http://tocqueville.com/insights/gold-strategy-investor-letter-3Q16
In our opinion, numerous catalysts are aligning to stoke broader interest and a renewed advance in gold prices:
Spreading loss of confidence in central banking, both from investors and policy insiders. Trial balloons to eliminate cash, ramp up fiscal deficits, and push nominal interest rates below the zero bound seem to proliferate. Commentary in main stream financial media openly questions the efficacy of ultralow interest rates and QE to stimulate economic growth.
Interest rates appear set to rise on a schedule not orchestrated by the Fed but by the financial markets. Both political candidates favor fiscal stimulus that will inflate deficits at a time when non US buyers of treasuries, a principal source of demand in recent years, have been in a liquidation mode for the past twelve months. In our opinion, a continuation of rising interest rates will lead to steep capital losses for holders of low to negative yielding sovereign debt, and cause considerable collateral damage to equities.
Global gold mining production, in our opinion, appears locked into an irreversible decline for the next 5 to 10 years. Because exploration has slowed sharply, there are fewer new deposits to mine. Industry reserve life is dwindling. Barriers to new mine construction seem more formidable than at any time for the past twenty years.
The US economy is cruising at stall speed on a best case basis and more likely teetering on recession. Should interest rates rise at this precarious juncture, monetary policy, perceived to be in a tightening mode, could be forced into another phase of QE or even more radical measures.
Gold is extremely under owned in Western investment portfolios. Because supplies of above ground stocks normally available to satisfy Western investment demand have been severely depleted by flows to Asian investors, the price dynamics could be explosive.
Gold has enjoyed a stealth bull market since the advent of radical monetary policies around 2000. As the chart below shows, gold has been the best performing asset class since then, a fact that is completely unrecognized by main stream media and conventional investors. The painful correction from 2011 to year end 2015 camouflaged gold's strength and explains why most investors remain complacent as to systemic risk, intellectually understanding the unsustainability of radical monetary policy but unmotivated to seek gold's protection.
(chart)
It seems unlikely that the long term erosion of investment confidence, the onset of a secular bear market in financial assets, and further advances in the stealth bull market for gold will take place in a linear fashion. There are bound to be shakeouts and fake outs along the way to camouflage the underlying reality that the global financial system as we know it is in extremis. We also believe that the current sharp correction in the precious metals complex is a setup for another major advance toward new highs in metal and share prices. We therefore recommend taking advantage of current weakness to build or establish new positions.
