Beaver Creek: Industry heavyweights weigh in on gold's role in a changing world order

The Precious Metals Summit currently underway in Beaver Creek, CO has heard how gold is poised to play an increasingly important role in a changing global geopolitical landscape.

During a keynote presentation, Incrementum AG managing partner and investment manager Ronald-Peter St??ferle said gold could be a monetary communication tool between vying blocks. It could become re-monetized because of its highly liquid nature, its lack of counterparty risk and its neutral asset status.

In conversation with John Hathaway, senior portfolio manager at Sprott Asset Management, St??ferle noted how much the world had changed in the past 12 months.

"Last year, when you tried to shake hands, you were really like a brave guy. Now it's normal again, thank God. But you know, we have a war in the middle of Europe. It's 700 km from Vienna. So, it's really there. As a result, we're seeing the de-dollarization trend picking up momentum, which could benefit gold," he said.

St??ferle co-authored the 2022 edition of the In Gold We Trust report, published in May, saying the world was fragmenting in real-time.

"We can see that Russia is the third largest gold producer and embracing the alliance with China, the largest gold producer and consumer. Then there was Iran which joined the Shanghai Cooperation Organization, a very important organization nowadays.

"We're seeing that the Saudis don't pick up the phone anymore when Joe Biden calls. Those developments tell me that there's quite a lot happening in the grand scheme of things, and I think currency reform sounds very gloomy. The reality is that if you understand monetary history, it happens every couple of decades," explained St??ferle.

Gold cooling after a pour. Credit Henry Lazenby

The bottom line is that in every monetary transition period past, gold played a significant role. "I just don't see any reason why it should be different the next time, especially with those countries that are now clearly the opponent of the Western world," said St??ferle.

Hathaway responded, saying he didn't necessarily disagree with St??ferle's view but added he would expect some kind of more profound crisis to force a change of this magnitude in the global trading currency.

"Russia is trying to price oil in terms of either roubles or gold, and they're having success with China doing that," said Hathaway, "selling it basically at a discount to the world price, if you pay in rubles, so there is a movement away from the US dollar. An interesting question would be to what extent that volume is sapping the dollar as a trading currency. Still, certainly, that's the intent of Russia and China given their leverage concerning oil."

Effective hedge

Amid all the geopolitical tension, St??ferle said gold was doing precisely what it's supposed to do. "It's protecting your purchasing power. It's a great hedge against inflation. It works really well in most other currencies. In Japanese yen terms, it's up 15%. So, I think we shouldn't forget that we see a brutal bull market in the US dollar, and the US dollar is behaving like a big wrecking ball through markets, and I think this is something that tends to be forgotten," said St??ferle.

"So, we've got the strengthening of the US dollar, we've got quantitative tightening, and we've got a pretty aggressive Federal Reserve. Now, last year, interest rates were at 0%. This year, we're heading up to 4%. So, we've seen a pretty big move in rates. "It was a pretty tough environment we have seen in capital markets in general, with about US$50 trillion wiped out since the beginning of the year. That's more of the combined GDP of China and the US," noted St??ferle.

"I would say that that's a huge tornado. And I think it would be naive to believe that gold can completely decouple from financial markets and go to US$2,500 or whatever."

"The wolf of inflation, which has crept up almost unnoticed by many, is now joined by the bear of recession. Together, the two form a 'duo infernale,' equally for investors, central bankers and politicians," said Mark Valek, co-author of the In Gold We Trust report.

"Stagflationary phases are a particular challenge for investors. The classic mixed portfolio consisting of 60% stocks and 40% bonds has a diversification problem in times of falling stock prices and simultaneously rising bond yields due to the positive correlation between stocks and bonds. Therefore, it needs a diversifier for the portfolio," St??ferle said.

"And that portfolio hedge is gold because gold has usually risen strongly in these phases."

According to St??ferle, in the short term, the situation in the commodity markets looks overbought. "As long as the Federal Reserve makes no move to leave the path of interest rate hikes, the general environment for risk assets will remain difficult. A turnaround in monetary policy or the pressing of the monetary policy pause button by the Federal Reserve will give the starting signal for the next upward cycle," said St??ferle.

Gold equities on sale

Hathaway said when it came to the underlying gold equities, it was a buyer's market with bargains abounding.

"I think owning companies that are producing cash right now is pretty important. And I think, generally speaking, that the industry is pretty healthy," Hathaway said.

Generally speaking, the gold industry has average All-in Sustaining Costs of around US$1,200 to US$1,300 per oz., which means at a US$1,700-plus gold price, nearly everybody is making money.

"You could say the industry is a value trap, but Ronald and I both say there's a pathway for gold trading much higher. And that's not in the gold stocks," said Hathaway.

Hathaway said the most considerable risk when he and his team considered gold equities was dilution to the shareholders. "And this industry has been so guilty of that, he said.

One of Sprott's greatest success stories involved Corvus Gold (TSX: KOR; NASDAQ: KOR), which kept a clean capital structure with a tight share count. "I think we raised something like US$80 or US$90 million over a long time. And it became a three or four-bagger.

Drills on Corvus Gold's Mother Lode project in Nevada's Nye County. Credit: Corvus Gold.

"And I think that's a model that the junior companies need to understand and go with. But broadly speaking, the stocks are the cheapest I've seen in 20 years, both on an absolute basis relative to S&P stocks and the gold price itself," said Hathaway.

Meanwhile, St??ferle pointed out that passive investing had become one of the most critical trends affecting gold equities. "Everybody just bought ETFs where you don't need an active manager. However, I think you will have to be much more active over the next couple of quarters. You will have to trade. The bear market rallies, you'll have to short to get out in time; you have to behave completely different compared to the last cycles," said St??ferle.

The Incrementum manager added he believes gold would become less of a 'satellite' asset in the future. "I think people will realize that it should be a core asset. It should be inflation protection in your portfolio, but I think it's just starting. When I'm talking to most economists and asset managers, they still think the inflation is transitory. There's a lot of wishful thinking out there," St??ferle said.