwar recovery period. In the late 1960s, however, as US spending for the Vietnam War and President Lyndon Johnson’s Great Society accelerated, US trade and operating deficits became widely anticipated. Over 50% of the US gold was exchanged for dollars within eighteen months prior to August, 1971, when Richard Nixon “closed the gold window”. At that point, our gold amounted to only 6-7 % of the US monetary base. This level is important because we are back to that same level today.

We are not suggesting that the US, or anyone else, will make their paper currency convertible into gold any time soon. It wouldn’t work for long, in any event, because deficits in all major trading countries are larger than ever, and paper currencies would once again be tendered for gold. No country could back their currency with gold, unless they were “balancing their books” or, at the least, that prospect was in sight. We do, however, feel that the value of the gold “in circulation” should have a relationship to the value of alternative currencies. You might be surprised to learn that the country most able to make their currency convertible into gold would be Russia, perhaps our most prominent political adversary and a consistently large buyer of gold.

The chart above indicates that 7% could be 35%, or five times the current price. This  ballpark calculations indicate what we consider to be a rational value of 5-6x the current $1730/oz, or $8600 to $10,300/oz. This ballpark price range objective is at the current time. The monetary base is now rising at about 20% per year with all the money printing to support the economy in the current crisis. Though gold is now moving steadily higher, the monetary base is also rising so the price objective within just the next few years could be well over $10,000/oz.

THE TIMING – FOR GOLD BULLION PRICES

The following two charts provide insight into the possibility of an imminent major upward move. The first chart shows the high correlation of the gold price to the amount of worldwide sovereign negative yielding debt, which peaked at $16-17T in mid ’19 and is now in the low teens. Even in Germany, the strongest European country, the entire yield curve has been negative or close to it. We believe that the amount of negative yielding debt will continue its upward march and could even include some of the US debt, especially based on President Trumps implied blessing just two weeks ago. The continued upward trend of this indicator could be influential in breaking the gold price out above the previous all-time high of $1911. That, in turn, could ignite the price toward the price objectives noted above.

The second chart shows a nineteen-year price chart of gold. It shows the end of an 11-12-year bull market, ending in 2012, then a 6-7 year “consolidation”. The price has now clearly broken above $1400, the previous high. Chart technicians would say that the longer the base, the bigger the move. It is conceivable that a new bull market has begun that could last for quite a few years. This would tie in to our logic that the price of gold could be 5-6 times higher over a number of years.

There are other charts we could provide that show a long term correlation of the price of gold to the level of US debt. Over the last fifteen years the same sort of correlation has taken place between gold and the buildup of the Federal Reserve balance sheet.

THE GOLD MINING STOCKS

The chart just below shows the gold mining index, XAU, relative to the price of gold bullion. Since 2008, the relative valuation of gold equities to gold bullion has fallen 75% from the prior 25-year average. The ratio of the XAU Index to spot gold averaged 0.25x for a quarter century through 2008. As of 3/31/2020, the ratio was 0.05x.

We believe that the substantial divergence in performance is due to mostly outdated opinions.  Managements have been improved, balance sheets have been strengthened, operations have been streamlined. Additionally, energy costs, which are 15% or operating expenses, are much lower today than the range of $80-120/bbl of ten years ago.  Higher gold prices and lower expenses have produced impressive recent results from established miners and should become even more so.

SUMMARY

The healthcare crisis, now exacerbated even further by the social unrest,  has accelerated, magnified, and brought forward in time many of the long term fiscal/monetary trends that we have been expecting for some time. We continue to feel that gold mining companies are the single best asset class in terms of reward versus risk.

We’ve been joined lately in our conviction relative to gold by legendary investors and portfolio strategists such as David Rosenberg, Jeff Gundlach, Ray Dalio, Jim Roberts, Stanley Drukenmiller, David Einhorn, Stephanie Pomboy, Luke Gromen and others. Long term proponents of gold and gold miners such as John Hathaway Fred Hickey, Bill Fleckenstein and Peter Schiff are more convinced than ever. Though it’s nice to have some “smart money” in our camp, the investment world in general is just beginning to take small positions in this sector.

Gold bullion is up about 14% this year at this moment (a safe haven, after all). The miners, which were down for the year a month ago, are now in positive territory and catching up with bullion. In the last two months, gold mining stocks, as measured by an average of  GDX and GDXJ, the two largest gold mining ETFs,  have moved over 5x the price change of bullion (Our Investment Partnership, RHL Associates, LP, has done even better).  We believe we are still in the first inning of the resumption of the long term bull market for gold related securities.

Roger Lipton

 

 

SEMI-MONTHLY FISCAL/MONETARY REPORT – GOLD AND THE GOLD MINERS CONTINUE THEIR MOVE, NEW PRICE OBJECTIVES !

SEMI-MONTHLY FISCAL/MONETARY REPORT – THE STIMULUS IS MIND BOGGLING – GOLD AND THE GOLD MINERS HAVE JUST BEGUN THEIR MOVE !

The Coronavirus will pass, but the economic ramifications will be far longer lasting.  You don’t get out of a fiscal/monetary hole by continuing to dig. The current health crisis has brought forward, accelerated, and magnified the economic trends that were already in place. The monstrous buildup in debt is important because economic history has clearly shown that the higher the debt burden the bigger the drag on productive growth. This is why “the longest (and falsely promoted as “the strongest”) economic expansion in US history only provided 2.3-2.4% annual real GDP growth from ’10 through ’19. You heard it here first: there is no chance in hell that future growth (after the “dead cat bounce” from current levels) will be higher than 2% or so, likely to be materially  lower, with the new debt burden that the world will be carrying. 

We all know that the Fed balance sheet is exploding, as it finances the monstrous government spending. It is instructive to look at the pattern of growth over the last dozen years, as the supposedly apolitical Fed ignores the conservative side of the Keynes economic equation. John Maynard Keynes suggested, the in the late 1920s and early 1930s that the Fed should provide stimulus in hard times and pull it back in better times, presumably muting potential booms and busts. Unfortunately, economic conditions never seem to get good enough to remove the previous accommodation. Recapping the last dozen years: The Fed Balance sheet was under $1T in early ’08. It grew to about $2.2T by late’08, stayed around that level until mid ’09 when it started moving to about $3T by late ’11. From late ’12 to late ’14 it moved to $4.5T where it stayed until early ’18. The economy apparently never got quite good enough to pull back between ’10 and late ’17. In early ’18 the Fed announced a program of “automatic” reduction, with the implied objective to get back to perhaps $2.5-3.0T. It got back (only) to $3.7T by the end of ’19, but with the economy softening and distortions in the short term “repo” bond market, the Fed backed off and built its asset base to $4.2T, clearly on the way to a new high by mid’20. Which brings us to the current “new world”. Since March 4, 2020, the Fed has taken its balance sheet from $4.2T to $7.0T, and Chairman, Jay Powell, has indicated that he will do “whatever it takes”. We expect it to be $10T or more in a matter of months. People, this does not provide organic, productive, sustainable economic growth. This only provides an addictive high (not so high, in this case), supportive by always increasing doses of fiscal/monetary drugs.

The debt and deficits that require the Fed’s intervention are likewise exploding. The US debt, excluding unfunded entitlements like Social Security, is now over $25T, up from $22.7 at 9/30/19. The operating deficit which was supposed to be about $1.2T for the full year ending 9/30/20 is now expected to be at least $4.0T. The deficit in April alone was $738B. At this junction, after trillions of dollars have already been provided, it is clear that there is much more fiscal/monetary stimulus to come and nobody knows the ultimate magnitude or duration. Most importantly: virtually everyone, fiscal hawks and doves alike, bipartisan in nature, agree that the support must be provided, and we can all worry about the ramifications later.

THE PRICE OBJECTIVE FOR GOLD BULLION

The price of gold has shown a strong long term correlation with the federal US debt. The buildup of the Federal Reserve balance sheet over the last fifteen years has also strongly correlated with the gold price. The above discussion therefore supports a materially  higher price of gold related securities.

We believe that gold has proven itself for thousands of years as a store of value and the ultimate currency. It competes with paper currencies as the supply and demand of one currency (gold) must relate to the supply and demand of (these days) unbacked colored paper. The following chart shows the value of the gold held by the United States, since 1918 (shortly after the Fed was established in 1913), relative to the adjusted monetary base. A chart looks similar on a worldwide basis. You can see that from 1913 until just before the end of WWII, the value of the gold was about 35% of the monetary base. After the Bretton Woods agreement in 1944 whereby the US Dollar was established as the reserve currency, the percentage drifted down. The monetary base was growing steadily, and the US gold backing was declining, but the world was relatively unconcerned during a postwar recovery period. In the late 1960s, however, as US spending for the Vietnam War and President Lyndon Johnson’s Great Society accelerated, US trade and operating deficits became widely anticipated. Over 50% of the US gold was exchanged for dollars within eighteen months prior to August, 1971, when Richard Nixon “closed the gold window”. At that point, our gold amounted to only 6-7 % of the US monetary base. This level is important because we are back to that same level today.

We are not suggesting that the US, or anyone else, will make their paper currency convertible into gold any time soon. It wouldn’t work for long, in any event, because deficits in all major trading countries are larger than ever, and paper currencies would once again be tendered for gold. No country could back their currency with gold, unless they were “balancing their books” or, at the least, that prospect was in sight. We do, however, feel that the value of the gold “in circulation” should have a relationship to the value of alternative currencies. You might be surprised to learn that the country most able to make their currency convertible into gold would be Russia, perhaps our most prominent political adversary and a consistently large buyer of gold.

he chart above indicates that 7% could be 35%, or five times the current price. This  ballpark calculations indicate what we consider to be a rational value of 5-6x the current $1740/oz, or $8700 to $10,440/oz. This ballpark price range objective is at the current time. The monetary base is now rising at about 20% per year with all the money printing to support the economy in the current crisis. Though gold is now moving steadily higher, the monetary base is also rising so the price objective within just the next few years could be well over $10,000/oz.

THE TIMING – FOR GOLD BULLION PRICES

The following two charts provide insight into the possibility of an imminent major upward move. The first chart shows the high correlation of the gold price to the amount of worldwide sovereign negative yielding debt, which peaked at $16-17T in mid ’19 and is now in the low teens. Even in Germany, the strongest European country, the entire yield curve has been negative or close to it. We believe that the amount of negative yielding debt will continue its upward march and could even include some of the US debt, especially based on President Trumps implied blessing just in the last couple of days. The continued upward trend of this indicator could be influential in breaking the gold price out above the previous all-time high of $1911. That, in turn, could ignite the price toward the price objectives noted above.

The second chart shows a nineteen-year price chart of gold. It shows the end of an 11-12-year bull market, ending in 2012, then a 6-7 year “consolidation”. The price has now clearly broken above $1400, the previous high. Chart technicians would say that the longer the base, the bigger the move. It is conceivable that a new bull market has begun that could last for quite a few years. This would tie in to our logic that the price of gold could be 5-6 times higher over a number of years.

There are other charts we could provide that show a long term correlation of the price of gold to the level of US debt. Over the last fifteen years the same sort of correlation has taken place between gold and the buildup of the Federal Reserve balance sheet.

THE GOLD MINING STOCKS

The chart just below shows the gold mining index, XAU, relative to the price of gold bullion. Since 2008, the relative valuation of gold equities to gold bullion has fallen 75% from the prior 25-year average. The ratio of the XAU Index to spot gold averaged 0.25x for a quarter century through 2008. As of 3/31/2020, the ratio was 0.05x.

We believe that the substantial divergence in performance is due to mostly outdated opinions, the justification for which have been corrected over the last 10-12 years. Managements have been improved, balance sheets have been strengthened, operations have been streamlined. Additionally, energy costs, which are 15% or more of mine operating expenses are 60-70% lower today than they were a decade ago. Combined with sharply higher gold prices, results from established miners have been impressive recently and should become even more so.

SUMMARY

The healthcare crisis has accelerated, magnified, and brought forward in time many of the long term fiscal/monetary trends, as well as fundamental developments in our society. We believe that the worldwide economy will stagnate, at best, after the short term sequential bounce from the current situation. Some companies will survive and prosper, many will not. All will change to varying degrees. Profit margins will change, mostly for the worse. From an investment standpoint, we continue to feel that gold mining companies are the single best asset class in terms of reward versus risk. We’ve been joined lately in our conviction relative to gold by legendary investors and portfolio strategists such as David Rosenberg, Jeff Gundlach, Ray Dalio, Jim Roberts, Stanley Drukenmiller, David Einhorn, Stephanie Pomboy, Luke Gromen and others. Long term proponents of gold and gold miners such as John Hathaway Fred Hickey, Bill Fleckenstein and Peter Schiff are more convinced than ever. Though it’s nice to have some “smart money” in our camp, the investment world in general is just beginning to take small positions in this sector. Gold bullion is up about 15% this year at this moment (a safe haven, after all). The miners, which were down for the year a month ago, are now in positive territory and catching up with bullion. In the last six weeks, gold mining stocks have moved about 4x the price change of bullion.  We believe we are still in the first inning of the resumption of the long term bull market for gold related securities.

Roger Lipton

SEMI-MONTHLY FISCAL/MONETARY REPORT – YEARLY TRENDS NOW ONLY TAKE MONTHS, EVEN WEEKS ! !

SEMI-MONTHLY FISCAL/MONETARY REPORT – YEARLY TRENDS NOW  ONLY TAKE MONTHS, EVEN WEEKS !

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.

A PICTURE (ABOVE) IS WORTH A THOUSAND WORDS!

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.

A QUICK LOOK BACK

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.”

WE UNDERESTIMATED THE URGENCY, THE DEPTH, AND THE BREADTH OF THE FISCAL/MONETARY SUPPORT NECESSARY

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.

CONCLUSION AND STRATEGY

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

SEMI-MONTHLY FISCAL/MONETARY REPORT – THE VIRUS IS CONTROLLABLE, THE FED IS NOT !

SEMI-MONTHLY FISCAL/MONETARY REPORT – THE VIRUS IS CONTROLLABLE, THE FED IS NOT !

FOREWORD: This report is early because major developments are practically daily, all very supportive of higher gold prices.  Gold bullion, and the gold miners are up sharply this month. Relative to our Investment Partnership, RHL Associates, LP (almost entirely invested in gold mining stocks):  Considering the pace of news and the volatility  of prices, new investors (minimum $250,000), or additional investment by existing investors (no minimum), will be allowed to add funds as of closing prices on Wednesday, April 15th. If interested, call at 646 270 3127 or email at lfsi@aol.com. (This is not a solicitation, which can only be made by way of an offering circular, to be provided.)

UPDATE

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 lately reduced to  only $3.7T. 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.”

WE WERE WRONG: WE SUBSTANTIALLY UNDERESTIMATED THE NEED

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 $6T, up almost $1T in the last two weeks alone. Ten trillion dollars is the consensus, but our bet is at least $15T within a year, and more later.  They have 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. 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 seen no discussion yet on the news about the $6T of underfunded pension liabilities, which the Fed will be called upon in a declining stock market.

ONE YEAR AGO, ON 4/15/19, WE WROTE AN ARTICLE ABOUT INTERVENTION IN NORMAL SUPPLY/DEMAND RELATIONSHIPS, E.G. GOVERNMENTS NOT  ALLOWING FOR TRUE “PRICE DISCOVERY” . PART OF THE ARTICLE IS AS FOLLOWS:

“Where are we in this process ??  In addition to the negatively yielding fixed income government securities, the Bank of Japan (that has been doing this for almost thirty years) now owns about $250 billion of Japanese ETFs, or 75% of that entire market of ETFs. On the fixed income side, the Bank of Japan owns about 45%, or $4.5 trillion worth of all the Japanese government bonds outstanding. With it all, the Japanese economy is still running well below 2% real growth, with inflation at well under the 2% objective. It is of course an important sub-text that central banks worldwide are trying to stimulate inflation, rather than subdue it, which was the original objective.  Closer to home, we have been informed that our Fed is abandoning QT, preparing for a new form of QE, which, some have suggested, could include the purchase of US equities as well as bonds.

“Here’s a quick economic lesson for the hundreds of PHDs that are working within central banks. Don’t intervene in a market unless you are prepared to BUY IT ALL, because you will, eventually. Witness the holdings of the Bank of Japan, who have been at this game the longest, still without the result they have been reaching for. Aside from a long list of unintended consequences that have yet to play out, the attempt to lighten the inventory, (Sell to whom?) has just been demonstrated in the US. One down month in the stock market (December ’18) with the two year treasury rate approaching 3% and the US Fed caved. Whom do you think the Japanese Central Bank can sell to?”

BACK TO TODAY,  APRIL 13, 2O20

Governments and Central Banks, around the world, are doing precisely what is described above, buying all kinds of securities at prices higher than the free market would call for.  The end result is that they will own it all. The previous owners are getting a gift, with an unnaturally high price. 

CONCLUSION AND STRATEGY

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 another, unexpected by all of us, consequence.

The long term trend of increasing deficits and increasingly sluggish growth (burdened by the higher debt) is 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.

Stock investors, at Thursday’s closing prices , have generally given back about five years of gains, and could give up the previous five as well if there is another downleg.

On the other hand, gold, the “real money”  has protected purchasing power over the very long term. Gold bullion after bottoming several years ago at $1050, has been steadily higher and is now selling only about 15% below its all time high of $1900 in 2011. Our preference, the gold mining stocks, have not done as well since 2012, still down more than 50% from their highs in 2012. Our choice has been admittedly costly, but we wanted the operating leverage that the mining companies provide with a rising gold price.  This continues to be the case, and we think the upside opportunity in the gold mining stocks is greater than ever. Coming off the lows of early ’09, gold bullion doubled in price and the miners more than quadrupled. The opportunity is even larger today since (1) balance sheets are better (2) management teams are improved (3) energy prices represent 15-20% of operating costs. Crude oil was between $80-120 per barrel back in ’09-’11, now a fraction of that, so profits at these higher gold prices will be that much more impressive.

We have been heavily invested in this area for 6-7 years, writing on this subject for the last four years. The articles are available, for FREE, on this website.

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

Roger Lipton

SEMI-MONTHLY FISCAL/MONETARY UPDATE – THE CORONAVIRUS PRICKS THE CREDIT/DEBT BUBBLE !

SEMI-MONTHLY FISCAL/MONETARY UPDATE – THE CORONAVIRUS PRICKS THE CREDIT/DEBT BUBBLE

First, from myself and my administrative partner for over thirty years, Michael Heyward,
we are hopeful that you and your loved ones are surviving this ordeal as well as
possible. Michael and I and our respective families are unharmed so far. Michael is
working out of his NYC apartment and I am with my wife and daughter in Southampton,
where my daughter had already been living and working. We can always be reached by email (lfsi@aol.com) or phone. Our office phone will be forwarded to my cell phone. This letter is longer than I usually like to provide, but I’ve got the time to write it, and you probably have the time, for a change, to read it. It helps me organize my thoughts, is probably therapeutic for me, and I like all of you to be as well informed as possible.

Our world, in many ways, has changed for the foreseeable future. Unprecedented
measures are in place from a healthcare standpoint, and financial remedies are being
undertaken that are even more uncertain. All of this has created unprecedented
volatility, with equity markets often moving 5-10% per day. While gold bullion, as
a safe haven was actually up a bit for the month, the gold mining stocks acted
like stocks (as discussed below), and were down with the general equity market.

It is worth noting that most of the largest mining companies are paying dividends.
While the average return is about 1.5% (more than twice that of a 10 year US treasury note), the amounts are increasing and could become much more meaningful as earnings reflectthe higher gold price and lower operating expenses. As an example, in late 1929 the
value of Homestake Mining stock was about $80/sh. During the next six years
Homestake paid out a total of $128/sh. in cash dividends, including $56 per share in
1935 alone. Many of today’s mining companies have demonstrated a willingness to
share profits with investors by way of dividends.

I’ve often said that “hope is not a strategy”, and a dramatic recovery of gold mining
stocks is not just a hope, but continues to be a well considered expectation. The stocks
are a huge bargain under just about any scenario and there is no place I would rather
be for a still large part of my family’s liquid net worth.

WHY THE RELATIVE WEAKNESS IN GOLD MINING SHARES?

Even the modest year to date increase in the price of gold bullion has not reflected the
unprecedented creation of paper currency by the Federal Reserve Bank and the multi-trillion fiscal stimulus from the government. Furthermore, the dramatic relative weakness
of the mining stocks seems to be due to a number of short term factors.

(1) The gold mining stocks are “stocks”, in brokerage accounts, and subject to margin
calls as portfolios depreciate, as opposed to physical gold, which is usually paid for in full and generally stored in presumably safe places. Physical bullion is accumulated worldwide, including by Central Banks, while mining stocks are owned largely by North American investors who are not nearly as committed an “uncorrelated safe haven” or a “money substitute”. In a panic phase, stock investors sell “what they can, rather than what they want to”.

(2) Eight to ten years ago, quite a few mining companies did a poor job allocating
resources and managing balance sheets, particularly with acquisitions. In many cases,
corporate management has changed and/or learned from experience. Operating profits
were also reduced until just recently by the high cost of energy, partially offsetting the
higher gold prices. Balance sheets are now generally strong. Operating results have
been excellent for most established miners in the last year or so, vividly demonstrated in Q4’19, as gold production is sold for prices $200/oz. more than in ’18 and energy costs started to come down.

(3) There have been a number of mines closed temporarily due to the Coronavirus. This
is obviously not a short term positive, but this has not been widespread so far, the
money is still in the ground, so the long term value of the companies are intact.

(4) A great deal of daily trading is still dictated by computers, responding to short term
trading patterns, so price weakness begets more selling, for no particular fundamental
reason.

CURRENT FINANCIAL OVERVIEW

Fundamentally, the Coronavirus has quickly created the financial desperation that has
been inevitable in the wake of forty years of financial folly, especially the last twenty
years, most especially in the last ten. Since ’08, the $3.5 trillion of money creation and
growing operating deficits, accompanied by suppressed interest rates have allowed for
tens of trillions of mis-allocated capital, as investors “reach for yield” in various forms.
The unpredictable surprise is that the financial “chickens would come home to roost” as
a result of an internationally contagious virus.

We pointed out to you just last month that the current trading pattern is likely to be a
repeat of ’08 and early ’09, when gold and the gold miners went down with the general
market. Once the markets stabilized, gold quadrupled over the next two years and
the miners did even better. The difference this time is that gold bullion has held up
relatively well, so the gold miners are even more of a long time bargain. Of course, the
money printing and fiscal stimulus now being provided is an order of magnitude larger,
so both gold bullion and the miners should make proportionately even larger moves than
in ’08 to ‘09.

INFLATION OR DEFLATION – GOLD WINS EITHER WAY

The unimaginable amounts of currency that are being created will have two possible
general consequences. There could be the desired “save” of the economy, and the
potential very inflationary consequences are far down the current list of worries by our
leaders. Workers will go back to their jobs, restaurants will reopen (in many cases),
sports events will take place (with appropriate care) but it is hard to picture “old times”
any time soon. As a middle ground (e.g. the 1970s) we could have “stagflation”, which
especially affects the middle class. The other extreme is a 1930s type deflationary
downturn, as the government stimulus fails to turn the economic tide, and economic
distress for almost everyone.

      INFLATION

The best demonstrations of the inflationary influences on gold bullion and gold
mining stocks comes from the 1970s and the period from 2000 to 2012.
Setting the stage for the discussion of the 1970s: recall that the Bretton Woods
Conference in 1944 established the US Dollar as the world’s “reserve currency”, with
worldwide trading to take place in “King Dollar”. The US had the responsibility of
backing the Dollar with gold, at an exchange rate of $35.00/oz . That conversion
option would presumably control the natural political instinct to produce paper
currency at excessive rates, in essence spending to satisfy electoral constituencies.

The program worked adequately well until the mid-sixties when spending increased under the influence of Lyndon Johnson’s Great Society and the Vietnam War. Foreigners realized that operating and trade deficits were on the horizon and reduced the US stash of gold between 1969 and 1971 from over 20,000 tons to 8,400 tons, which hasn’t changed since then. President, Richard Nixon, closed the gold window in August, 1971, eliminating the conversion privilege. His speech, which you can find on YouTube, assured us that this move would be for the best, and help the US economy.  The gold price took off immediately, peaking at $850/oz. nine years later. The economy went into “stagflation”. The stock market reflected the economic malaise, climaxing in 1973-1974 with the collapse of the highly valued “nifty fifty” growth stocks (FANG of the 1970s). Inflation went up steadily, peaking at about 12% as theFederal Funds Rate went to 18% late in the decade. Gold stocks, mostly South African mining companies did well, though hardly any are still independently trading and it is difficult to find price histories through the decade. We did find that the Gold Mining Index, composed of ASA (a mining stock mutual fund), miners Campbell Red Lake and Dome Mining, appreciated more than 260% from its 1973 low (40) to its 1974 high (147). So during the most severe portion of the 1973/74 bear market, while
stocks lost half their value – gold mining companies almost quadrupled.

Starting in 2000, after about twenty years of relatively controlled government spending
and three years of budget operating surpluses (can you believe it?) at the of Bill
Clinton’s presidency, government spending took off. This was the result of coping with
Y2K, the aftermath of the 9/11/01 terrorist attack which included two wars, and the
collapse of the stock market dotcom bubble. Alan Greenspan’s Fed papered over the
problems, which helped to produce the ’08-’09 financial crisis. In the course of
preventing an economic collapse ten years ago, we all remember TARP, Cash for
Clunkers, and other government programs which cost something like a trillion dollars. At
the same time, the Fed embarked on an interest rate suppression experiment, taking
their balance sheet from about one trillion to $4.5 trillion to buy fixed income securities,
including those issued by the US Treasury.

The US balance sheet has also become  increasingly burdened with debt as a result of annual operating deficits. The US federal debt more than doubled under GW Bush to about $11T, grew to about $20T under Obama, is now $23T and accelerating in a major way. As a percentage of GDP, it has been just under the peak when we were conducting WW2, and will shortly exceed that. Gold was trading around $300/oz. in 2000, peaked at $1850-1900/oz. in 2011. Gold mining stocks did even better. As a proxy, the Tocqueville Gold Fund went from $10 to $90. All the influences that provided this performance are back in place today. The only difference is that gold mining shares are even less expensive, relative to the price of bullion, than they were in 2000, and the positive factors we have discussed are much larger. There is a lot more paper currency being created, zero percent interest rates
were not even conceivable in 2000, operating deficits are much larger, and a “safe
haven” has hardly ever been more of a need for investors.

           TARGETED “SYMMETRICAL 2%” INFLATION

Overriding all of the inflationary or deflationary possibilities, Central Banks, which were
created to control inflation, are desperately trying to stimulate inflation, lately targeted by
the US Fed at a “symmetrical” 2% rate. This means that a rate of over 2% (no doubt
substantially over) will be tolerated because we have been well under 2% for so long.
Inflation is necessary to encourage consumers to spend today, before prices go up,
and to allow everyone, from individuals to countries, to liquidate their debt for less
valuable currency. Above all, deflation is the ultimate curse, because consumers won’t
spend and the debt at every level becomes more of a burden.

     DEFLATION – A COMPARISON TO THE 1930s

The other possibility is to allow the markets to “clear” in the course of a deflationary
depression. It hurts me emotionally to even use the word, but it has happened before and it will happen again at some point.

The magnitude of the current monetary and fiscal support is unprecedented. According
to historical accounts, the Federal Reserve Bank, while active in the 1920s, essentially
ceased open market operations in 1934, so did not play a meaningful role. However, the
FDR administration, over seven years from 1933 through 1939, provided $41.7 billion,
which translates into about $700 billion in today’s dollars. The increase in the federal
debt during that time was 30%. The cost per capita, in today’s dollars, was about $5,800
per US person. The $41.7 billion represented about 40% of the 1929 GDP.

At the moment, the Federal Reserve Bank has committed to creating $1.5 trillion, to
purchase all manner of securities, backstopping money market funds, various ETFs,
and mortgage securities, among others. Last Friday, the federal government passed a
$2.2 trillion stimulus bill, with a promise to do a lot more, as needed. The combined
“down payment” of $3.7 trillion amounts to over $11,000 per US capita, almost double
the seven year New Deal. Almost everyone expects many trillions of dollars to follow.

The effect on the US balance sheet, already at a level that has impeded growth, is
similarly dramatic. Previous expectations were that the current year’s deficit would be
about $1.2 trillion, and the debt would go up by about $1.5 trillion (including off budget
items, funded by borrowing from the social security trust fund). Those numbers were
expected to go steadily upward in the 2020s, assuming steady GDP growth of 3%,
which was always questionable. It is clear now that the current year’s deficit, ending
9/30/20 will be at least $ 2 trillion and a lot more in 2021 with the absence of capital
gains tax receipts, as well as lower personal and corporate taxes. The current federal
debt is above $23 trillion, already over 100% of GDP, so it is easy to picture federal debt
well over $30 trillion seven years from now, an increase of a lot more than the 30% of
the 1930s. This is important, because a higher debt burden impedes productive
investment and growth, for a family, a business, or a country.

The last comparison is the stimulus and spending relative to the nation’s GDP. The New
Deal spending was about 40% of the nation’s 1929 output. GDP in fiscal 2019 was
$21.4 trillion, so 40% would be $8.6 trillion; a number which we believe will be exceeded
before the dust settles. It is important to note, however, that the federal debt/gdp ratio
was only 16% in 1929 and 33% in 1933 (before the creation of social security and
Medicare and other entitlements), and stayed around 40% through the 1930s. This
compares to over 100% in the US currently (without including unfunded entitlements).
The US in the 1930s was therefore at a much more manageable starting point, more
able to spend 40% of GDP in an attempt to save the economy.

An argument can be made that gold mining firms do even better during a deflationary
depression than during an inflationary depression (or stagflation). Profit margins are at
their best during these conditions because labor is cheaper and operating costs are
lower. In particular, energy costs to drive earth moving equipment amounts to 20% or
more of variable expenses and drilling rigs are more available. One of the reasons gold
mining stocks have underperformed other commodity stocks over the past few years
was because the cost of production was rising so dramatically.

THE HISTORY OF GOVERNMENT STIMULUS PROGRAMS

Relative to the 1930s, it is well documented that the economy stabilized from 1933
through 1936, then endured a serious recession in 1937, blamed on the Fed who is
accused of tightening money markets prematurely. It wasn’t until after World War II,
when the soldiers came home and the US resumed normal activities (making babies,
buying autos and homes, etc.etc.) that the US economy, its GDP and employment
statistics, returned to pre-depression levels. Economists debate whether FDRs New
Deal shortened or lengthened the adjustment after the roaring twenties. We are in the
latter camp, partly due to our observations about more recent governmental
interventions.

Following the Asian Financial Crisis of 1997, Japan fell into an economic recession.
Beginning in 2000, the Bank of Japan (BOJ) began an aggressive QE program to curb
deflation and to stimulate the economy. The BOJ moved from buying Japanese
government bonds to buying private debt and stocks.  Between 1995 and 2007, Japanese GDP fell from $5.4 trillion to $4.52 trillion, so the QE program was obviously ineffective. Japanese government debt has continued to accumulate, now amounting to about 250% of GDP, but continues to fail in terms of stimulating inflation and better economic growth.

The Swiss National Bank (SNB) also instituted QE after the 2008 financial crisis. The
SNB has now accumulated assets, including US equities, nearly equal to annual GDP,
the highest in the world, relative to GDP. Even with the QE program, GDP growth has
averaged less than 2% for the last decade. Even with interest rates below zero,
the SNB has been unable to stimulate inflation, averaging under 1% for the last decade.
It is, of course, unclear, what might have been the case without QE, but the results have
not met targets.

The Bank of England (BofE), after creating 375 pounds ($550B) of new money between
2009 and 2012, in August 2016 announced a QE program to counteract “Brexit”. The
plan was to buy 60 billion pounds of government bonds and 10 billion pounds in
corporate debt. The object was to suppress interest rates and stimulate business
investment. From August 2016 through June 2018, the UK reported that capital
formation (a measure of business investment) was growing at an average quarterly rate
of only 0.4%, lower than the average from 2009 through 2018. It is, once again,
impossible to know what would have been the case without QE.

We have all lived through the various QEs that were created to deal with the
2008-2009 financial crisis. The Fed took their balance sheet from about $1T to
$4.5T and almost a trillion dollars was provided by government spending
(TARP, Cash for Clunkers, etc.etc.). Interest rates have been maintained at
rates close enough to zero that all kinds mis-allocation of capital has been the
result. GDP growth averaged a tepid 2.3% from 2009 through 2016. The last
three years, under a business friendly administration, have continued to
provide monetary and fiscal accommodation, but GDP growth has averaged
no more than 2.5%. Once again, while it is impossible to know what would
have been the case without government “help”, the results have been less
than impressive.

CONCLUSION

There is no reason to think that the programs being implemented will be successful in
re-igniting the US, or worldwide, economy by way of even larger credit and debt
creation. By the way, the US did not have a 3% GDP economy prior to the Coronavirus, as is being promulgated by the conservative media and more or less accepted by the liberal commentators. Last year was about 2.5% and Q1’20 was on the way to just over 1% before the Coronavirus reared its head.

Overall, one does not get out of a hole by continuing to dig. Even China has failed
to maintain their previous double digit growth rate by way of the rampant availability of
credit. The Chinese Communists are very smart and plan for the long term, but they
have not repealed nature’s laws of supply and demand.

We cannot predict to what degree the governmental intervention will succeed in
papering over the current healthcare challenge which is already becoming an economic
crisis. As described above, no matter which direction the worldwide economy takes,
gold should emerge as the best currency standing as well as the asset class that will best protect purchasing power. We cannot know the exact timing, or extent to which gold (and the mining stocks) will appreciate from today’s bargain prices. It is true that other asset classes have recently become better bargains as well. However, gold and the gold miners, especially at recent prices, represent the ultimate uncorrelated asset class, safe haven and most secure long term store of value.  Accordingly, they should appreciate very substantially whether Central Bankers succeed, or fail, in their desperate effort to “save” the economy.

None of this is any fun but the above discussion should provide a template in terms of the possibilities. The investment partnership that I manage is 95% invested  in gold mining stocks, and open to new investors 🙂

These difficult days move slowly, but we will all get through this. Stay
healthy and safe, and call or write any time you like!

Roger Lipton

SEMI-MONTHLY FISCAL/MONETARY UPDATE – NO PLACE TO HIDE – THIS TOO SHALL PASS, BUT WHAT WILL THE FINANCIAL WORLD LOOK LIKE??

SEMI-MONTHLY FISCAL/MONETARY UPDATE – NO PLACE TO HIDE – THIS TOO SHALL PASS, BUT WHAT WILL THE FINANCIAL WORLD LOOK LIKE ??

You don’t need me to tell you that we are all living through unprecedented times. First and foremost, I hope everything is well with you and your loved ones. For what my opinion is worth, and from what I read, the virus hates “heat”, temperatures above 77F degrees and sun, and I think the weather will warm up in the USA before the most dire of the predictions take hold. That of course varies from country to country but aggressive precautions are now in place all over the world, and I hope (and actually expect) that will be sufficient to stabilize this situation.

In terms of all equity portfolios, this has obviously been an unbelievably volatile month in the financial markets. The last week and a half have been brutal, there has been no place to hide, everything gets hit with margin calls and so forth. Investors, and especially traders, sell “whatever they can”, not “whatever they want to”.

As you know, I’ve been writing, and investing, with the long term debt and credit bubble in mind, expecting a new round of money printing and stimulus when the next recession hits, which will drive gold and especially the gold miners much much higher. I have expected, in the next few years, for gold to be $5000 or higher and the gold miners to go up 10-20x in value. The big question, of course, is timing, but with the trillions of stimulus now being discussed, it seems like the time is just about here. Just as in 2008-2009, once the dust settles, gold and the gold miners should lead the recovery by a lot. Nobody could foresee that it would be a worldwide virus that would start the deflation of the latest and largest debt and credit bubble, but I view the forty years of monetary and fiscal promiscuity by central banks and governments as the cause of the current situation in the capital markets. The coronavirus, expected by nobody, is just the catalyst.

My general conclusion, therefore, is that this too shall pass, in terms of the coronavirus, but the effect on the worldwide economy (and probably the equity markets) will be much more long lasting. Recovery will take place in stock prices, but it could be a long time coming. There has been an enormous amount of psychological damage to investors. The lack of liquidity in everything, and the risk, especially in equities, has now been demonstrated. There are a lot of “kids”, who have only managed money during the last ten years, who never saw a real downtick until ten days ago. Also, stocks may look “cheap”, but in 1974 there were 150 stocks on the NYSE selling for about one times EBITDA, so equities can get a lot cheaper before they recover. Central Banks and Governments, around the world, will “do what it takes” to support the capital markets but it will require many trillions of new dollars. That will provide a much larger debt burden, which will be a larger deterrent on an economic recovery, and therefore limit the recovery in stock values. Japan has been leveraging up their government balance sheet for 30 years and have avoided recession but growth has been slow, and their stock market is still way below the speculative high of 1990. I’ve provided a chart below.

My personal ongoing strategy is to stick with the gold mining stocks, which I feel represent the best long term value among all asset classes. Their performance has been terrible the last ten years, even as gold bullion has gone from $900 to $1600, so they have never been cheaper and the opportunity is that much greater. The gold mining companies now have strong balance sheets, improved management, mining costs are coming down with lower energy prices, and they are already reporting sharply higher earnings.  I expect gold to be north of $5000 per ounce in the next few years, and the gold miners could (and should) go up by 10-20x in value. Everybody knows that gold is a great inflation hedge (it went from $35 to $850 in the inflationary 1970s), but it is also a safe haven in a deflationary world. In the deflationary depression of the 1930s, the publicly held mining stocks went up by something like 10x in value. I could go on, obviously, but I know you’ve been reading about my opinion on this subject for years.

I can’t help but suggest that a modest participation (perhaps 5-10%) in gold mining stocks, as a hedge, and the chance of a very big move on the upside in the next several years. There are lots of ways to do that, and one way is through my investment partnership. My timing has admittedly been less than ideal :), since I transitioned the fund six or seven years ago into this approach, but it looks like a monstrous amount of spending and stimulus (many trillions of dollars) is in our future, so I could finally be vindicated. Funds can come into my Partnership on the first of any month. We are about 90% invested in gold mining companies, with 8-10% in a few non-gold “special situations”. The fee of 1% annually, plus 10% of gains is a lot less than the standard “2 and 20”. I’m the largest investor, always have been, and that’s the end of my “pitch”.

More important are my thoughts, above. I may be the only money manager you will meet that says “money isn’t everything”. Nobody knows what the “end game”, as a result of forty years, especially twenty years, and most especially the last ten years, of financial promiscuity, will look like. The best we can do is to stay flexible and healthy: financially, physically, emotionally, be in a position to respond to events as they unfold.

Roger Lipton

SEMI-MONTHLY FISCAL/MONETARY REPORT – HISTORICAL VOLATILITY – CAN THE FED SAVE US ?

SEMI-MONTHLY FISCAL/MONETARY REPORT – HISTORICAL VOLATILITY – CAN THE FED SAVE US ?

February was a very volatile month, most noticeably the last week of the month, apparently driven by the worldwide concern about the coronavirus. We say “apparently” because we view the coronavirus to be the catalyst for an overdue decline, rather than the real cause. The cause will prove to be the distortions (over the last forty years, even more the last twenty years, and especially the last ten years) of normal monetary supply and demand created by promiscuous central banks around the world.  In any event, the selling was emotional and indiscriminate, especially last week. Gold bullion and the gold miners were both doing nicely, up over 3% and 7% respectively until the panic selling of everything last week. Gold bullion closed the month down a fraction of one percent and the miners closed down more than 10%. This kind of price action in gold and the gold miners is disconcerting for sure but not surprising in a market panic almost unprecedented.

We wrote our normal month end letter to investors in our investment partnership the first day of the new month, and, at 2 pm yesterday, after talking about how bad February had been,  I wrote  “For better or worse, we report as of the month end, which in this case could be the low point. For what it’s worth, as I finish this letter, gold bullion is up 1.3% today and our portfolio is up almost 4%.”   If I were to write the letter right now I would say that gold bullion is up 6% we are up 12% for the first day  and a half of the month.

So much for short term trading commentary. More importantly:

All the fundamental developments in the worldwide economy point to much higher gold prices and much, much higher prices of the gold mining stocks. We look back, below, at the price action of the precious metals sector in the last crisis, that of ’08-’09.

The two charts below, that of “GLD”, the ETF that tracks gold bullion, and “GDX”, the ETF that tracks the gold mining sector. The chart shows the price performance from the middle of 2008, through the bottom of early ’09, and then the recovery through the end of ’11. You can see that GLD and GDX both declined, with the stock market, until the fall of ’08, started recovering before the general market bottomed in March ’09. From the bottom, over the next two years, GLD went from about 70 to 180, up 157%, and GDX went from 18 to 62, up 244%.

It is important to note that the monetary stimulus that supported the worldwide economy ten years ago, and drove the price of gold and the gold miners so much higher, will of necessity be dwarfed by today’s needs.

In the fall of ’08, the five year US treasury note was at about 3% and the two year was around 2%. The Fed drove them down to about 0.7% and close to ZERO, respectively, while printing about $3.5 trillion. The starting point today is about 0.7% for both the five year and two year treasury, interest rates can’t be lowered by much. It therefore falls to the printing press to provide the stimulus and it will likely be a lot more than the last $3.5 trillion. By the way, the Federal Reserve Assets in ’08 were only $1T, ending at $4.5 trillion which were supposed to be reduced in a stronger economy. The economy got just a bit stronger (averaging 2.3% GDP growth) but the Fed balance sheet only was reduced to about $3.7T. It then was expanded again, through bond purchases last fall (which coincided with a strong stock market), then stopped growing in January, which may have foreshadowed the stock market collapse in February.

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. The last installment of this unprecedented monetary adventure took gold and the gold miners up well over 100% (the miners more than the bullion). The next trip should be even more dramatic, especially for the gold miners. As we’ve said before, while gold is down about 18% from it’s high of 1900 in 2011, the gold miners are down well over 50%. At the same time, the gold mining companies are far better managed, strategically positioned, and with stronger balance sheets than ten years ago.

The US Fed Reserve’s aggressively lowered the Fed Funds Rate by 50 bp a couple of hours ago. It is an interesting commentary that the stock markets rallied, but have now given up their gains and are down for the day. 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.

All of the above is supportive of much higher gold prices, and much much higher prices for the gold mining stocks.

Stay tuned.

Roger Lipton