In Gold We Trust: The Big Long is Just Getting Started
19th edition of the gold sector bible released
Incrementum has released its annual In Gold We Trust report, considered essential reading for those in the gold sector.
The 19th edition of the report covers all facets of gold, including equities, as well as silver and bitcoin.
This year’s IGWT comes against the backdrop of a record run for the gold price.
“Now the price is taking a breather, but our conviction is we haven’t seen the end of this bull market and therefore we said we want to make a case for the big long for the second part of this golden decade,” Incrementum managing partner Ronald-Peter Stöferle said during a press conference in Vienna to mark the report’s release on Thursday.
The gold price is up 92% since 2020, while the US dollar has devalued by almost 50% versus gold.
In the 2020 edition of IGWT, the case was made for a base case gold price of US$4800 per ounce by the end of the decade, which Stöferle said remained on track.
“Gold is not a contrarian asset anymore, compared to 2020, when making a bold forecast on gold, like we did back then, it was kind of an outlandish forecast we made,” he said.
So far, there has been 76 new all-time highs in this bull market, compared to 209 in the 1970s bull market and 106 all-time highs in the 2000s bull market.
Gold is in a bull market versus cash and bonds, but not versus stocks.
“Now it seems gold is about to break out versus stocks as well and this would be a sign for a new stage of this bull market,” Stöferle said.
Western investors slow to join in
Stöferle noted there was yet to be any excitement about gold from Western investors.
“There’s more people who believe that Elvis is still alive than people who own gold in the United States, so this bull market is still primarily driven by central banks and Eastern gold demand, primarily emerging financial markets, while the Western investor has only started recently to accumulate gold,” he said.
“Actually, if you talk to investors, most of them ask us ‘shall we sell gold now?’ so we don’t really see any irrational exuberance.
“From our point of view, this will change over the next couple of years.”
Family offices still only have 1% allocated to gold in their portfolios.
“From our point of view, this is a sign that at some point in this bull market, in this big long, physical gold, but what we also call performance gold, will become much more important for institutional investors,” Stöferle said.
Incrementum partner Mark Valek said while gold was on track for the firm’s base case price of US$4800/oz, the potential remained for it to hit US$8900/oz in a bull case scenario.
“In case of a second inflation wave, we could imagine our bullish scenario is a very realistic one,” he said.
The bear case scenario is US$2800/oz, which could be triggered by the easing of the trade war or a Middle East peace deal.
Valek said any dips in the price represented a good opportunity to buy.
What about equities?
Stöferle said gold was still attractively valued versus the S&P 500 with the total market capitalisation of gold equating to 40% of the value of US equities, in line with the long-term average.
“Valuations in the mining space are very, very attractive, not only from a relative point of view, but also on an absolute basis,” he said.
Stöferle pointed to recent takeover activity increasing in the sector and forecast that to continue.
“We expect some major moves by the large-cap producers over the next couple of months,” he said.
“They haven’t been really active so far, but at gold prices around US$3000, they’re producing enormous amounts of free cashflow, so those price levels are, for the mining companies, who have vastly reduced their debt, have enormously increased their margins, which also got their costs under control, this environment is the best environment for the mining space that I’ve ever seen.”
The GDX is still underperforming the gold price and the large-cap miners are outperforming the small-caps.
“So this sector rotation that we’re forecasting should mean that at some point, gold miners will really start outperforming the price of gold itself, then at the later stage, the small-caps will be outperforming the large-caps, but we’re not there yet,” Stöferle said.
A trigger for an increase in equity prices would be increased interest from generalist investors and the ongoing sector rotation happening out of US tech.
The 443-page IGWT report was produced after more than 20,000 hours of research by 20 people and can be found here.