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In Gold We Trust Report 2016 Incrementum AG In Gold we Trust 2016 June 28th, 2016 In Gold we Trust 2016 Gold is back! With the strongest quarterly performance in 30 years, the precious metal in Q1 2016 emerged from the bear market that had been in force since 2013. A decisive factor in this comeback is growing uncertainty over the recovery of the post-Lehman economy. After years of administering high doses of monetary painkillers, will the Fed succeed in discontinuing the practice? Or is the entire therapy about to be fundamentally challenged? Generating growth and inflation remains the imperative of monetary Authors: policy. The systematic credit expansion required for this just doesn't want to get going. Even the ECB, which initially acted with restraint after the financial Ronald-Peter Stoeferle, CMT crisis, is nowadays stuck in a perennial loop of monetary improvisation and [email protected] stimulus. General uncertainty has now increased even further after the Twitter @RonStoeferle surprise outcome of the Brexit referendum. Mark J. Valek, CAIA [email protected] After years of pursuing low interest rate policies, central banks have Twitter @MarkValek maneuvered themselves into a lose-lose situation: Both continuing and ending the low interest rate regime harbors considerable risks. In an attempt to finally achieve the desired boost to growth, a monetary Rubicon has been crossed in several currency areas with the imposition of negative interest rates. Gold is increasingly attractive in this environment. It used to be said that gold doesn't pay interest, now it can be said that it doesn't cost interest. As a last resort, even the radical measure of helicopter money is considered these days. As the flood of liquidity has hitherto primarily triggered asset price inflation, newly created money is now supposed to be injected into the economy by circumventing the banking system in order to boost aggregate demand. It seems realistic to expect that such a windfall would indeed ignite the much-coveted price inflation. Whether it will be possible to put the genie back into the bottle once it has escaped is a Feedback welcome: different question. [email protected] An exit from the Fed's monetary emergency programs has been announced for years in the US. This, together with the perception that the economy was recovering, led to a strengthening US dollar in recent years. Commodities and gold weakened as a result. So far, the actual extent of the normalization of monetary policy consists of the discontinuation of QE 3 and a single rate hike by 25 bps. The US economic expansion appears to have run its course already. Should the rate hike cycle that has been initiated fail, a significant loss of confidence in the central bank's policies and with it the USD appears likely. This would go hand in hand with rising commodity prices and a return of inflation and would represent a “perfect storm” for gold. We believe the time for investing in inflation-sensitive assets has come. Apart from gold, silver and mining stocks offer very interesting opportunities. After several years of drastic adjustments, it is likely that mining shares will once again exhibit strong gold price leverage. We believe that the events of the past year are validating our (Most) Prices are closing prices as of June 24th views and are maintaining our gold price target of USD 2,300 by June 2018. “In GOLD we TRUST” 2016 Page 1 Incrementum AG In Gold we Trust 2016 June 28th, 2016 Table of contents 1. INTRODUCTION .......................................................................................................................................................4 2. WHERE THINGS STAND........................................................................................................................................ 12 a. Retrospective and Status Quo ................................................................................................................. 12 b. Are Inflation Dynamics Changing? .......................................................................................................... 16 c. Is the Bull Back? ....................................................................................................................................... 18 d. Anecdotal Evidence of Three Worldviews ............................................................................................... 21 3. The Economic Narrative Crumbles ....................................................................................................................... 26 a. The Dominant Narrative ............................................................................................................................ 26 b. The Recession that Must not Happen ...................................................................................................... 27 c. Hostage to the Wealth Effect .................................................................................................................... 29 d. Excursus Trumpmania: It’s the Economy, Stupid! ................................................................................. 31 e. When the Credit Cycle Turns ................................................................................................................... 33 f. The Trigger of the Next Recession........................................................................................................... 35 g. Excursus: GDP vs. Gross Output ............................................................................................................ 39 h. From Reflation to Stagflation ................................................................................................................... 40 4. INFLATION AND INVESTMENT ............................................................................................................................. 43 a. Misunderstood inflation ............................................................................................................................ 44 b. The Holy Grail of Monetary Policy ........................................................................................................... 46 c. “The dollar is our currency, but it’s your problem” ................................................................................ 48 d. Global inflation trends in a dollar-centric world ...................................................................................... 51 e. Cycles of consumer price inflaton vs. asset price inflation ................................................................... 55 f. Criticism of the calculation of inflation .................................................................................................... 57 g. Gold and the Illusion of Nominal Value ................................................................................................... 58 h. Helicopter money: the reflation policy's ace in the hole? ...................................................................... 63 i. Conclusion “Inflation and Investment” ................................................................................................... 69 5. FROM RISK-FREE INTEREST TO INTEREST-FREE RISK ................................................................................... 71 a. The monetary Marshmallow test .............................................................................................................. 71 b. Negative interest rates in the name of monetary stability ...................................................................... 73 c. Interest rate limbo: How low can yields still go? .................................................................................... 76 d. Negative interest rates and gold .............................................................................................................. 78 e. The fatal long-term consequences of negative interest rate policy ....................................................... 79 6. FINANCIAL REPRESSION: WHEN THE GRASPING HAND OF THE STATE RUNS RAMPANT .......................... 85 a. Financial repression – the supposed solution to the debt crisis? ......................................................... 85 b. The war against cash ................................................................................................................................ 87 c. Debt haircut ahead? .................................................................................................................................. 89 d. Historical bans on gold ownership .......................................................................................................... 91 e. The Fix is In – Gold Price Manipulation Exposed ................................................................................... 93 7. GOLD IN THE CONTEXT OF PORTFOLIO DIVERSIFICATION ............................................................................. 96 a. A solution to the dilemma faced by investors: the Permanent Portfolio ............................................... 96 b. Anti-fragile investing with gold? ............................................................................................................ 100 c. The opportunity costs of gold ................................................................................................................ 107 8. VALUATIONS, SCENARIOS AND PRICE TARGETS .......................................................................................... 114 a. Gold: comparison of absolute
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