In Gold We Trust Report 2016

Last week, the 2016 edition of the In Gold We Trust report was released. What can we learn from this publication?

Introduction

As always in June, Incrementum AG published its annual “In Gold We Trust” report - the extended version of which can be downloaded here. Because it offers many interesting insights into the current global economy and the gold market, we provide a short summary for you today.

Gold Is Back

The main idea of the report is that the shiny metal emerged from the bear market in the first quarter of 2016, marking the strongest quarterly performance in 30 years. The main reasons for its excellent performance were the growing uncertainty over the recovery of the post-Lehman economy, and negative interest rates. According to the authors,

“After years of pursuing low interest rate policies, central banks have 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, not it can be said that it doesn’t cost interest.”

What Is Gold?

What we like in this report is that authors properly understand the nature of gold as a monetary metal which mirrors the state of the global economy and monetary architecture. Thus, the factors which influence the price of gold are not supply and demand statistics, but:

• The trend in inflation and inflation expectations.
• The level and trend of real interest rates.
• The trend of the U.S. dollar and other fiat currencies.
• The trend of commodity prices.
• Credit spreads (as an indicator of economic confidence and credit growth).
• The trend and momentum of money supply growth.
• Opportunity costs (returns offered by stocks, bonds, etc.).
• Confidence in central bank policy, the stability of the financial system and economic developments.
• Confidence in the political system and fiscal stability.
• The demand for money and the propensity to save.

We do not agree with all of them (see, for example, our report on money supply and gold, but authors do not cite the mining supply or jewelry demand, at least).

Too Optimistic Price Target

Although the report provides many interesting insights, we recommend skepticism about the authors’ gold price target of $2,300 per ounce by June of 2018.  We are also optimists with regard to the long-term trend in gold prices, but we do not believe in the upside of $1,000 in two years. At the moment, nothing justifies such increases. Historically, it would be unprecedented (in absolute terms). However, let’s analyze the authors’ main argument for such a target.

Why Does Gold Have To Rise?

According to the report, the main reasons for being bullish with regard to gold are:

• The ultra low interest rates and the bubble in bonds – when it bursts, gold will surge.
• The possibility of adopting even more expansive monetary policies, like helicopter money, which could lead to inflation, and a loss of confidence in the central banks and paper currencies.
• The potential for disappointment that could result from a further delay in the normalization process is high. In particular, the recent Brexit vote may be the excuse the Fed needs to postpone its rate hikes.
• The current economic expansion is old, weak, artificial and not satisfactory in the eyes of the broad population – therefore, a new recession is inevitable, while stagflation is highly possible.
• The full-fledged inflation trend is underway.

Conclusions

To sum up, the last edition of the In Gold We Trust report is a very lengthy, but interesting publication. The price target of $2,300 was not changed from a year ago and it seems definitely too high. The main problem with gold bulls and analysts predicting the imminent crisis is timing. Although authors are right with regard to many current risks, it does mean that the risks have to materialize immediately. Therefore, it is worth reading the report (since the authors properly see the nature of gold), but with a dose of skepticism. 

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Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our trading alerts.