September 2020

Massive stimulative programs, favorable economic data and booming stock markets mean gold and gold equities are still attractive


Thanks to extremely stimulative fiscal and monetary policies economic data are improving and stock markets are booming. Further economic recovery and a continuation of the equity bull market will need further measures of stimulus.


Calls for more state aid are getting louder

US Treasury Secretary, Steve Mnuchin is now trying to negotiate additional “rescue packages” with Democrats in Washington. There are also calls from the Fed demanding more state aid, something it views as necessary for the survival of many businesses and households. The Fed has emphasized that it is doing its part, for example by buying $ 1,000 billion of mortgage bonds over the past six months.


A record year for US bankruptcies is in the making

The pandemic is likely to mean that 2020 goes down as a record year in the history of US bankruptcies. In August alone 20 companies, each with liabilities over $ 50 million, sought bankruptcy protection. The previous record was 14 in August 2009. This year in May, June and July combined, nearly 100 claims for bankruptcy protection were submitted. The energy sector is especially hard hit, in particular the shale oil and gas producers.


US Purchasing Managers’ indices surprise positively

In August, the US Purchasing Managers’ index for manufacturing rose to 56 (versus an expected 54.8). The component index for new orders jumped to its highest value since January 2004 at 67.6 (versus an expected 58.8). These data indicate that US manufacturing companies now believe in a strong economic recovery.


Chinese Purchasing Managers data confirm recovery

The Caixin/Markit Purchasing Managers’ index for the manufacturing sector in China rose from 52.8 in July to 53.1 in August, the highest value since 2011. Comparable indices in South Korea and India also rose.


One record after another…

August was another great month for stocks, setting one record after another. The S&P 500 index rose for the 5th month in a row and daily performance was only negative on five trading days. Indeed, August saw the best monthly performance since 1984, during Ronald Reagan’s presidency! Interestingly, it was not only technology stocks that rose, also stocks of aerospace, tourism and live entertainment companies (e.g. casinos) that had been particularly hard hit earlier on in the pandemic. Moreover, stock price gains were achieved with very low volatility and thus very high Sharpe ratios (i.e high excess returns on investment per unit of risk).


Technically, stock markets are now “overbought”

Technology-heavy indices like the Nasdaq are technically very “overbought “, reflecting their excellent performance. In “normal times” the risk of setbacks would be high, especially as September is traditionally a poor months for stocks. However, since the rally has been primarily driven by the “extreme money-multiplication” strategy of the central banks, and thus can be at least partially attributed to a targeted devaluation of legal tender, nothing changes in our assessment for stock markets. This is outlined in the following paragraphs.


Given the linkages only combined forecasts are possible

Unfortunately, only joint forecasts are currently possible. A further rise in the equity markets requires that central banks implement or announce increasingly expansionary monetary policies. We think this is possible. However, should monetary expansion be paused or become more restrained, the bull market would be endangered.


It’s not just the stock markets, the economic outlook also depends on the extent of additional stimulus

The very good economic figures of the last few weeks can be attributed to the policies of stimulus. In the US, a drop in consumption was prevented by government borrowing (via the central bank) to replace employment income with direct payments to US households. In Europe, jobs were temporarily secured through government payments to companies, financed by those governments borrowing from their central banks.

Political economy suggests the policies of stimulus will continue so long as there are no serious funding restrictions. Since a large part of the net new government debt being created is already being financed by the central banks, there are few financing restrictions on the short-term, or even the medium-term, horizon. But, were inflation to surprise on the upside, this situation could change.


Gold and gold mining stocks could benefit from either of two extreme scenarios

Should stimulus measures fail to boost the economy, the pandemic worsen and the financial system and associated debt pyramids collapse, gold would benefit greatly. Physical gold is one of the few investments that has no claims to anything. (Think, for example, of the claim on a corporate infrastructure that comes with owning an equity or the claim on interest payments that comes with owning a bond. In a severe downturn many such claims will become less valuable). Rather, gold has an intrinsic value which stands to become relatively more attractive in such an environment.

Should the policies of stimulus continue and the economy stabilize further as a result, the price of gold should also rise due to the expansion of the money supply (the creation of money out of nothing).

In either extreme case, gold mining stocks would benefit from higher gold prices. Only in a half-way scenario, whereby economies stabilize without further stimuli, is the gold price likely to be at risk of a significant fall.

Similar considerations apply to silver and silver mining shares. Compared to gold, silver is more associated with

industrial applications. Thus, the fate of silver and of silver mining shares is more closely linked to the economic cycle and, compared to gold, these are higher risk investments (although also offering greater potential upside).


In future, “positive surprises” will likely be harder to come by

In the future it will become more difficult to top existing market expectations with regard to any additional improvement in the economic indicators, the future expansion of the money supply and the profit trends of companies. This is because investors are already “spoiled on all sides” by the recent good data flow and have adjusted their expectations accordingly. Therefore, we feel obliged to repeat our message. Considerable extra stimulus from both fiscal and monetary policy will be needed if stock markets are to rise further. We expect investor anxieties and market volatility to rise in the next few months.



Contact: Thomas Härter, CIO, Investment Office
Telephone: +41 58 680 60 44

Disclaimer: The information and opinions in this document come from sources that are considered to be reliable. Nevertheless, we cannot guarantee the reliability, completeness or accuracy of these sources. The information and opinions in this document do not constitute and shall not be construed as a solicitation, offer or recommendation to purchase or sell any investment or to engage in any other transaction. We urgently recommend that interested investors consult their personal investment advisor before making any decisions based on the document so that personal investment objectives, financial situation, individual needs, risk profile and other relevant information can be duly taken into account in conjunction.