The Erste Bank/Incrementum Gold Report

We are happy to once again present the annual gold report by Ronald-Peter Stoeferle and his co-author Mark Valek. Although Ronald is no longer with Erste Group in Vienna (he is now a managing partner at Incrementum AG in Liechtenstein), he still writes the 'In Gold We Trust' report for Erste Group in his role as an external advisor. The version of the report that we are offering for download here is the extended Incrementum version, which inter alia contains a section on gold stocks and a number of elaborations on topics which are not as extensively discussed in the shorter version.

In spite of this year's decline in the gold price, we still trust in gold, one might say. There are a few valid reasons for the recent bearish trend, some of which Ronald dissects; nevertheless, the bet remains that it is very likely undergoing a large degree correction in a secular bull market.


As we have already remarked on occasion of previous editions, Ronald was and remains one of the very few analysts working at a mainstream institution (or in this case as an external advisor to one), who truly understand how the gold market works in terms of price formation and how it should therefore be analyzed. In chapter 3 of the report, this topic is thoroughly examined, including the fact that gold's high stock-to-flow ratio is precisely what gives it its importance as a monetary asset (and is a major reason why it was chosen as money, i.e., the general medium of exchange, in times past, before governments imposed fiat money). Chapter 3 also contains an interesting subsection on 'aurophobia' and its psychological roots.

Financial repression also receives an in-depth look in this year's report. The term was rediscovered by Carmen Reinhart and Belen Sbrancia and describes the many ways in which governments that have accumulated too much debt organize the theft of the citizenry's assets by underhanded means in order to avoid having to enact politically unpopular measures.

Obviously this is a topic that is highly relevant to gold investors, as a result of a number of unique properties gold possesses. After all, governments cannot devalue it at will. In the longer term, they can only lessen investor appetite for gold if they institute policies that are the polar opposite of those that are characteristic of financial repression. Moreover, gold represents relatively mobile wealth, that nevertheless exists physically and does not depend on counterparty promises (including that most rapacious of counterparties, the State). As such it offers investors a means to protect themselves against financial repression, at least as long as its possession is legal (as we know from historical experience, there is no guarantee that it will remain so, even if it appears likely from today's vantage point).

The chapter on financial repression also makes clear why it is erroneous to compare today's vast public debt/ financial repression combination to that of the post-war period.

Another new feature in this year's report is the attempt to approach the valuation of gold from a quantitative standpoint. Specifically, a regression model that looks at probability-weighted scenarios of future Fed balance sheet trends strikes us as quite interesting. Of course, the value of gold is subjective, as are all values. Since it pays no stream of dividends (why that is the case is also explained in the report) and issues no financial statements, one cannot apply any of the valuation methods that are employed in valuing stocks or bonds. However, it is possible to ascertain gold's relative value versus a range of other investable assets and where it stands at a given point in time in the historical context. We were actually surprised to learn how moderately valued gold still is when looked at in this manner in spite of the advance since 1999/2000.


The report can be downloaded here:   In GOLD we TRUST 2013 – Incrementum Extended Version

The german version is available here





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7 Responses to “In Gold We Trust, 2013 Edition”

  • I am now officially a gold bug. When I missed the breakout from the $400 range years ago, it was hard to convince myself to chase the price. This time, it is different. It could fall back to $500, which would put it in the range of the CPI from the 1920’s, but compared to other assets, that isn’t a disaster. The stock market could easily lose 70% of its value, based on historical norms, and need massive inflation to get out of that rut, as we have seen in Japan for 2 decades. I wrote my reasoning on another page today, where the blogger was anti-gold.

    The financial repression term is a good one. Cash earns no income. You want bonds, risk on has to be maintained, as does faith in the dollar. Due to the world insolvency, faith could last a long time, or it could vanish in a wink. The actions of Benny and the Fed tells me the bankers and the government have no intention of paying their debts, only devaluing our monetary assets. The stock market is totally out of any reasonable valuation and though it may go higher, it is based on unsustainable fundamentals. It could easily be decided the Cyprus mess is the solution to the debt problem. In fact, to solve this problem is going to require a massive haircut, before we are done. When all is said and done, $500 gold might be a bargain, when it was bought at $1200.

    I recall listening to Bob Hoye in 2007. He brought up the gold/silver ratio and used the measure of 58 or so to determine if a credit crunch was going on. We are currently around 65. I don’t believe we have reached the max there, but only that the divergence today was a brief respite and a response to the central bankers claiming they would clean up the mess. They can’t clean it up, because it is a matter of skin in the game and not credit in general. They merely threw another log on the fire. These are the true risks of remaining in other assets.

    • jimmyjames:

      I am now officially a gold bug.


      Welcome to the dark side mann- always good to have another whack out to share the daily ration of abuse with-

      As to your post.. it could take 10 years or 10 seconds to validate your views- I suspect it will be sooner rather than later-
      imo…If even one major bond market pukes…the flight to safety will not be like the days of old-
      Clueless governments in a panic- will be a goldbugs best friend in the end-

    • rodney:

      Right on board with you Mann, long @1215, stops below 1200.

  • jimmyjames:

    I can’t imagine what John Paulson’s portfolio looks like.


    I would suspect someone as big as Paulson would be hedged somewhere?
    If those who bought miners in 01 and held through the 08 crash and this one as well- are still doing fine-
    We can cherry pick whatever years we choose to make a gain or loss scenario out of anything-

  • ab initio:

    Gold is a good example of why dogmatism in investing can burn your portfolio. Risk management and portfolio exposure to any asset class is something that very few investment publications and blogs spill much ink on.

    At least Pater noted the deteriorating technical condition. Those that bought the miners at the 2008 spike low and held will have seen a near complete round-trip. I can’t imagine what John Paulson’s portfolio looks like.

    Macro and fundamentals while important do not provide the whole picture. Technical analysis is a useful tool in managing risk. But even more important is a strategy for portfolio management.

  • JasonEmery:

    Also a big divergence between gold and silver today, though not as big as with the stocks.

  • jimmyjames:

    Thanks for posting this-

    Finally a small divergence pog/miners- not much- but better than we’ve seen in a long time-

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