Incrementum Chartbook

In GOLD we TRUST 2015

Charts And Conclusions Of This Years Gold Report*
+ Update On Recent Developments

Ronald-Peter Stoeferle & Mark J. Valek

September 7, 2015

*The entire report can be downloaded at: www.incrementum.li

Our Conviction
Due to structural over-indebtedness and the resulting addiction to low/negative real
interest rates, we believe that the traditional approach to financial markets and asset
management is no longer beneficial for investors.
Therefore, at Incrementum we evaluate all our investments not only from the
perspective of the global economy but also in the context of the current state of the
global monetary regime. This analysis produces what we consider a truly holistic view
of the state of financial markets.
Financial markets have become highly dependent on central bank policies. Grasping the
consequences of the interplay between monetary inflation and deflation is crucial for prudent
investors.

We believe that the Austrian School of Economics provides us with the appropriate
intellectual foundation for our investment assessment and decisions, especially in this
demanding financial and economic environment.

Ronald-Peter Stoeferle, Mark J. Valek

We Are Systemic Debt And Inflation Addicts:

Total Debt Has To Grow Exponentially To Create Sufficient GDP Growth
70

1000 bn. USD

60

y = 4,3817e0,0002x
R = 0,9915

50
40

GDP

30

Total Credit Market Debt

20

Expon. (Total Credit Market

Debt)

10

Total debt/GDP growth below

feel good level

0
16
13

yoy Growth

10
7
4
1
-2
-5
1952

3
1959

1966

GDP growth
Sources: Federal Reserve St. Louis, Incrementum AG

1973

1980

1987

1994

2001

Total Credit Growth (adjusted for inflation)

2008

 However, We Are Seeing A Major Deviation From The Exponential

Path Of Debt Growth Since 2008
70

2011: 53,558 bn.

60

1,000 bn. USD

50

40

1991: 13,870 bn.

1981: 4,828 bn.

30

2001: 27,764 bn.

1971: 1,657 bn.

20

10

0
1971

1981

Base Money

1991

GDP

2001

2011

Total Credit Market Debt Owed

Once upon a time, credit doubled every 10 years. Since 2008, total credit (or debt) growth in the US has
slowed significantly. In order to generate sufficient GDP growth in the current debt-based monetary system,
an expansion in overall debt levels is required. Central banks and governments have been stepping in to
compensate for the reluctance of banks and individuals to expand credit.
Sources: Federal Reserve St. Louis, Incrementum AG

Nevertheless, Private Households, Corporations And Financial

Institutions Have Been Increasing Their Debt Levels Significantly!
199 tn
200
40
160

Household

142 tn
33

120

56

Corporate

87 tn
80

38
19
26

40

58
33

22
20
2000

Government

37

45

2007

2014

Financial

Global debt levels have increased by USD 57 trillion since 2007 this amount is around three times
annual US economic output! New government borrowing has recorded the highest growth momentum!
Difficult for us to spot the infamous deleveraging!
Source: McKinsey Global Institute, Haver Analytics, World Economic Outlook, IMF, Incrementum AG

The Inflation Doctrine:

Fiat Money Brought Us Indebtedness And The Inflation Imperative
40

43% of all Years Price Deflation

12% of all years Price Deflation

30

CPI yoy

20
10
0
-10
-20
1775

1795

1815

1835

1855

Gold/Silver Money (with Interruptions)

1875

1895

Classic GS

1915

1935

1955

Partly Debt Based

1975

1995

Debt Based Fiat

3000

CPI Basket

2500
2000
1500
1000
500
0
1775

1795

1815

1835

1855

1875

1895

Source: Measuringworth.com, Incrementum AG

1915

1935

1955

1975

1995

Our Debt-Based Currency System Needs Continuous Price Inflation To Be

Able To Service The Outstanding (Nominal) Debt In Debased Currency
2100

1800

USD: 8.1% p.a.

CAD: 9.3% p.a.
EUR: 8.6% p.a.
GBP: 9.3% p.a.

1500

1200

900

600

300

0
1971

1976

1981

1986

1991

1996

USD

CAD

Euro

2001

2006

2011

GBP

The debt based monetary system needs rising commodity (therefore implicitly also long term rising
gold) prices! Thats essentially why we left the Bretton-woods system after all, to be able to debase
fiat currencies permanently! The more (nominal) debt is outstanding, the greater the urge for
debasement (i.e. inflation)!
Sources: Federal Reserve St. Louis, Incrementum AG

Today, There Is Not Enough (Nominal) Growth To Keep Debt Levels

Sustainable Thats Why Central Banks Are All Getting Aboard!
100%

80%

60%

40%

20%

0%

ECB

BoJ
Jan. 2007

BoE
Jan. 2010

SNB

FED

Jan. 2015

The days of restrained monetary policy appear to be over. Several major central banks have
expanded their balance sheets many times over since 2007. The ECB has pursued a comparatively
restrictive monetary policy since 2008 however, with the implementation of Euro-QE, things
are changing radically. The FED moving back to normality* before the next crisis? No chance!

Sources: Bloomberg, Federal Reserve St. Louis, SNB, Incrementum AG

* Well define that as shrinking the balance sheet to pre-2008 size and increasing rates to 3-5 percent

Relative Scarcity: Annualized Rate Of Change Of Central Bank Balance

Sheets Vs. Annual Change In The Stock Of Gold (2008-2015)
20.5%

23.41%

SNB

Federal Reserve

20.30%

13.90%

9.53%
6.94%

1.60%

Gold

EZB

People's Bank Bank of Japan Bank of England

of China

In contrast to fiat currencies, gold supply has grown by only 1.6% per year. This clearly
underscores its relative scarcity!

Sources: Datastream, Bloomberg, Incrementum AG

Changing Perspectives: The USD Is Becoming Cheaper In Gold Terms

How Many Milligrams Of Gold Can I Buy For 1 USD? (Log Scale)
1000

1 Dollar =
255 mg Gold
1 Dollar =
125 mg Gold

100

1 Dollar =
47 mg Gold

10
1968

1972

1976

1980

1 Dollar =
18 mg Gold

1984

1989

1993

1997

2001

2005

2009

2014

Milligram Gold per Dollar

Given its high stock-to-flow ratio, gold is far more stable than paper currencies. Hence, lets look at
the dollar from a stable point of view: one US dollar costs 27 milligrams of gold!

Sources: Federal Reserve St. Louis, Incrementum AG

10

Our Famous Gold-Wiesn-Beer Ratio Confirms Golds Relative Stability

Purchasing Power Of One Ounce Of Gold At The Munich Oktoberfest
250

1980:
227 Beer/Ounce

200

150

2011:
138 Beer/Ounce

1971:
48 Beer/Ounce

Average: 87
Beer/Ounce

100

50

0
1950

1960

1970

1980

1990

2000

2010

Whereas the price of a Mass (1 liter) of beer at the Munich Oktoberfest has increased from EUR
0.82 in 1950 to EUR 10 in 2014, the price in gold terms is close to its historical median. This is all
the more astonishing, considering that it is not only buying a beer, but buying a beer at an event
that has enjoyed enormous hype over the past few decades, which has made the Wiesn beer more
valuable!
Sources: www.HaaseEwert.de, Historisches Archiv Spaten-Lwenbru, Incrementum AG

11

Fighting Consumer Price Deflation, Creating Asset Price Inflation?

In a highly leveraged world, price deflation is from a

political viewpoint a horror scenario that has to be
averted whatever it takes, due to the following reasons:

Deleveraging* leads to consumer price deflation and

asset price deflation. Tax revenue declines
significantly. Asset price inflation is taxed, asset
price deflation cannot be.

Falling prices result in real appreciation of nominal

denominated debt. Increasing amounts of debt can
therefore no longer be serviced.

In an over-indebted world, debt liquidation and price

deflation have fatal consequences for large parts of
the banking system.

Central banks also have the mandate to guarantee

financial market stability and to make sure It
doesnt happen here

There is no inflation? False!

Successful prevention of price deflation via monetary
inflation has led to massive asset price inflation!

Translation: Make sure to keep currency and

credit supply growing exponentially

*Note: Deleveraging may have taken place in some parts of the economy but in aggregate the total debt/credit has kept on
growing; Please refer to: http://www.federalreserve.gov/boarddocs/speeches/2002/20021121/

12

What Is The Gold/Silver-Ratio Telling Us?

Disinflation Has Been Around Since 2011!
10
2000
30
1500
50

1000
70

500

90

S&P500

G/S-Ratio
2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

110
1990

There has been an astonishing synchronization between equity markets and the gold-silver ratio until
2011. A rising stock market almost always coincided with a declining gold-silver ratio, i.e. with silver
outperforming gold. This may have been due to re-inflation being accomplished with conventional
monetary policy i.e., credit expansion by commercial banks in previous cycles . This affected the
real economy more quickly and fostered consumer price inflation. This time, re-inflation has been
attempted by means of central bank securities purchases, which has led to price increases in
investment assets, but has not been able to spur consumer price inflation.
Source: Bloomberg, Incrementum AG

13

Bull Markets In Stocks Mean Opportunity Costs Of Holding Gold:

Shiller P/E Ratio Since 1881
50
1999: 44x
40
1929: 33x
30

1901: 25x

1966: 24x

20

10

2015: 27x
Average: 16.6x

0
1881

1889

1897

1906

1914

1922

1931

1939

1947

1956

1964

1972

1981

1989

1997

2006

2014

Shiller PE

Equity bull markets like the current one are usually not a positive environment for the gold price. From
this perspective, it is plausible that the continuation of the gold bull market should coincide with the end
of this equity rally. However, the Shiller-PE, which calculates the inflation-adjusted average priceearnings ratio (10 years trailing) since 1881, signals that the outlook for US stocks does not appear very
enticing. The current level of 27x has been exceeded only twice in history.

Sources: Prof. Robert Shiller, Incrementum AG

14

55 bn.

351 bn.

312 bn.

1,240 bn.

1,270 bn.

2,145 bn.

2,869 bn.

5,037 bn.

7,599 bn.

18,148 bn.

Are Gold Equities The Most Contrarian Investment?

Comparison Of Market Capitalization (USD bn.)

A glance at the market capitalization of gold mining companies shows a similar valuation
discrepancy. Currently, the Gold Bugs Index, which includes the 16 largest unhedged gold
producers, is valued at a mere USD 55 billion. Compared to the S&P 500, this market capitalization
is tiny, amounting to 0.3% of the index. The market capitalization of Microsoft alone is more than 6
times higher than that of all components of the Gold Bugs Index combined.
Sources: Blooomberg, Federal Reserve St. Louis, Incrementum AG

15

Gold Miners Are Dirt Cheap Not Only Compared To Other Sectors;
Relative To Gold They Are At The Lowest Level Since 1942!
7

Mean: 1.56x

0
1939 1943 1947 1951 1955 1959 1963 1967 1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011 2015

BGMI/Gold-Ratio

The Barrons Gold Mining Index (BGMI) is the oldest available gold index. It recently
reached its lowest level relative to gold in more than 70 years. The current ratio of 0.4
is significantly below the long-term mean of 1.56. This is a clear indication of just
how undervalued gold stocks have become!
Sources: Nick Laird, Sharelynx.com, www.nowandfutures.com, Barrons, Incrementum AG

16

High Debt Levels And Rising Rates What Interest Rates Other Than
Zero Could Governments Be Able To Pay?
25
U.S. Recession

Fed Funds Rate

20

U.S. Recession
7/90 - 3/91

Credit Crisis
"Latin American
Debt Crisis"
"U.S. Banking
Crisis"

15

U.S. Recession
12/07 - 6/09

U.S. Recession
3/01 - 11/01

Credit Crisis
"S&L Crisis"

10

Credit Crisis
"Mexican Peso
Crisis"

Credit Crisis
"Dot Com Bust"

Credit Crisis
"Subprime Loan
Crisis"

Will 25 BP increase
+ quantitative
tightening pop this
bubble?

0
1975

1980

1985

1990

1995

2000

2005

2010

2015

This long-term chart of US policy rates reveals that rate hikes have always been followed by
recessions and financial crises. Low interest rates are a trap, as people and governments
engage in low marginal-return projects that cannot survive rate hikes. This time around talks
of a rate increase and quantitative tightening (which is happening via EM Central Banks
which have to sell T-bonds) could trigger the next crisis.
Sources: RealForecasts.com, Federal Reserve St. Louis, Incrementum AG

17

A Sustainable Acceleration In Economic Growth? Demographic

Headwinds: Age Dependency Ratio 1950 To 2090
90
80
70

60
50
40
30
20
10

0
1950
WORLD

1970
China

1990
Japan

2010

Germany

2030
South America

2050

2070

2090

United States of America

Demographic trends in most industrialized nations are akin to an overarching

deflationary superstructure. The age dependency ratio shows the ratio between
retirees, who reduce their savings and divest their assets, and young adults, who are
the growth drivers of the population. The ratio will be rising sharply in the coming
decades. Hardly a conducive environment for a sustainable acceleration in economic
growth.
Sources: United Nations World Population Prospects, Incrementum AG

18

The FEDs Dilemma: Delivering Rate Hikes And Popping The Bubble Or
Keep Procrastinating?
3

5Y Break Even Rates US

5Y Break Even Germany

-1

Sources: Federal Reserve St. Louis, Incrementum AG

19

We Are Perhaps 10% Above A Bullard-like QE4 Statement Similar To

November 2014!
2200

2100

2000

1900

1800

Bullard helps out the

markets with a QE 4
call!

1700

1600
09/2013

12/2013

03/2014

06/2014

09/2014

12/2014

03/2015

06/2015

Should the S&P 500

fall further we
expect the next
FED-put.

We are convinced the FED would not stand by if the market fell another 10%-15%! Intervention via
communication or more easing if necessary would definitely be the result of a further declines in
equity prices. In this case fed-fund rates will drop like a stone. In or view an OTM equity put spread
could elegantly finance a call for the respective OTM call on the eurodollar (money market) future.
Sources: Federal Reserve St. Louis, Incrementum AG

20

What Happens To Gold If Debt-deflation Spirals Out Of Control? Gold,

Silver And Commodities In Historical Deflation Eras

Silver
89%

1814-1830

-24%

-23%

-65%

-50%

-31%

-5%

5.60%

27%

44%

Commodities

40%

100%

Gold

1864-1897

1929-1933

2008

Deflationary periods represent a positive environment for gold, which is especially evident in the long
term. Gold has clearly gained in purchasing power during times of deflation. Moreover, this chart also
demonstrates clearly why gold in particular is a monetary asset, and not just another commodity.
BEWARE: Times of disinflation (defined as slowing consumer price inflation) are Golds enemy!
Sources: Roy Jastram, The Golden Constant bzw. Silver, the Restless Metal, Incrementum AG

21

Our Approach:
Being Prepared For Inflation And Deflation!
Monetary Seismograph

Price inflation is a monetary phenomenon. Due to the

fractional reserve banking system and the dynamics of
monetary tectonics, inflationary and deflationary
phases may alternate.

To measure how much monetary inflation is spilling

into the markets, we utilize a number of market-based
indicators, which are combined in a proprietary signal.
This method of measurement can be compared to a
monetary seismograph.

The measurement results in the Incrementum-Inflation

Signal, indicating the current momentum of inflation.

From our point of view, it is not the absolute level of

inflation but rather the rate of change of inflation that
matters.

According to the respective signal we position

ourselves for rising, neutral or falling inflation trends.

22

Our 10 Conclusions:

Deflationary forces have had the upper hand since 2011.

In an over indebted world with insufficient real growth aggressive re-flation (i.e. higher nominal
growth) seems to be the only feasible way out for policy makers. NOTE: Reflation in the current
global USD-centric monetary order means a weaker USD - especially vs. oil/commodities.

The Problem is, deflationary forces have been massively increasing during the past 12 months, our
Inflation Signal once again has been signaling major deflation to us since the beginning of July!

Strong USD, weak oil, slowing growth (China!) could trigger debt defaults and send shockwaves
throughout the financial system which again would trigger another (deflationary) financial crisis.

The FED is NOT out of bullets, for now it is still reluctant to use them before we are at least close to
a full fledged crisis; currency swaps, QE and negative interest rates are all on the table.

We expect increasing market turmoil before the FED reverses course!

Traditional protection for equities (puts) by now are somewhat expensive, especially in comparison to
some short term interest rates (eurodollar). In our opinion it is quite a safe assumption, that the FED
would reverse course if US equities sold off further 10-15%.

A major deflationary event and (potentially internationally coordinated) reaction of central banks could
finally be the trigger for the transition from deflation to stagflation!

Today ideas like a self sustaining recovery and escape velocity are pure fantasies as the debt
induced growth model of the past decades is very close to its limits.

Shorting equities is a tricky business in an increasing volatility environment but could prove to be an
interesting macro play until the FED gives in. Also watch out for a USD selloff when that materializes!

IV.

APPENDIX

24

About Us
About the In Gold we Trust report:
The 9th annual In Gold we Trust report was written by Ronald Stoeferle. The last 3 years, it is co-authored by his fund management
partner, Mark Valek. It provides a holistic assessment of the gold sector and the most important influencing factors including: real interest
rates, opportunity costs, debt, demographics, demand from Asia, etc.
The In Gold we Trust report has been endorsed by the following highly renowned companies: Philoro EDELMETALLE GmbH, Mnze
sterreich AG, LPM-Group, Bullion Capital, GUSSA and Tocqueville Asset Management LP.

Ronald-Peter Stferle, CMT

Ronald is a managing partner of Incrementum AG. Together with Mark Valek, he manages a global macro
fund which is based on the principles of the Austrian School of Economics.
Previously, he worked seven years for Erste Group Bank where he began writing extensive reports on gold
and oil. After his studies in business administration, economics and finance at the Vienna University of
Economics and the University of Illinois at Urbana-Champaign, he participated in various courses in Austrian
Economics and obtained a CMT and a CFTe designation. Next to his work at Incrementum he is a lecturing
member of the Institute of Value based Economics and at the Academy of the Vienna Stock Exchange.

Mark J. Valek, CAIA

Mark is founding partner and investment manager of Incrementum AG. Together with Ronald Stoeferle he manages a
global macro fund, which is based on the principles of the Austrian School of Economics. In 2014 he co-authored a
book on Austrian Investing.
Before, he worked at Raiffeisen Capital Management for more than ten years. There he was fund manager and
responsible for inflation protection strategies and alternative investments. During his studies Mark worked in equity
trading at Raiffeisen Zentralbank and at Merrill Lynch Private Banking in Vienna and Frankfurt.
Marks education includes a degree in business administration from the Vienna University of Economics and Business
Administration. He is CAIA charterholder and Certified Portfolio Manager. Next to his work at Incrementum he is a
lecturing member of the Institute of Value based Economics and lecturer at the Academy of the Vienna Stock
Exchange.

About Us

Incrementum AG is an owner-managed asset management boutique based in the Principality of

Liechtenstein.

Our Investment Principles are based on the Austrian School of Economics. We sincerely believe that the
Austrian School of Economics provides us with the appropriate intellectual foundation especially in this
highly demanding financial and economic environment.

Independence is a main Pillar of our Philosophy

Our Core Competences are :

Austrian Investing
Precious Metals
Absolute Return
Bottom Up Fundamental Research

Incrementum AGs partners are highly qualified and have over 140 years of combined banking experience.
Prior to joining the company, the partners held positions at UBS, Dresdner Bank, Lombard Odier, Darier
Hentsch & Cie., Cantrade Private Bank, PBS Private Bank, Bank Leu, Pictet & Cie., Bank Sal. Oppenheim,
Merrill Lynch, Raiffeisen Capital Management, Erste Group and Socit Gnrale.
For further information please visit: www.incrementum.li

26

Our Philosophy At Incrementum:

The Austrian School Of Economics

The Austrian School of Economics originated in Vienna in the late

19th century and provides an alternative assessment of economic
affairs. Contrary to mainstream economics, this analysis produces
a truly holistic view of financial markets, because it integrates the
current state of the monetary regime.

Followers of the Austrian School have been extremely successful

at anticipating major economic events like the Great Depression,
the stagflationary environment of the 1970s, the Dotcom Bubble
and the Housing Bubble.

The insights of this school of thought offer exceptional

understanding and superior interpretation of the interdependencies
between money supply and price inflation.

This knowledge is valuable especially nowadays, as central bank

policies massively distort and influence financial markets.
Grasping the consequences of the interplay between monetary
inflation and deflation will be crucial for prudent investors.

Scholars of the Austrian School are convinced, that today's

radical monetary and fiscal policy interventions will not lead to a
self-sustained recovery of the economy, but to further turmoil in
financial markets.

For further information about the Austrian School please visit our webpage:
http://www.incrementum.li/austrian-school-of-economics/an-introduction-to-the-austrian-school-of-economics

27

Our Upcoming Book On Austrian Investing

Pre Order @ http://www.austrian-school.com/