Peter Palmedo, Sun Valley Gold LLC June 20, 2023
Think Different
Aristarchus of Samos
Aristarchus’ theory of heliocentrism took almost 1800 years to become more widely accepted. Understanding the behavior of gold shouldn’t take that long.
Gold Price Is Driven By Real Returns
BITCOIN
EMERGING MARKETS
REAL RETURNS
INFLATION
CASH
GOLD
STOCKS
BONDS
INTEREST RATES
REAL ESTATE
1993- Gold Revolves Around Financial Returns
“Regression to the mean is such a powerful tendency - in fact it may be the only eternal verity in investing - that deviations have to be feared and respected.” – Barton M. Biggs
Gibson’s Paradox
NBER WORKING PAPER SERIES
Because gold is a durable asset, its relative price is systematically affected by fluctuations in the real productivity of capital, which also determine real interest rates.
GIBSON'S PARAOOX ANO THE GOLO STANOARD
Robert B. Barsky Lawrence H. Summers
1985 research paper: “Gibson's Paradox and the Gold Standard”
Summers Barsky
Working Paper No. 1680
NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 August 1985
Expected Return Matrix
Gold returns are higher when capital productivity is lower
We are grateful to Olivier Blanchard, Stanley Fischer, N. Gregory Mankiw, Franco Modigliani, Julio Rotemberg, and participants in seminars at Columbia, Harvard, Maryland. Michigan. MIT, UCLA, and the Federal Reserve for extremely helpful comments. The research reported here ;s part of the NBER's research programs in Economic Fluctuations and Financial Markets and Monetary Economics. Any opinions expressed are those of the authors and not those of the National Bureau of Economic Research.
30 Years Later
Gold and S&P 1970-2021 (log)
1993
Source: Data from Bloomberg
*excl of dividends
The Gold Story
EVOLUTION OF MONEY
NEW REGIME
PORTFOLIO STRATEGY
EVOLUTION OF MONEY
History’s Longest Lasting Money
• Money has evolved from ancient times
• Modern money goes from Isaac Newton to Bitcoin
• Nothing has outlasted gold as a unit of value
The Gravity of Money
Sir Isaac Newton
• Astronomer and physicist best known for theory of gravity, he also confirmed heliocentrism through observations made using a telescope.
• Lesser known as Master of the Mint, he effected a gold standard in 1717 to combat the historic dilution of money.
• This established the gold guinea as 21 shillings. It was the basis for gold as an anchor to currencies for the next 250 years.
Breaking the Bond – Illegal for US Citizens
Severing the Bond – Gold Fully Floats
1971 - Centuries after Sir Isaac, money and gold float again
Inflation pressures mount
1980 - Chairman Volker goes to work
The New Era of Unlimited Money
Fear of Deflation “But the U.S. government has a technology called a printing press…” - Ben Bernanke, 2002
“Whatever it takes” - Mario Draghi, 2012
The Morning After the Crash “The Federal Reserve… affirmed today its readiness to serve as a source of liquidity...” - Alan Greenspan, Oct 20, 1987
The Alchemy of Money
Alchemy ( ˈ al-k ə -mē): a medieval chemical science and speculative philosophy aiming to achieve the transmutation of the base metals into gold…
– Miriam-Webster
NEW REGIME
Risk – Economic Regime Change
In November 2021, Federal Reserve Chairman Jerome Powell signaled a tightening of credit
“Over the long run the Fed will most likely chart a middle course that will take the form of stagflation.” - Ray Dalio, June 2022
“But one thing is certain: Stagflation is real, and it's here in the U.S.” - Mohamed El-Erian, June 2022
“The Fed’s current policy trajectory is likely to lead to stagflation, with average unemployment and inflation both averaging over 5 percent over the next few years — and ultimately to a major recession.” – Lawrence Summers, August 2022
Risk – Geopolitical Regime Change
A new fundamental global economic construct – “It’s Different”
China & Russia’s secular diversification from US dollar
Challenging the oil/$ pricing standard
Risk – Investment Regime Change
Stagflation is like swimming upstream
Higher inflation
Higher interest rates
Slower growth
Anti-Risk
Bridgewater Analysis
Inflation Breakout – ‘Real’ Gold Next?
Real Gold January 1970 – August 2022 (log) *
40+ years of disinflation
Real Gold Price
Consumer Price Index (annual % change)
* Real Gold data is in 2020 dollars. Source: Bloomberg, Refinitiv
PORTFOLIO STRATEGY
Investing in the Future
GOLD IN THE GROUND
DEVELOPERS
PRODUCERS
Producers
Positive De-risked operations producing cash flow
Negative Depleting reserves that need to be replenished
Opportunity Generally highest valuations
Developers
Positive De-risking through building on time and on budget means lower discount rate Negative Fraught with risk, uncertainty, capital overruns, and unproven resource estimates
Opportunity Investors rewarded if It all goes right
Gold in the Ground
Positive Lowest valuation, greatest asymmetric risk
Negative Negative cash flow means highly sensitive to the cost of capital Opportunity Discoveries are lifeblood for depleting industry and offer the greatest accretion potential
Mining in a Shrinking World
Global Mine Production
Source: 2021 data from Goldhub
Investment Methodology
Disciplined investment strategy provides a long-term advantage
Mine site visits generate detailed, risk- based inputs for resource valuation models
Research-driven company analysis drives portfolio selection
Historical Performance
Fund Performance December 1999 - December 2022 (log) Fund Performance December 1999 – December 2022 (log)
$100.00
$10.00
$1.00
$0.10
12/99 12/00 12/01 12/02 12/03 12/04 12/05 12/06 12/07 12/08 12/09 12/10 12/11 12/12 12/13 12/14 12/15 12/16 12/17 12/18 12/19 12/20 12/21 12/22
SV Gold Master Fund
Gold Spot
GDX
Source: Spot and index data from Bloomberg
FUTURE OF GOLD
Dawn of a New Gold Era
• The gold bull market enters the modern era
• Inflated financial assets revert to low real returns – gold has a secular breakout
• Digital technology dramatically expands global demand channels
Market Mechanics Demand Channels Grow in the SVG 10-Year Expected Gold Return Scenario (20%+ average annual returns)
DIGITALIZATION
QUANTITATIVE INVESTING Trend-following and computer-driven optimizations
FUNDAMENTALS Low REAL Return World
Digitalized gold goes viral on 5 billion phones
Digital Revolution
The Future is Digital
A Contrarian’s Dream
Deep bearish sentiment remains – while gold keeps pushing secular highs
1996 – 2022 Gold Daily Close
Decade low?
Decade low
Multi-decade low
Source: Gold spot data from Bloomberg, historical Market Vane Sentiment Data courtesy of Market Vane Corporation
Looking Forward
CONCLUSION
Dare to Think Different
• Great ideas are often born from doubt and disdain • New eras emerge slowly and face uncertainty before becoming widely accepted • Gold – the new next great investment
Call to Action
An extraordinary investment opportunity for long-term investors Think Different
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