Tag Archives: GOLD

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

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

              

SEMI-MONTHLY FISCAL/MONETARY UPDATE – GOLD BREAKS OUT OVER $1600/OZ & THE US DOLLAR APPROACHES 6 YR HIGH – SCRATCH ONE MORE MYTH !!

SEMI-MONTHLY FISCAL/MONETARY UPDATE – GOLD BREAKS OUT OVER $1600/OZ & THE US DOLLAR APPROACHES 6 YR HIGH – SCRATCH ONE MORE MYTH !!

It’s an accepted fact that gold and the US Dollar move in opposite directions. Any number of economists, market strategists, and stock pickers have presented this as gospel. One true giant of the gold mining industry, no less than Pierre Lassonde, has stated that 90% of the price action in gold is dictated by the price performance of the US Dollar.

Not exactly !

If that were true, it would be impossible for gold bullion to be breaking out above $1600/oz., a multi-year high, at the same that DXY, the ETF representing the performance of the US Dollar relative to a basket of other currencies is hitting a multi-year high. WHICH IS WHAT WE HAVE TODAY !

There are a large number of other myths relative to the attractiveness of gold as a store of value and/or a speculative investment. We have dealt with many of the following over the years, will again in the future, and there are other myths as well:

Gold is mostly attractive as a “safe haven”, in times of economic, social, or political chaos.

Gold is useful primarily as an inflation hedge.

Gold can only go up when interest rates, especially adjusted for inflation, are very low.

Gold can’t do well when the stock market is doing well.

Gold is not as liquid as other currencies.

Gold’s absence of dividends is a killer in terms of a store of value.

Gold, going forward, is far less attractive than bitcoin or other crypto-currencies.

I could go on, but for the moment: THE STOCK MARKET AND THE US DOLLAR ARE HITTING NEW MULTI-YEAR HIGHS AND and (somehow) SO IS GOLD !!

Roger Lipton

P.S. But the gold miners are still down 50-70% from their highs & that’s another story for another day !!

SEMI-MONTHLY FISCAL/MONETARY REPORT – GOLD BULLION UP 4.5% IN JANUARY – WITH GOOD REASON

SEMI-MONTHLY FISCAL/MONETARY REPORT – GOLD BULLION UP 4.5% IN JANUARY – WITH GOOD REASON, AND  THE GOLD MINING COMPANIES WILL REPORT SHARPLY IMPROVED RESULTS !

Gold bullion was firm in January, up 4.5%. The gold mining stocks were down modestly. This short term divergence only makes the gold mining stocks even more of a bargain. There are many gold mining companies with strong balance sheets, long term reserves, and improving production. There have been hardly any large discoveries in the last ten years and it takes something like ten years to get a new mine permitted. Sharply higher gold prices will not create a lot of new supply, so much higher prices can be sustained for a long time. The mining companies have reported excellent results from last year’s third quarter, the fourth quarter results will be no different, the bullion and the miners’ price charts still look good. Though gold bullion is approaching the $1600/oz. level, most analysts have built their earnings and cash flow models on lower prices and will be revising projections sharply higher as the new bullion price range becomes more established. As described below, gold related investments are starting to become mainstream, with the emphasis on starting.

A very small percentage, something like 1% of worldwide investable assets are allocated to gold related investments. All the gold related liquid assets (mining stocks, bullion ETFs, etc.) combined amount to something like $400 billion, compared to the trillion dollar valuations of one company like Apple or Microsoft. That 1% compares to over 20% in 1934 and 1982, when investor stress was extreme and gold was considered a safe haven.

In recent years, if a mutual fund manager invested in controversial  gold related securities, his/her job could be at risk, as opposed to buying Apple or Microsoft.

However, it is starting to become acceptable to own gold related securities, as quite a few investment legends endorse the holdings. (I’ll leave it to Google to provide you with their credentials).

Ray Dalio has said: “If you don’t have 10% of your assets in gold….you don’t know history”.

Jeffrey Gundlach has said: “I’m certainly long gold….it’s getting almost exciting. Something big is happening”.

Paul Singer has said: “It makes a great deal of sense to own gold. ….the world’s central bankers are completely focused on debasing their currencies”.

Kenneth Rogoff has said: “….a shift in emerging markets towards accumulating gold would help the international financial system..”

Paul Tudor Jones has said: “My favorite trade in the next 12 to 24 months is gold….it’s possible we go into a recession….rates in the US could go down to the zero bound; gold in that situation is going to scream.”

While his fiscal/monetary credentials are not quite as well known as the above investment professionals, Roger Lipton says: “My favorite investment in the next five years is gold mining stocks. To whatever extent gold “screams”, the miners should move by a multiple of that.”

Roger Lipton

SEMI-MONTHLY FISCAL/MONETARY UPDATE – A COMPELLING ARGUMENT FOR GOLD ABOVE $10,000

 

SEMI-MONTHLY FISCAL/MONETARY UPDATE – A COMPELLING ARGUMENT FOR GOLD ABOVE $10,000

The following is an excerpt from an excellent article published recently by Myrmikan Research. We warn you advance that it is more technical than most investors like to deal with, but nobody ever said it is easy to maintain wealth. The following provides a logical and compelling case why a much higher price for gold, and gold mining stocks, is inevitable. Enjoy !!

The following is republished with the permission of Myrmikan Research LLC

Gold Past $10,000

Gold in 2019 finally burst through the $1,350 ceiling that had been established during the crash of 2013. Gold’s current price of $1,550 may be materially higher than where it has traded over the past six years, and it has returned most gold miners to profitability, but it is nothing compared to where the price of gold is headed. For the benefit of new readers and to jog the memories of long-time followers, let us work through the admittedly circuitous but conceptually simple reasoning behind the reason why the dollar price of gold is heading well above $10,000 per ounce

In 1915, the Federal Reserve’s assets were 77% gold, 7% commercial bills, and 2% government bonds (the remainder a smattering of various “amounts due” from other institutions). By 1923, those figures had shifted to 61% gold, 22% commercial bills, and 3% government bonds. There was no possibility that the Federal Reserve’s liabilities (i.e., the dollar) could decline in value when they were so backed: the Federal Reserve’s assets had almost no credit risk nor interest rate risk. Those who held dollars could at any time demand that the Federal Reserve redeem their dollars into gold, but few would want to given that the dollar was more liquid than gold and so solidly backed.

During the credit collapse of the 1930s, asset prices crashed against real money (gold) as malinvestments liquidated. Roosevelt made holding gold a felony, but there was little need: the dollar, backed by gold and commercial bills, remained relatively constant. Gold, in fact, flooded into the central bank from Europe: by 1940, Federal Reserve assets were comprised of 85% gold, 0% commercial bills, and 9% government bonds.

Contemporaneous economists understood that the dollar had not become “too strong” in the 1930s; it was asset prices that had been too high in the 1920s. But then the age of Keynes arrived, and the Federal Reserve embarked its new mission of funding the government instead of liquefying trade. By 1971, the Federal Reserve had increased its assets and liabilities by five times and lost over half of its gold to European governments (which retained the right to redeem dollars into gold): its balance sheet shifted to 12% gold, 0% commercial bills, and 71% government bonds. The Federal Reserve was no longer a liquidity provider in the mold of the Bank of Amsterdam, but a credit creator for the state.

In 1971, Nixon closed the gold window, and U.S. physical gold reserves have remained nearly constant since. But the Federal Reserve bought enormous amounts of government bonds in the 1970s to keep interest rates low to prop up government spending and financial market excesses. By the end of 1980, the Federal Reserve had increased its liabilities (i.e., the number of raw dollars) by 76% by buying government bonds. The dollar’s value collapsed.’

Under the quantity theory, a 76% increase in the number of dollars should have produce a 44% declined in its value. Or, if we look at M2, which increased by 125%, the dollar should have fallen by 55%. Instead it fell against gold by 96%.

The chart below shows what happened: as the government printed more money, interest rates rose, and the bonds the Federal Reserve holds to back the currency fell in value. It wasn’t that there were too many dollars chasing too few goods—as the monetarists claim—it was that each dollar was stripped of that which gave it value. It would as if the Bank of Amsterdam had suddenly announced that half of its gold reserve had been stolen: the value of its paper currency would immediately fall in half.

The surging price of gold—really the devaluation of the dollar—exactly tracked the increase in nominal interest rates. Note that the first surge in rates occurred when the price of gold was still fixed—instead of the price of gold rising, the U.S. lost 15% of its gold reserves to European governments.

The next chart shows the Federal Reserve’s balance sheet in terms of its gold backing. It shows clearly what happened when the Keynesians took over economic power in the 1940s and stuffed the Federal Reserve full of Treasury bonds. Then, in 1971, the reaction set in: interest rates soared and as did the the price of gold until the Federal Reserve’s existing stock backed Federal Reserve liabilities by over 100%.

Then they did it again from 1981 to today (only this time they called themselves monetarists). The Federal Reserve bought government bonds to fund the growth of the state and keep interest rates low to stimulate industry artificially. Leading up to the 2008 panic, gold increased to a price that caused it to backed Federal Reserve liabilities by nearly 30%. But then the Federal Reserve issued dollars to buy Treasuries and mortgage-backed securities, massively expanding its balance sheet and saving the malinvestments.

By the time QEs were complete, the gold backing of the dollar had fallen to just 6% (as opposed to 12% in 1969). In other words: in 2016, with gold trading at $1,050 per ounce, the price of gold was half what it had been in 1969 in terms of the Federal Reserve’s balance sheet. And, as the chart below shows, the composition of that balance sheet in 2016 was much worse than it had been in 1969 (the dip in bond holdings in 2008 was due to temporary swap lines with other central banks and other short-term extraordinary bailout programs).

In the 1970s, the duration of the Treasury bonds on the Federal Reserve’s balance was only a few years—now it is over a decade. Plus, the duration of mortgage-backed securities is inverse to the movement in rates: few borrowers refinance in a rising interest rates environment. Unlike at the Federal Reserve’s founding, when its assets were virtually immune from interest rate risk, its assets now are highly sensitive.

At the moment, when the Federal Reserve prints money to buy bonds, the result is rising prices and falling interest rates, which keeps the government funded and financial markets aloft. The end of the dollar will begin when this dynamic flips, as it did in the 1970s. At some point, the market will demand a premium to protect against the weakening position of the Federal Reserve’s balance sheet. The more the monetary authorities print, the higher rates will go, the more money the government will need to print to cover its interest payments and deficit, the lower the dollar will sink, and the higher gold’s nominal price will be.

The question is when will the dynamic flip? The great economist Ludwig von Mises argued that psychological factors are determinative:

“Finally, the public becomes aware of what is happening. People realize that there will be no end to the issue of more and more money substitutes—that prices will consequently rise at an accelerated pace. They comprehend that under such a state of affairs it is detrimental to keep cash. In order to prevent being victimized by the progressing drop in money’s purchasing power, they rush to buy commodities, no matter what their prices may be and whether or not they need them. They prefer everything else to money. They arrange what in 1923 in Germany when the Reich set the classical example for the policy of endless credit expansion, was called die Flucht in die Sachwerte, the flight into real values.”

Mises’s description of what happens after the panic begins is undoubtedly accurate, but there is no need to rely on psychology to determine when panic sets in: the cause is the collapse of cash flows from business projects due to overcapacity, which is what ended the canal boom of the 1830s, the railroad boom of the 1850s and 1870s, the stock market and real estate booms of the 1920s, 1960s, and 2000s.

After the last panic, the Federal Reserve managed to lower structural interest rates by around 4%. Existing projects looked more valuable, and the lower rates stimulated industry to build all the marginal projects that suddenly appeared to be profitable. Instead of a thorough liquidation of the financial and economic systems, the Federal Reserve engineered a new boom.

The next panic will similarly require not just a bailout of the banks but also a structural lowering of rates in order to avoid complete liquidation. This is why Bernanke announced earlier this month from his perch at the Brookings Institute that “new policy tools can provide the equivalent of 3 percentage points of additional policy space.” These new tools include: “the future use of negative short-term rates, both because situations could arise in which negative short-term rates would provide useful policy space.”

Negative interest rates that (adding the commercial banks’ spread) result in near-zero rates for large industry might well serve to keep the economy and government from complete collapse for a time. The consequences, however, would include providing gold with a positive carry as against government bonds and further deterioration of the composition of the Federal Reserve’s balance sheet.

At some point, whether it is during the next panic or the following one, the market will discover that much of society’s wealth has become entrapped in non-cashflowing malinvestments. Tax revenues will plummet, and the assets that our central bank holds will be shown to be near worthless. That is when gold will shoot into the multi-thousands of dollars per ounce.

History allows us to make some projections: The average gold backing for Bank of England liabilities from 1720 to 1900 was 33%. Private banks in the U.K. maintained a similar percentage of gold backing during this time. This percentage was set more by the market than by policy-makers: until World War I, anyone could deposit gold and demand paper or vice-versa. The composition and size of the Federal Reserve’s balance sheet requires gold to trade above $5,000 to reach one-third backing.

Looking at American history, Federal Reserve notes were freely exchangeable for gold until 1933, and the average gold backing of the Federal Reserve through that time was 54%. To reach that level of backing would currently require a gold price above $8,500.

Recall, however, that the above figures occurred when the non-gold assets on central bank balance sheets were nearly all commercial bills. Given the current composition of the Federal Reserve’s balance sheet, the market will demand more backing than one third or even a half.

The panic in 1980, for example, sent gold to a price that caused Federal Reserve liabilities to be gold backed by an absurd 135%—to achieve the similar figure today would require gold to trade over $20,000 per ounce. That was the peak of a dollar panic, not an equilibrium price, but it shows how crazy the gold market can get.

The nominal figures above assume that the Federal Reserve will keep the size of its balance sheet constant. But, of course, as Bernanke has telegraphed, the central bank will start printing as soon as recession looms. The Federal Reserve has, in fact, already starting printing to support the repo market, the primary funding mechanism for both the state and real estate loans.

Bernanke claimed on 60 Minutes: “We could raise interest rates in 15 minutes if we have to. So, there really is no problem with raising rates, tightening monetary policy, slowing the economy, reducing inflation, at the appropriate time.” This is exactly what Federal Reserve governors thought would happen in 1979 when they boosted rates to 21%. Instead, the dollar went into it final swoon as the Federal Reserve’s bond portfolio collapsed in value.

The money to push gold over $10,000 per ounce has already been printed. And now they are going to print more. The bubble economy is already teetering. No doubt strong fiscal and monetary intervention may extend its life for a time, but then the ultimate price objective for gold will then be markedly higher. The gold miners will do even better.

The above article excerpt is republished with the permission of Myrmikan Capital LLC

Roger Lipton

YEAR END FISCAL/MONETARY SUMMARY – GOLD, AND THE GOLD MINERS, RE-ESTABLISH UPWARD TREND, WITH GOOD REASON!!

YEAR-END FISCAL/MONETARY SUMMARY – GOLD, AND THE GOLD MINERS, RE-ESTABLISH UPWARD TREND, WITH GOOD REASON!!

December, and the fourth quarter, continued in the same vein as the first three calendar quarters.  The operating leverage for the miners is starting to be recognized, since the move in mining stocks in December was more than double the 3.7% that gold bullion moved. It was a similar case for the year, with gold bullion up 17.9% and the miners up about double that. The most impressive relative move of the month was the last two days when the miners were up  2-3% with bullion up only 0.4%, so it is possible that this is the beginning of the still very depressed mining stocks catching up to the bullion price. The performance of our investment partnership, almost entirely invested in gold mining companies, mirrored that described above.

While bullion (at $1525/oz.) is down about 20% from its high of $1900/oz. (in 2011), the miners are down 50-70%, so the mining stocks could go up 100% or more with bullion rising 20-25% to the previous high. Since we believe that bullion will sell for something like $5,000/oz. within the next few years, you can see how our portfolio could multiply by many times the current price.

There is no reason to change our longstanding view that gold mining stocks have the most upside potential of any liquid asset class we know of. All the reasons we have been discussing for the last six years are only intensifying, and the potential reward for our patience has increased with time. You can review at your leisure our article written in August  of this year: THE CASE FOR GOLD – we are gratified that a true giant of the gold mining industry, Rob McEwen, who built Goldcorp, one of the largest and successful mining companies (recently merged with Newmont Mining),  has re-published (with our permission) our article on the website of his young company, publicly traded McEwen Mining (MUX). . Maybe we know something, after all 😊

Our many articles on this subject, largely summarized in THE CASE FOR GOLD, are hereby augmented with the following thoughts regarding Inflation, Central Bank Gold Purchasing, US Deficits and Cumulative Debt, Interest Rate Expectations and Worldwide Economic Trends.

INFLATION, which is supportive of the gold price, is not dead, as widely assumed. The apparent absence of inflation, as measured by the Bureau of Economic Statistics, has provided comfort to the PHDs at central banks. However (1) the price indexes that are quoted, inexplicably excluding food and energy which are consumed daily, have been manipulated periodically to put a false face on reality. Among other benefits to our government, understated inflation provides an insufficient increase to entitlements such as social security payments (2) Though certain imported apparel prices and some consumer electronics have not increased in price, asset prices (explicitly targeted by central banks), including stocks and bonds and prime real estate and collectibles have made the rich richer while the middle class strains to make ends meet. Inflation is with us when a Van Gogh painting sells for $240M or a NYC coop sells for over $100M. The super rich are purchasing iconic items which they know will command a premium price long into the future, as opposed to holding the colored paper that they know will have a tiny fraction of its current purchasing power. Even an understated 2% annual inflation rate destroys 50% of your purchasing power in 35 years. A 1971 dollar is worth about $0.15, a 1913 dollar is worth less than $.03. That Van Gogh or Central Park South penthouse will do better than that. The chart below shows how big ticket items, where the money is spent, have inflated over the last twenty years at rates well above those reported by our Bureau of Economic Analysis.

CENTRAL BANKS INCREASE GOLD BUYING, and the inevitable ramifications are becoming more obvious. Central Banks, most notably China and Russia, are buying physical gold at a record rate in 2019, at the same time reducing US Treasury Securities as a percentage of their reserves. Central banks collectively, even with China’s understated purchases, are now absorbing more than 20% of annual worldwide gold production. Furthermore, an increasing amount of trade is taking place between China, Russia, and the Mideast, conducted in terms of Yuan and Rubles and Gold, and the ounces of Gold it takes to purchase a gallon of Oil may indeed be a very important guidepost that determines the future relationship between various currencies. With geo-political-trade tensions so high, nothing would please the Chinese, the Russians, or the Saudis more than an ability to conduct more of their business in something other than US Dollars. Well connected sources are increasingly suggesting that China, combining the gold ownership of its many government agencies, likely owns upwards of 20,000 tons of physical gold, rather than the 1,900 tons owned by the Peoples Bank of China, which they report. This dwarfs the 8,100 tons the US has owned since 1971. Russia, with their rapidly increasing 2,200 tons, is the largest owner relative to the size of their economy and currency and most able to implement some sort of a gold related monetary system if they were so inclined.

There are reports of international discussions relating to a new “reserve currency”, joining or even replacing the US Dollar. The Bretton Woods Agreement of 1944 assumed the US would maintain the “value” of the US Dollar by backing it with gold. The USA has blatantly abused its trading privilege during the last 75 years by “closing the gold window” in 1971, generating annual operating deficits in 35 out the last 39 years, running up $23 trillion of debt (excluding tens of trillions of unfunded entitlement)  and printing $4 trillion of fresh (fiat, i.e.unbacked) money by our Federal Reserve Bank. International monetary circles are starting to consider a new monetary “approach”, and worldwide central banks may be anticipating that likelihood by way of their physical gold purchases.  We believe that China could announce, almost any time, a new form of currency, perhaps a so called crypto-currency, backed by upwards of 20,000 tons of gold. At the same time, a new base price for gold bullion at $5,000/oz. or more would be supported by the Chinese.

The current worldwide fiscal/monetary “promiscuity”, unbacked paper currencies being diluted into oblivion by the politicians of the day, cannot go on indefinitely without predictable ramifications. When a trend cannot go on, by definition, it will not. We view gold as re-emerging as the true currency, the store of value and unit of exchange it has been for 5,000 years. Central banks, including our most direct political and economic adversaries, get it. The public in China and India get it. Investors in North America hardly at all, some might say “whistling past the graveyard”. It’s going to be interesting.

THE FEDERAL DEBT is north of $23 trillion in the US, also growing rapidly in the other largest trading nations in the world. We’ve pointed out many times that the debt is increasing even more than the annually budgeted operating deficits would imply. This can only happen with governmental accounting. The difference is due largely to the federal government borrowing from the social security trust fund. In the fiscal year ending 9/30/19, for example, the operating deficit was $984B but “off budget” spending, financed by the social security system which is itself approaching insolvency, took the cumulative debt up an extra $206B, from $21.97T to $23.16T. This is not “one off”, it happens almost every year and is to be expected. Therefore, we can expect the total deficit in the fiscal year ending 9/30/20 to be something like $24.5T, on its way to $26T by the time the newly elected president takes office in January,’21. This assumes that there are no economic disruptions, and a recession, with lower tax revenues and larger deficits are out there somewhere. All of this is very important because, the larger the debt the more difficult economic growth becomes. Whether we’re talking about an individual, a family, a company or a country, the more effort it takes to service debt, the less investment can be made in productive pursuit. Our economy and other major worldwide economies will therefore continue to be kept afloat by central bank financial creativity. It will work until it doesn’t, and will inevitably be accompanied by many unintended painful consequences.

INTEREST RATES are not going to change much in the foreseeable future. Interest payments on the debt are barely tolerable only because rates are so low. Every increased point (100 basis points) of extra interest equates to $230B of extra interest as current bonds mature, and over 50% of our outstanding debt is under 5 years. This extra interest would be a material increment and would squeeze out potentially productive government spending. Higher interest rates, which the US Fed tried briefly a year ago, stopped our economy and the stock market in its tracks, and the policy was quickly reversed. The US economy has stabilized currently but GDP growth is projected to be no more than a tepid 2% this year, even less than it was a year ago when slightly higher interest rates took their toll. The only way interest rates could rise by much is if the Federal Reserve, and other central banks, lose control over the situation and this would be a sign of impending financial chaos. Lower interest rates are possible, but the 10 year treasury note is under 2%, and the marginal benefit of lower rates from here is debatable. Negative interest rates on something like $13T of sovereign debt is a fact of life, but that approach has its own set of unintended consequences, and adoption by the US Fed would clearly be a sign of desperation. Give or take 50 basis points, we believe interest rates are “range bound” for the next year or two.

WORLDWIDE ECONOMIC TRENDS support our contention that worldwide central banks, in support of local economies, will maintain low interest rates interest rates, which provides a major tailwind for our portfolio. Headlines in the Wall Street Journal today, January 2, include (1) Asian Economies Must Brace for Chill Wind From China (2) Japan’s Lost 30 Years (with debt going to 250% of GDP) Give Pause to Those Looking at U.S. (3) Japan Has Gone from Growth Market to Bargain Rack (4) ‘Japanification’ Haunts Slow Growth Europe (5) Latin America’s ‘Oasis” Descends Into Chaos. As Wendy’s put it, thirty years ago: “Where’s The Beef”.

PUTTING IT ALL TOGETHER, we’re certainly pleased that our gold mining oriented investment partnership provided positive results in December, the 4th quarter, and the year.  The mining stocks have just begun to gain investment traction. It seems that, until now investors and analysts have not believed that gold at $1400-1500 per oz. is here to stay. They have been therefore unwilling to adjust upward their estimates of gold reserves, mine lives, earnings and cash flow expectations for the gold mining companies. Gold bullion prices have now clearly broken out on the upside from their six year “consolidation” and the possibility (we call it a likelihood) of a big upside move now comes into view. We can therefore expect upgraded expectations and higher valuations.

There have been virtually no major new gold reserves discovered in the last ten years, and new mines take many years to get permitted. Higher prices will allow expanded mining of some lower grade reserves by established companies but will not allow new mines to come onstream for many years. Existing miners have made major progress in cost control over the last few years and are in a position to improve cash flow and profits dramatically, even at current prices. Operating results for the quarter ending 9/30/19, the first quarter in eight years that the gold price was something like $200/oz. higher than a year earlier, have begun to demonstrate the operating leverage that is in place. We believe that the bull market in gold and gold mining stocks has resumed and the upside potential is very substantial.

Roger Lipton