We are currently on a journey to the outer reaches of the monetary universe. We believe that the monetary experiments currently underway will have numerous unintended consequences, the extent of which is difficult to gauge today. Gold, as the antagonist of unbacked paper currencies, remains an excellent hedge against rising price inflation and worst case scenarios.

Monetary policy does not work like a scalpel, but like a sledgehammer. The tug-of-war between a deflationary debt liquidation and politically-induced price inflation is well and alive. Last year we coined the term ”monetary tectonics” which describes the battle between these powerful forces.

In our opinion, it is by no means certain that inflationary forces will win the race. However, socio-economic incentives and high indebtedness clearly suggest that in case of doubt, higher inflation rates will be tolerated.

Should the inflation trend reverse, there would be excellent opportunities in inflation sensitive assets like gold, silver and mining equities.

In the course of last year’s price collapse, a lot of technical damage was inflicted. The past months have seen a significant decline in speculative activity in the sector. The majority of bulls appear to have thrown in the towel. We like the fact that the consensus considers the gold bull market over. Gold is now a contrarian investment.

The migration of gold demand from West to East is continuing. The growing importance of Asia's middle class for gold demand is widely underestimated. Assuming that incomes in China and India will continue to rise, gold will inevitably be one of the beneficiaries of this “love trade”.

Gold stocks clearly exhibit a highly asymmetric risk-reward profile at present. In the wake of the correction, mining companies have reset their priorities - profitability, capital spending discipline and shareholder value have replaced the maximization of production. Moreover, there is no other sector that investors view with similarly pronounced scepticism.

From a technical perspective, our assumption is that the gold price is near the end of its long consolidation period. The clearly positive CoT data and the recent revival of gold mining shares all suggest as much. We are therefore convinced that the technical picture has been repaired and that a stable bottom has formed.

Our 12-month price target is the USD 1,500 level. Longer-term, we expect that a parabolic trend acceleration phase still lies ahead. In the course of this event, our long-term target of USD 2,300 should be reached at the end of the cycle.

David Fuller's view

Here is this excellent report.

Veteran subscribers may recall ‘In Gold we Trust’ because this is the eighth annual report by Ronald-Peter Stöferle.  It is easily one of the very best gold reports available, in my opinion, and that includes the accuracy of its predictions.

This is also a very good read, being well written, extremely informative and beautifully illustrated.  It is the most comprehensive gold report that I have seen - from the global fundamental economic background to Austrian economics, ratio graphs and technical analysis – it is all in this report.   

I maintain that the gold price looks as if it has bottomed and should continue to range sideways to somewhat higher over the next few years.  If so, it is once again a useful long-term occasional hedge against one’s equity portfolio.  However, in owning a little gold which I prefer to trade via spread-bets because these attract no capital gains tax in the UK, I am certainly not hedging against disaster.

In fact, while I think we will see some choppy stock market activity over the next several years, due to events including the gradual normalisation of interest rate policies in the US and most other economies, I maintain that we are in the foothills of another secular bull market for equities.  I expect this to be driven by the accelerated rate of technological innovation, the rapidly increasing global middle classes, and lower energy prices in real terms for countries which seize the opportunities available.   

If this is correct, the stock market secular bull trend of approximately a generation will outperform gold for most of the time.  You can see this potential on the Dow Gold Ratio (Dow divided by gold) dating back to 1920.  I am assuming that the ratio has bottomed and commenced a long-term uptrend.