Earlier this month the National Bureau of Economic Research announced the U.S. entered a recession in February. Ronald Stoeferle, author of the In Gold We Trust report, told FS Insider the coronavirus was simply a catalyst for a recession that was long overdue. He also explained how this correlates to his outlook on gold and how current monetary policy is playing a role. See below for excerpts from his interview.
The National Bureau of Economic Research announced earlier this month that the U.S. entered a recession in February. How does this relate to your 2020 outlook for gold?
If you go back 12 months or so, we said as soon as we go above this massive resistance zone at 1362 - 1380, gold will enter a new stage of the bull market. And only a couple of days after we published our last In Gold We Trust report in 2019, that happened and then momentum kicked in. We entered this so-called public participation phase based on the Dow Theory.
Last year, we'd already said gold is in a bull market in basically every currency, but everybody is just staring at the dollar price of gold. Now, gold is also in a in a very, very strong bull market in US dollar terms. In fact, gold made new all-time highs in basically every currency but the US dollar. From our point of view, it's only a question of when we will make new all-time highs in dollar terms. It is showing relative strength against bonds and against stocks.
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What we're seeing is that mining stocks also confirm this uptrend. They broke out on very high volume, the GDXJ for example is outperforming the GDX, so you can really see from many different angles that gold is now in a bull market. As Bob Farrell famously said, “Bull markets are more fun than bear markets.” I think we're going to have quite a lot of fun with gold and the mining stocks going forward.
One of the key topics of this year's In Gold We Trust report is that the coronavirus is only the accelerant of the recession. And it was a recession that was overdue anyway. We saw many, many signs last year, like a yield curve inversion, like an earnings recession that many countries like South Korea and Germany, who are very much driven by the global economy and their exports, they already showed that everything was cooling down dramatically. So, for us, it wasn't a big surprise that we're entering into a recession in 2020. But of course, we didn't expect a virus to be the catalyst of this crisis.
Can you tell us about monetary policy and where that exists today?
We wrote about MMT, Modern Monetary Theory, or as many people call it, the Mugabe Maduro theory or magical money trees. We wrote about helicopter money and QE and universal basic income in the last couple of years. But back then it was only something for economists sitting in the ivory tower. I think this is really the biggest difference between 2008 - 2009 and the current actions from central bankers.
First of all, central bankers were much more regressive, and for example, inflation expectations recovered much quicker than in 2008. So, the market believes that these reflationary actions will happen much faster. But this time around, it is not only monetary policy, it is also fiscal stimulus that is introduced, big time.
Here are a couple of numbers to put things into perspective. The United States has implemented 30% monetary stimulus, 30% of GDP and 15% fiscal stimulus. In the eurozone, we've got 12% monetary and 28% fiscal stimulus. In Japan there’s 20% monetary and 40% fiscal stimulus. The numbers are just unprecedented.
I think over the last couple of weeks history happened. Who would have expected that the Federal Reserve would enter the corporate bond market? Who would have expected that the Fed would invest in SPVs that are basically managed by BlackRock and where the Treasury buys the majority of those SPVs? They’re circumventing legislation from my point of view.
Who would have thought something similar like euro bonds would be introduced? Of course, they don't call it euro bonds, but we're on the way to those things. I think this is also the reason why we're seeing this this kind of V shaped recovery in markets. But I wouldn't call it V shaped, I would call it L shape because it’s liquidity shaped.
The Fed has so far expanded the balance sheet by $3 trillion, which is twice the pace of 2008 - 2009. At the same time, that's probably only a coincidence. The market cap in the S&P 500 has recovered by $2.8 trillion. We are seeing the correlation between the S&P 500 and the Fed's balance sheet above 90% now, so it is extremely driven by monetary stimulus and by fiscal stimulus at the moment. This just shows us that the toolbox of central bankers is empty now. They really have to get out the big bazookas.
Gold did exactly what it's supposed to do. From my point of view, this was really a good confirmation for the case we're making for gold; that it basically recovers losses you're having on the equity side. That it initially sold off in risk off phases when there's really big stress in financial markets but then it reacts to monetary and stimulus very, very quickly.
It is pretty obvious now in the U.S., as well, that we're in the zero interest rate trap. We published a book called Zero Interest Rate Trap last year. Now the English translation is being published. And this just means that it would be naive to believe that will see high positive real rates over the next couple of years. Therefore, this should provide a very, very positive environment for the price of gold, because the opportunity costs for holding gold will be minuscule over the next couple of years.
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