Tag Archives: GOLD

SEMI-MONTHLY FISCAL/MONETARY UPDATE – WE SUGGEST: THE FOUR MONTH CONSOLIDATION IN GOLD IS OVER

SEMI-MONTHLY FISCAL/MONETARY UPDATE – WE SUGGEST: THE FOUR MONTH CONSOLIDATION IN GOLD IS OVER

The US debt at 9/30/00, excluding unfunded entitlements,  just before President Bush took office was $5.7 trillion. Eight years later, at 9/30/08, just before President Obama, the debt was $10.0 trillion. Eight years later, at 9/30/16, just before President Trump, the debt was $19.6 trillion. Four years later, at 9/30/20, just before President Biden, the debt was $26.9 trillion.

                          

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 tax receipts), underestimated the spending and therefore substantially underestimated the deficit. With that in mind, the CBO projected 8.6% deficit in the current year,  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, only 1% 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 if the Fed can control it. If and (as we believe) when that is no longer the case, it will indicate that the Fed has lost control, inflation is about to take off, and all bets are off in terms of the economy and capital markets.

NEGATIVE INTEREST RATES HIT A RECORD

New records are being set as $18.4 trillion of global 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 creates 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 Tesla, Doordash and $60 or $70 billion worth of SPACs are trading where they are as stock market averages his new record highs. It also means that savers not willing to play the TINA game are being screwed (no better way to put it ), to the benefit of central bankers and politicians who are kicking the fiscal/monetary can down the road. Negative interest rates also improve gold as an investment because the absence of interest or dividends is better than the negative yield on government debt.

We have pointed out before that negative “real yields”, along with lots of other current indicators, have strongly supported higher gold prices. We are admittedly surprised that the gold price and gold mining stocks have given back over half of the mid-2020 gains, and 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 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 do not believe that the current strength in cryptocurrencies such as Bitcoin is as much of a culprit as the factors above, since gold and gold mining stocks are far more of a long term “store of value” rather than the crypto currencies that are primarily trading vehicles.

We believe fiscal stimulus is coming shortly, to be followed by more fiscal/monetary support in just a few months and more after that, ad infinitum.

This point in time happens to coincide with gold bullion and the gold mining stocks trading just at the technical support price at the 200 day moving average. We are determined not to play it too cute with our holdings of gold mining stocks, trading out at a short term peak, and trying to time a re-entry. The long term potential is too compelling. The gold mining industry is the least expensive asset class we know of, not only protecting purchasing power over the long term, but a potentially very lucrative investment in nominal terms. 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. (Our investment partnership remains open to qualified investors.)

Roger Lipton

SEMI-MONTHLY FISCAL/MONETARY UPDATE – ECONOMIC, SOCIAL, POLITICAL, MONETARY WORLDS ARE IN HOLDING PATTERN, BUT GOLD PERKS UP!!

SEMI-MONTHLY FISCAL/MONETARY UPDATE – ECONOMIC, SOCIAL, POLITICAL, MONETARY WORLDS ARE IN HOLDING PATTERN, BUT GOLD PERKS UP!!

THE CONTEXT

The general market has been very strong since the election, so there has been less perceived need for a “safe haven” such as gold. Gold bullion was therefore down about 5.7% in November and the mining stocks were down 8-9%. However, it has become increasingly clear over the last week or so that Janet Yellen, the apparently incoming Treasury chief,  will be a predictably doveish monetary policy participant. That is one reason that gold and the gold miners have “caught a bid” in the last few days. Perhaps it is dawning on investors that the deficits and spending and debasement of fiat (unbacked) paper currencies around the world will definitely continue. The new administration has been dubbed by some as “Obama 2.0”. Recall that in the first two years of President Obama’s administration gold bullion went up 100% and the gold miners went up over 200%.

We discuss below the recent short term performance, perhaps why gold has been in a consolidation mode over the last four months, and then a longer term discussion. While I understand that many of you don’t want to deal with these details, we like our readers to be as well informed as possible.

FOUR MONTHS OF CONSOLIDATION IN THE GOLD PRICE

The chart just below is over the last several years, and shows how the price of gold has correlated with “real yields”, that is the actual short term interest rate (inverted on the chart) adjusted for inflation. With short term rates less than 0.5% and inflation of 1.5-2.0% the “real yield” is now close to a negative 1.5%. That means that savers, in high quality fixed income securities, are losing purchasing power of 1.5% annually. It also means that, from the standpoint of current real return, investors are 1.5% better off in gold, yielding zero. The chart shows how gold has moved up in price as the real yield became increasingly negative. Over the last four months, however, you can see that the negative real yield (in red) stabilized and actually became a little less negative, so bears on gold speculated that interest rates were moving up, real yields might be rising and gold would be less attractive, so the gold price corrected over 10% from its high in early August.. Lately, however, you can see real interest rates (in red) breaking out on the upside, so the real yield (inverted on the chart) is becoming more negative. Contributing to this situation is over $17 trillion (a new high) of sovereign debt worldwide yielding less than zero. This type of action presaged earlier upward moves in gold bullion, and the miners, so that might well be the case again

LONGER TERM

The USA is the most powerful nation on earth. The holding pattern we are in before the new administration takes control, as well as the Covid-19 vaccines become widely distributed, has affected the world we live in, on many levels.

At the moment In the capital markets: The stock market chooses to look across the valley, flirting with an all time high as this is written. Traders have lightened up on their gold bullion positions, since a “safe haven” is not considered as necessary. Gold mining stocks have retraced virtually their entire gains since the first of the year. The reasoning in a nutshelll: (1) A new, more comforting, US administration is about to take office (2) Vaccines are on the way (3) There is no alternative to investing in the equity markets (TINA) since interest rates are so low.

Meanwhile: The facts of life include the following discussion points. Take them under consideration, with the cautionary overview that it is very difficult not to be seduced by the madness of crowds. 

With that preface:

The central banks around the world continue to stand by, prepared to accommodate further when necessary, which will no doubt be the case, though the form it takes is a bit more uncertain. Overall,  the basic situation has not changed, in terms of (1) Negative interest rate debt, which is at an all time high (2) The current deficits and cumulative debt are at record levels (3) Most asset classes have been bid to record levels (4) Governments around the world are searching for sources of funds, and the public will pay (5) Gold is underpriced, the gold mining stocks even more so.

NEGATIVE INTEREST RATES

The total worldwide sovereign debt now selling at negative interest rates has just hit a record of $17 trillion. China, for the first time, recently sold negative yielding debt. Major trading nations compete with each other to raise capital so the fact that German five year bonds sell with a negative .74% yield allowed the Chinese to provide an attractively higher yield at a negative 0.15% on their five year paper. The Chinese issuance was part of a package that yielded a barely positive 0.318% for ten years and 0.665% for fifteen years.

People…this kind of situation has not happened in recorded history, and is not good.

THE DEBT AND THE DEFICITS

As we have written before, the addict needs an increasingly large “hit” to maintain the “high”, though hardly anyone would say that the worldwide economic situation is rocking and rolling (i.e.”high”) While common wisdom these days is that the economy was strong before Covid-19 hit, US GDP  (up about 2.5% in calendar ’19) was forecast, before the Covid-19,  to grow only about 1.5% in Q1, clearly rolling over. The chart below shows vividly how large the stimulus, worldwide, has been, to get us through the pandemic, compared to the last crisis.

People….there has to be a hangover after this fiscal/monetary party.

MOST ASSET CLASSES ARE AT RECORD HIGHS

Ben Bernanke, Fed Chairman ten years ago, made it clear that his Fed’s objective was to support asset prices, which in turn would hopefully create a trickle down wealth effect for the broad economy. Janet Yellen, and now Jerome Powell have continued in the same vein. Moreover the mandate has evolved, as described by Powell, to achieve a “symmetrical” two percent inflation rate (tolerating above 2% for a while) and, most recently, economic growth that will benefit all segments of the economy, clearly targeting the wealth gap. This policy, echoed by central banks worldwide, has produced negligible interest rates of fixed income securities (all the way out to thirty years),  supporting the stock market because TINA (there is no alternative). The chart just below shows vividly how US equities (the S&P 500, ex financials) are selling at 49x free cash flow, almost 50% higher than at the top of the dotcom bubble.

People…..safe to say we are closer to a top than a bottom.

GOVERNMENTS NEED HELP, AND IT’S ON THE WAY, FROM US !!

First, we should understand that the minimal, or even negative, interest rates, are a form of wealth transfer. Fixed income security holders earn nothing, losing ground to even minimal inflation, and the government benefits from negligible interest cost on Treasury securities.

Additionally, though President-elect Biden publicly dances around the subject, it is clear that tax rates in the US will go up under his administration. It won’t be close to filling the cash flow gap but will be designed as acceptable to the public while the can (cash flow gap) gets kicked down the road. There has been a lot of discussion in the United Kingdom on this subject and our policies tend to mirror theirs.  Rather than a Value Added Tax (VAT) which would raise the most money but tax everyone, taxes targeting the rich alone are more politically preferable. This could include a tax on homes with a value above a certain level, much higher capital gains taxes, higher estate taxes, and higher rates on large incomes. The charts below show the long term trends in tax rates both in the UK and the US. Tax rates in the future may not match the 90%+ as shown in the charts, but higher than today they will be.

People…..it won’t be enough to materially reduce deficits, but everyone will be paying a more “fair share”.

GOLD IS UNDERPRICED, THE GOLD MINERS EVEN MORE SO

The price of gold has historically correlated strongly with the U.S. debt buildup, the growth in money supply, the buildup in negative yield debt, and Central Bank asset buildup. It has also protected purchasing power both during inflation (as in the 1970s) and deflation (as in the 1930s). By every measure, the price of gold should be a multiple of its current price. Central Banks around the world, who are most attuned to long term monetary trends, have been collectively buying over 400 tons of gold every year in the last ten. Though central bankers never admit to liking gold as an asset class, since a gold standard limits the ability of central banks to create more currency, this is a classic case of “do as I do, not as I say”. Gold mining stocks, whose earnings are leveraged to the price of gold, are even more underpriced than gold bullion itself. With the gold price almost the same as the $1900 high of 2011, the gold mining stocks are 50-60% below those levels. This undervaluation is underlined because, as the chart below shows, they have flipped from a negative cash flow position to free cash flow generators. One can only imagine how much cash they will generate as the price of gold (their end product) catches up with other asset classes.  Dividends are already being steadily raised by many of the major miners, just as they were in the 1930s, when Homestake Mining, between 1929 and 1936, paid out dividends worth three times the 1929 stock price.

People….it’s not a question of IF, more a question of WHEN.

CONCLUSION

We see no constructive movement, in terms of dealing with economic imbalances and fiscal/monetary distortions. The problems are an order of magnitude impossible to comprehend, let alone deal with, and have been created over decades, The current crop of politicians, worldwide, give no indication of a willingness to directly confront the situation.

We continually search for the flaws in our long term investment argument. If the facts, and important trends have changed, we would gladly adjust our approach. This is not the case, however. The fiscal/monetary influences on the worldwide economy have been on a parabolic ascent in recent decades. Stagflation, as in the seventies but worse, is the best outcome we can hope for in the foreseeable future. Events will at some point force the necessary financial, political and social changes necessary to encourage long term productive economic growth. The operative phrase is AT SOME POINT…..

Roger Lipton

SEMI/MONTHLY FISCAL/MONETARY UPDATE – ELECTION DAY !! – WHAT DOES IT MEAN FOR THE ECONOMY?

SEMI/MONTHLY FISCAL/MONETARY UPDATE – ELECTION DAY, WHAT DOES IT MEAN FOR THE ECONOMY?

It is difficult to step back from the 24 hour news cycle and focus on the forest, rather than the trees.  As of 9/30/2000, a mere twenty years ago when GW Bush was elected,  the total US Debt amounted to $5.7 trillion. In 2008  Barack Obama bemoaned the “irresponsibly built” debt of  $10.0 trillion, then took it to $19.6 trillion by 9/30/2016. Donald Trump campaigned suggesting he could balance the budget and begin to reduce the debt and the current total is now over $27 trillion. Even without the “extra” couple of trillion to cope with Covid-19, he was on pace to substantially exceed the pace of his predecessors. The deficit the next twelve months is likely to be in the $2-3 trillion range in the current fiscal year ending 9/30/2021, so the beat goes on.

Anyone who thinks our economy will resume long term real GDP growth in excess of 3% is ignoring the crushing burden of the ongoing debt buildup. The best we can hope for is “stagflation” as our dollar loses its purchasing power over the long term and the worldwide economy moves toward the “European Model”. This conclusion applies no matter which candidates, for the presidency and congress, prevail. The public (on both the political right and the left) wants health care insurance with no regard for pre-existing conditions, continuation of social security and other entitlements, increasing support for education at all levels, continued high defense spending, as well as other forms of government support. The Federal Reserve Bank has taken up the task of narrowing the wealth gap. All of this means continued major government spending, far in excess of government receipts. Larger government may be more predictable under Democratic leadership but will also be a necessary reality under the Republicans. Neither Trump, Pence, Biden or Harris created this situation. It has been created over decades, and the current players can only kick the can down the road, at best.

The worst outcome that we can envision is a deflationary depression, possibly one that could match or even exceed that of the 1930’s.

Our opinion is that the can gets kicked down the road, at least once more. These cycles take years to play out, so the timing of the ultimate “reset” is impossible to accurately  predict.

For the moment:  THE DISTORTIONS, AND PRESSURES ONLY INTENSIFY – YOU NEVER KNOW WHICH SNOWFLAKE WILL CAUSE THE AVALANCHE

There is lots of additional news, all of which only serves to intensify the financial distortions that we have been describing for years. With the US election upon us,  there seems to be nobody that expects government (fiscal) or federal reserve bank (monetary) support to be reduced after the election. It is virtually certain to be quite the contrary. Below we will hit a few “high” or perhaps “low” points, while quoting several more well known authorities than ourselves.

We have described many times how debt issuance brings forward demand, at the expense of future consumption. We have also pointed out, as Reinhart and Rogoff described over ten years ago in “This Time is Different” (chronicling 800 years of business history) that once government debt reaches approximately 100% of GDP it is a noticeable drag on productive growth.

Lacy Hunt and Van Hoisington of Hoisington Research said recently: “Countries in a debt trap (our italics) like the US, Japan, the UK and the Euro Area have experienced a fall in short term interest rates to the zero bound, in some cases into negative rates, thus eliminating monetary policy to play a role in supporting the economy.” In other words, once at zero, below zero can’t help much.

Hunt and Hoisington described the increasing burden of the debt buildup this way: “As proof of the connection (between debt and GDP slowdown), each additional dollar of debt in 1980 generated a rise in GDP of 60 cents, up from 54 cents in 1940. The 1980s was the last decade for the productivity of debt to rise. Since then this ratio has dropped sharply, from 42 cents in 1989 to 27 cents in 2019.”

Hunt and Hoisington also said “Debt financed fiscal policy can provide a short term lift to the economy that lasts one to two quarters. This was the case with….2009, 2018 and 2019. However, the benefit of these actions…even when the amount of funds borrowed and spent were substantial, proved to be very fleeting and the deleterious effects remain. The multi-trillion dollars borrowed for pandemic relief in Q2 encouraged the beginnings of a “V” shaped recovery, but this additional debt will serve as a persistent restraint on growth going forward. When government debt as a percent of GDP rises above 65% economic growth is severely impacted and becomes very acute (our italics) at 90%.”

Keeping the above in mind, we present the following chart, provided to us within our subscription to Grant Williams’ “Things that make you go hmmm”. Shown are examples of what was going on, describing profound societal adjustments that have accompanied the debt levels of today. Fifty one out of fifty two times in the past, when debt gets to 130% of GDP, the country eventually defaulted  on its financial obligations, one way or another, which is exactly where the USA is right now.

 

As the final footnote to this discussion, to demonstrate how dramatic the government intervention has recently been: the legendary investor, Howard Marks, pointed out recently that: “in the four months from mid-March to mid-July of this year, the Fed bought bonds and notes and other securities to the tune of more than $2.3 trillion. That was roughly 20 times what it bought in 18 months during the Global Financial Crisis (of ’08-’09).”  We have it it this way: the “drug addict needs an increasingly powerful ‘hit’ to maintain the ‘high’”.

Take all of this under consideration as you position yourself financially.

Roger Lipton

SEMI-MONTHLY FISCAL/MONETARY REPORT – THE DISTORTIONS, AND PRESSURES ONLY INTENSIFY – YOU NEVER KNOW WHICH SNOWFLAKE WILL CAUSE THE AVALANCHE

SEMI-MONTHLY FISCAL/MONETARY REPORT – THE DISTORTIONS, AND PRESSURES ONLY INTENSIFY – YOU NEVER KNOW WHICH SNOWFLAKE WILL CAUSE THE AVALANCHE

There is lots of additional news, all of which only serves to intensify the financial distortions that we have been describing for years. With the US election just days away, there seems to be nobody that expects government (fiscal) or federal reserve bank (monetary) support to be reduced after the election. It is virtually certain to be quite the contrary. Below we will hit a few “high” or perhaps “low” points, while quoting several more well known authorities than ourselves.

We have described many times how debt issuance brings forward demand, at the expense of future consumption. We have also pointed out, as Reinhart and Rogoff described over ten years ago in “This Time is Different” (chronicling 800 years of business history) that once government debt reaches approximately 100% of GDP it is a noticeable drag on productive growth.

Lacy Hunt and Van Hoisington of Hoisington Research said recently: “Countries in a debt trap (our italics) like the US, Japan, the UK and the Euro Area have experienced a fall in short term interest rates to the zero bound, in some cases into negative rates, thus eliminating monetary policy to play a role in supporting the economy.” In other words, once at zero, below zero can’t help much.

Hunt and Hoisington described the increasing burden of the debt buildup this way: “As proof of the connection (between debt and GDP slowdown), each additional dollar of debt in 1980 generated a rise in GDP of 60 cents, up from 54 cents in 1940. The 1980s was the last decade for the productivity of debt to rise. Since then this ratio has dropped sharply, from 42 cents in 1989 to 27 cents in 2019.”

Hunt and Hoisington also said “Debt financed fiscal policy can provide a short term lift to the economy that lasts one to two quarters. This was the case with….2009, 2018 and 2019. However, the benefit of these actions…even when the amount of funds borrowed and spent were substantial, proved to be very fleeting and the deleterious effects remain. The multi-trillion dollars borrowed for pandemic relief in Q2 encouraged the beginnings of a “V” shaped recovery, but this additional debt will serve as a persistent restraint on growth going forward. When government debt as a percent of GDP rises above 65% economic growth is severely impacted and becomes very acute (our italics) at 90%.”

Keeping the above in mind, we present the following chart, provided to us within our subscription to Grant Williams’ “Things that make you go hmmm”. Shown are examples of what was going on, describing profound societal adjustments that have accompanied the debt levels of today. Fifty one out of fifty two times in the past, when debt gets to 130% of GDP, the country eventually defaulted  on its financial obligations, one way or another, which is exactly where the USA is right now.

As the final footnote to this discussion, to demonstrate how dramatic the government intervention has recently been: the legendary investor, Howard Marks, pointed out recently that: “in the four months from mid-March to mid-July of this year, the Fed bought bonds and notes and other securities to the tune of more than $2.3 trillion. That was roughly 20 times what it bought in 18 months during the Global Financial Crisis (of ’08-’09).”  We have it it this way: the “drug addict needs an increasingly powerful ‘hit’ to maintain the ‘high’”.

Take all of this under consideration as you position yourself financially.

Roger Lipton

 

 

 

 

 

SEMI-MONTHLY FISCAL/MONETARY UPDATE – POLITICIANS BICKER, CONSUMERS AND INVESTORS, HOLD COLLECTIVE BREATH

SEMI-MONTHLY FISCAL/MONETARY UPDATE – POLITICIANS BICKER,  CONSUMERS AND INVESTORS HOLD COLLECTIVE BREATH

The general equity market was on the downside in September, up a little so far this month, probably based on the uncertainty relative to the election and the size (and nature) of the new stimulus program, still under negotiation between Steve Mnuchin and Nancy Pelosi. Gold bullion was down 4.3% in September, as the Fed Balance sheet “stabilized” around $7 trillion for a couple of months before taking off again. The gold miners were weaker in September, down a bit more than bullion. Both are still up substantially for the year.

Over the long term, the price of gold has closely tracked the increase in government debt. We’ve written almost continuously about the debt and the deficits and how increasing debt is a burden on the future economy. In simplistic terms, deficit spending (for an individual, a family, a business or a country) brings consumption forward at the expense of the future. It is just that simple and future consumption is currently being sacrificed at the altar of the can kicking (down the road) exercise.

A corollary to the current situation is that Federal Reserve money creation has been used to finance a very large portion of the US Federal deficit spending. As the table just below shows, the deficit in the current year has been $3 trillion for the eleven months ending 8/31/20. It seems like no accident that the Federal Reserve Balance Sheet has increased from approximately $4 trillion to $7 trillion currently, coincidentally exactly matching the eleven months of “stated” deficit.

But the story doesn’t quite end there. It’s true that the Fed, with the keystroke of a computer has created trillions of dollars to purchase US Treasuries, which has financed our massive spending deficits. The Fed has been a major buyer, for sure, but not the only buyer. In fact, the Total Public Debt of the US has gone up by almost exactly FOUR TRILLION DOLLARs in the last eleven months, a cool trillion dollars more than the stated deficit spending. Only with government accounting can the incremental debt not equal the deficit during the same period. Our website article on this subject, written in October, 2018, and provided to our investing partners  as well,  is provided just below.

https://www.liptonfinancialservices.com/2018/10/semi-monthly-fiscal-monetary-report-rising-deficits-even-faster-rising-debt-weve-only-just-begun/

In essence the reported monthly and annual deficits are just the numbers within the budget, and almost always the debt buildup is greater, most of it borrowed from the Social Security “lockbox”, now almost depleted. As our article two years ago pointed out, in the eleven years ending 9/30/18, the “extra” debt amounted to an enormous $3.24 trillion.

So the beat goes on, except:

All the numbers are an order of magnitude larger than just a couple of years ago. We all are well versed in the stated deficit, now over $3 trillion for fiscal 2020, but hardly anyone talks about the extra trillion of debt that has been incurred. A trillion dollars is still a great deal of money and the number of trillions is building rapidly. Just a matter of months ago, fiscal hawks were warning that the cumulative debt could approach $30 trillion by 2030, now more like the end of 2021, nine years earlier.

Many observers lose track, or lack perspective, over the actual results of various asset classes, including gold bullion. We all know that gold went from $35 to $850 in the 1970s after Richard Nixon eliminated the conversion of dollars into gold. From 1980 to 2000, with good reason, the price of gold suffered as Reagonomics (with Fed Chairman, Paul Volcker)  and then Clintonomics  kicked in and a strong economy with relatively modest inflation reduced the need for gold as a monetary safe haven. When US deficits increased dramatically in the early 2000s, with the cost of two wars, Y2k inefficiencies, and the aftermath of 9/11, gold started to perform well, and that has generally continued in the last twenty years. The chart below shows how gold bullion has performed in various currencies.

The chart is as of May, 2020, when gold bullion was up 14.3% in US Dollars and it has done even better since then. As you can see, 2013 was the one very poor year (out of 20). It is worth noting that our Partnership was down over 50% that year, since the gold miners typically go up and down more than the price of bullion. We have often pointed out that the upside performance of the gold miners has substantially lagged the price of gold bullion, and it was specifically the terrible 2013 from which we are expecting to recover.  Aside from that observation, you can see that gold bullion in US Dollars has averaged a 10.7% increase annually, almost exactly the 10.3% average of all currencies. There is nothing shabby about the price performance of gold bullion as an asset class, and when the gold mining stocks catch up, the same observation will apply.

Keep all of this in mind as the politicians, economists and pundits predict a new growth phase for the US economy. The Presidential “debate” on Tuesday evening only reinforced our view that the partisan (adolescent) bickering, the legislative dysfunction, the spending and deficits will all continue indefinitely, and there is no “graceful” way out of this political, social and economic mess. Gold and gold related securities have historically protected purchasing power over similar stressful periods, and we firmly believe that this time will not be different.

Roger Lipton

SEMI-MONTHLY FISCAL/MONETARY UPDATE – WARREN BUFFET’S BERKSHIRE HATHAWAY ADDS BARRICK GOLD (GOLD) TO PORTFOLIO

SEMI-MONTHLY FISCAL/MONETARY UPDATE – WARREN BUFFET’S BERKSHIRE HATHAWAY ADDS BARRICK GOLD (GOLD) TO PORTFOLIO

The big news, after the market close last Friday evening was that Berkshire Hathaway Inc., in the quarter ended 6/30, added $565M of Barrick Gold Corp. (GOLD) to Berkshire’s portfolio. This is a very positive development, not only as a reversal of Buffet’s long held disdain for the “barbaric metal”, but as an endorsement for the ownership of gold mining equities. Buffet has been quoted many times as saying that gold “just sits there”, no dividend, no interest, no growth. With interest rates virtually at zero, gold’s lack of dividend or interest is no longer a drawback. The lack of growth can now be overcome by ownership of a well run mining company that is increasing production and will benefit, in a leveraged way, from an increasing price of their end product. This rationale leads to ownership of Barrick Gold (GOLD) and lots of other possibilities, all of which we continue to own.

EXPECT A DEBATE (got to fill the 24 hour news cycle)

On one hand: $565 Million is a rounding error for Berkshire’s $150B portfolio, far from a major purchase. Barrick is just a gold miner (not gold itself) and the purchase decision was possibly made by one of today’s day to day active portfolio managers at Berkshire, not Buffet himself.

On the other hand: $565M was likely not the end of the buying. It is six or seven weeks since the end of June, the portfolio managers know that Berkshire’s purchase will trigger a great deal of interest not only in GOLD but in the entire gold mining asset class. It is therefore highly likely that more Barrick, and perhaps other mining companies have been bought by now. It is possible also, that Berkshire’s further (perhaps even more substantial) buying contributed to the strong performance since June 30th of the gold mining stocks.  Furthermore, while Buffet himself might not have initiated the move toward gold mining, he was no doubt well aware of the decision and is prepared to defend it.

Parenthetically, it is worth noting that: While Berkshire has purchased a gold mining stock for the first time, sold were billions of dollars worth of JP Morgan Chase, Wells Fargo and Goldman Sachs. Seems like a parallel path to the “money management” activities of worldwide Central Banks, who have continued to buy gold bullion while they reduce (as a percentage of reserves) their holdings of US Treasuries.

THE PSYCHOLOGY OF OWNING GOLD RELATED STOCKS

We believe Berkshire’s purchase could provide a psychological inflection point. Though gold and the gold miners have performed well for the last eighteen months, and over the long term,  a money manager puts his professional life at risk (and possibly his marriage as well) by owning a controversial gold related security. An institutional money manager can buy any amount of Microsoft or Apple or even Tesla, and his stakeholders won’t be critical if it doesn’t work, especially since so many competing money managers will be suffering the same fate. On the other hand, everybody has an opinion about gold, well informed or not, so a mistake in this area could be fatal.

In essence, Buffet now provides “cover”.

OUR ARGUMENT: SPEND THREE MINUTES WITH ME, ON YOUTUBE, YOUNGER,  AND A LITTLE EARLY, IN 2012

https://www.youtube.com/watch?v=ah7Y2rHuhCs

THE UPSIDE

The “cover” that Berkshire’s purchase provides has the potential of unleashing the upside in the gold related asset class, so let’s look at the upside.

The chart just below shows gold bullion as a percent of US Financial Assets. The chart goes only to 2014, and while it is true that gold has come back to over $1900/oz., up about 60%, the other asset classes are up about the same amount, so the relationship shown still exists. With gold bullion about 4% of assets versus a previous high around 16% there is obviously a great deal of catching up to do.

Compound the above chart with that just below which shows how the gold mining stocks have very substantially lagged the price of gold.  As you can see, the miners strongly correlated with bullion until late 2012. It would now take a triple to catch up.

SUMMARY

All the reasons that gold bullion has maintained its purchasing power for 3,000 years, for 200 years, for 50 years, for 20 years, all but between 2012 and now, are very much in place. John Maynard Keynes is quoted as saying: “When the facts change, I change my views. What do you do, sir?” The facts are not only the same as eight years ago, but substantially magnified. Warren Buffet, and his portfolio managers, do not make a lot of long term mistakes, and we join them in the view that we are much closer to the beginning of a new bull market in gold related assets than the end.

Roger Lipton

SEMI-MONTHLY FISCAL/MONETARY UPDATE – THE MOVE IN GOLD, AND THE GOLD MINERS, HAS JUST BEGUN!

SEMI-MONTHLY FISCAL/MONETARY UPDATE – THE MOVE IN GOLD, AND THE GOLD MINERS, HAS JUST BEGUN!

The capital markets continued to be supported by the Federal Reserve Bank’s continued accommodation, in its effort to counter the pandemic related slowdown. The Fed’s policy, to do “whatever it takes”, not even “thinking about thinking about” higher interest rates or tighter money, supported most asset classes, including gold bullion (up 10.8% in July, and up 29.8% YTD) and the gold mining stocks (which did even better). Our Investment Partnership’s portfolio, virtually 100% invested in gold mining stocks, has performed in a similar fashion. While we are pleased with the progress, we expect gold miners to continue to outperform bullion on the upside and feel it is only the top of the second inning for the major move to come. While gold bullion is now at an all-time high, the gold miners are still down more than 50% from their highs. We expect bullion to at least triple from here over the next 3-5 years and the gold miners to increase by a multiple of that. All the financial factors that the pandemic has brought into focus and magnified are still in play.

Prominent investment strategists at Goldman Sachs and other investment firms, as well as legendary investors such as Ray Dalio are now recommending gold and gold mining stocks as productive portions of a diversified portfolio. Virtually every point they make we have been discussing every month for seven or eight years. Goldman says gold is the “currency of last resort and there is more downside to come with interest rates”. Dalio points out that “China is an adversary, the dollar’s reserve status is at risk, there is no true ‘price discovery’ as the Fed is buying everything in sight, the deficits and cumulative debt are a huge burden on future economic growth, central bank balance sheets are exploding as they purchase stocks and bonds and gold bullion as well, all of which support an important allocation to gold”. Does any of this sound familiar?

In addition to the debt burden, another factor that slows the growth path is the aging population. The increasing portion of the US population represented by older people, similar to trends in Japan, China, and Europe, is shown in the following charts.

Lastly, an important feature of government spending in the US is the increasing burden of entitlements, social security in particular. Entitlements and defense make up about 75% of government spending, and that’s a major reason why the total budget is mostly (‘baked in the cake”. With everything else going on in the world, it is often forgotten that the social security system was put in place in the 1930s when the average life span of an American male was about 65, which today is about 80. There were also A LOT MORE workers contributing than recipients. The chart just below shows the steady contraction of that ratio, from 3.7 down to the low 2s.

The above chart is impressive….but the following chart shows numbers closer to the 1930s when FDR put the program in place, with 159 workers/recipient in 1940, decreasing to “only” 42 workers by 1945.

Combine the above charts dealing with Social Security with the reality of an aging population. Add to that what might be considered “anecdotal” in terms of our impression of the work ethic of the younger working age population. If “America’s Greatest Generation” of workers is being replaced by today’s youth, perhaps less convinced of the morality of capitalism, it is difficult to picture government spending coming down or GDP and productivity accelerating.

All of this is to say that central banks, around the world, will have no alternative to aggressive monetary accommodation. Governments, similarly, will do likewise with fiscal  measures. We can watch this play out currently on almost a daily basis, and this is at a scale unprecedented in modern business history. Gold bullion, based on many parameters which we have described previously, is as cheap now as it was in 1971, before it went from $35 to $850. At $850 it was likely “ahead of itself” but $300-400 would have been a rational range at that point. Accordingly, 8-10 times the current level, which discounted by 50% would be $8-10,000 per oz., can be justified today. The gold mining companies, leveraged to the price of gold, could (and should) go up by somewhere between two and four times that gain. This is the basis by which we suggest  that the gold mining stocks could increase by 10-20x their current levels.

With gold hitting all-time highs, and the gold miners at seven or eight year highs, you will no doubt hear a number of financial commentators suggest that “the easy money has been made”. Some will suggest taking profits, with an objective of getting back in at a lower level. We suggest that if you owned a stock that had gone from $11 to $20, but you think it will be $80 or $90 or $100 in a few years, would you sell it at $20 to try to buy it back at $19 or $18? Probably not :).

Over the very long term, gold should be considered a “store of value” rather than an “investment”. There is, after all, no dividend or organic growth.  At the present time, however, the investment characteristics of this asset class, substantially lagging the increased nominal prices of almost all others, are too compelling to ignore. That is why our investment partnership is 100% invested by way of the above approach.

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 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 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