Gold may potentially hit a record-breaking peak this year.
Gold Still a Solid Bet According to Mark Valek, Incrementum Partner
Meet Mark Valek, a partner at Liechtenstein asset manager Incrementum. He's the brains behind the portfolio management and research department, and he's worked at Raiffeisen Capital Management for a decade. Since 2013, Valek has teamed up with Ronald-Peter Stöferle to craft the "In Gold We Trust" report, Incrementum's renowned annual gold report.
BÖRSE ONLINE: Hey Mark, gold's known as a safe haven during crises, but it hasn't seemed to deliver lately, with COVID-19, supply chain issues, high inflation, the Ukraine war – you name it. Gold's been on a slide since March. What's the deal?
Mark Valek: Well, it's been a curious year, hasn't it? Gold's doing alright, given the challenges we've faced. In euros, it's even been positive this year, while in dollars, it's seen a dip. And sadly, it hasn't been the standout performer this year. The main culprit, I'd argue, is the aggressive shift in US interest rates. This has sent ripples through all asset classes, with investors expecting central banks, especially the Federal Reserve, to get a handle on inflation and fast.
2021 wasn't exactly a gold-lover's year, either, but it wasn't a crisis, either.
True story. Gold has a knack for looking ahead. During the 2020 corona crash, when central banks worldwide went wild with aid and quantitative easing, gold surged rapidly. But at that time, predictions of temporary inflation were commonplace. Since August 2020, gold's been in consolidation mode. Gold might've been held back in 2021 for the same reason. When it became clear in late 2021 and early 2022 that inflation was still on the rise, gold recovered, but inflation-linked bond rates and oil prices have kept it in check.
Are we reaching the end of a high-inflation spree?
It's fascinating to ponder that. The Fed's made some hefty interest rate increases, which likely means the inflation situation might improve in the short or medium term. Our internal Incrementum inflation signal hints that the inflation momentum seems to be waning since early July. Inflation-linked bonds have drifted lower, along with commodity prices. The dollar's strength, too, signals falling inflation.
But you're still predicting stagflation down the line.
You could say we're already experiencing stagflation. The U.S. recently entered a technical recession, with negative GDP for two quarters running, while inflation remains high. The term stagflation refers to low or negative growth coupled with high inflation. So it's not if we'll see stagflation, but rather how long it will last. We anticipate a series of inflation spikes over the medium term, with the first being near its end now, and the second ushering in a pause in U.S. interest rate hikes as inflation rates ease or oil prices continue to drop. With a fragile economy, central banks may struggle to raise rates further.
So we're not returning to low inflation anytime soon, right?
We called it back in 2021: we're likely heading into a inflationary decade. Since COVID, the "fiscal conservatism" train left the station, with debt no longer regarded as a significant concern, and governments free to print money at will. The Ukraine war has exacerbated this. We doubt the global economy will ever revert to a two percent inflation trajectory and stable inflation again.
But what if central banks continue hiking interest rates?
It's a big question for 2023. For instance, the ECB is finding it tough to take bold steps due to high debt levels within the Eurozone. If interest rates climb too high, there's a risk of a Eurozone crisis 2.0, particularly for southern countries that may face financing issues. The US is also weighed down by debt. A consequence of interest rate hikes is that a recession is likely, as observed in the US. Will the ECB really risk throttling growth to restore monetary stability? But if interest rates skyrocket, that'd indeed be the risk scenario for gold.
You're expecting a gold price of $4800 by 2030, around 170% higher than today. You're not banking on the risk scenario, right?
Indeed. We laid that target back in 2020 and confirmed it this year. We're still on track, but we don't expect interest rates to shoot up to a level that nullifies our forecast. Even with inflation rates of five percent, you'd need seven percent interest rates just to achieve two percent real interest rates. The Eurozone might strain under that. In the 2011 Euro crisis, we spoke of the 'death zone' of six percent yields for Italy. Italy's debt is so high that refinancing would then be too expensive relative to tax revenues. We believe this death zone is now lower, having increased with time. That's why our predictions might seem bold to some.
The Fed's far from pausing their interest rate hikes... but signs from their last meeting hint at a less restrictive monetary policy moving forward. A potential pause – even if it's just one or two more hikes, but smaller than currently expected – could give gold a much-needed boost.
Gold's a non-yielding asset. What's its purpose as an investment?
Gold remains the ultimate reserve currency, serving as both a store of value and medium of exchange. Unlike financial assets, it doesn't bear interest. Whenever you seek returns, you take on risk – from banks, bonds, or companies. Gold's unique because it carries no bankruptcy risk and tends to appreciate over long periods in a fiat money system, as the money supply tends to expand faster than the gold supply. Numerous studies suggest that holding gold in your portfolio makes sense, as it often moves counter to stocks and bonds.
How much gold should I invest in?
It's a personal choice. We distinguish between safety gold and performance gold. Safety gold shouldn't be part of your portfolio; it should be held physically as an emergency reserve and kept secure. Performance gold can be an ETF or other form of gold investment. If you want leverage, consider mining stocks or futures. We think the typically recommended five to ten percent gold in a portfolio is quite low in the current environment – you might want to consider more than ten percent. But don't forget the principle of diversification.
How is the gold mining industry faring in this inflationary environment?
We used the recent gold price drops to make substantial purchases and are now the heaviest investor in the gold mining sector in our Inflation Diversifier Fund. It's true that gold miners face inflation on the production side, but if the macroeconomic scenario unfolds as we predict, with energy prices falling and the gold price rising, these represent excellent entry points. They're currently an out-of-favor investment, having lost around half of their value since March. We're more committed to the gold mining sector than ever before in our Inflation Diversifier Fund history, and we've partially hedged our positions with put options. But there's always the chance it might move the opposite way.
- Mark Valek, of Incrementum, predicts a gold price of $4800 by 2030, around 170% higher than today, despite ongoing interest rate hikes.
- In terms of personal-finance, Valek suggests a diversified portfolio could include a higher than typical percentage of gold, considering the current inflationary environment.
- The gold mining industry, according to Valek, is currently an out-of-favor investment, but he sees great potential for future growth in an inflationary environment, due to falling energy prices and a rising gold price.
- Used to recent gold price drops, Incrementum has made substantial purchases of gold mining stocks in their Inflation Diversifier Fund, positioning themselves as the heaviest investor in the sector.
