Monthly Letter

Elements | August 2023

In this month's letter, we take a closer look at the concept of inflation. We go through how the world's central banks currently handle it, and we also look back to the Roman Empire, which faced the same challenge. More on this further down in the letter.

Some news that we are happy to announce is that a European pension fund invested 24 million euros in AuAg Gold Mining. It is great to see that larger institutions are starting to reallocate their portfolios and choose to include gold mining companies.

At the end of June, we had our second digital investor meetup, where the theme was "Metals for the green transition - an outlook for industrial and technology metals". The recording is now available in both video and podcast format. The links can be found below.

Use our unique "Research Centre" on an ongoing basis to take part in our current view of the market and the macro environment. We communicate all the time.

Here are a few media links from the past month:

Investment Solutions

Click on one of the funds below to get to the respective fund page. There you can find more information, such as: how to invest, the updated fund sheets (under "Documents"), and the live ticker price on the holdings.

AuAg Thoughts

  • In the fight against inflation, central banks around the world continued to raise interest rates during July. We can now also see that inflation is decreasing. The central banks and the media are quick to communicate this "success", and they want to reach the inflation target of around 2% as quickly as possible.
  • This "inflationary bonfire", its fight and future effects may in retrospect very well become the great economic event of the 20s.
  • Central banks believe raising interest rates gives them control over inflation, which is now on its way down. Inflation is gradually decreasing, but they fail to communicate that the Consumer Price Index (CPI) is still rising - even if inflation is dropping.
  • The Euro Area CPI is (as of June 30, 2023) 123.47 and was 107.7 (+14.65 %) two years ago when inflation started to pick up. Since the turn of the year, inflation has been going down, yet the CPI has risen from 120.52 to 123.47 (+2.45% in 6 months).
  • The goal for central banks is for inflation to reach 2%. But shouldn't the goal be to bring the CPI down to roughly what it was two years ago when inflation took off? With their current target, the 15 percent price increase will remain forever and gradually increase by 2% annually.
  • Inflation occurs because the amount of money increases faster than the world economy grows. The Central Banks create money, and the commercial banks can lend this money to their customers about ten times over (only one-tenth of the money we see in our accounts exists). Price inflation is affected by how often money is circulated (changes hands). In finance, you talk in terms like "Money supply" and "Money velocity".
  • We have a debt-based monetary system, which has grown to more than 300 trillion euro in debt. That is more than double what we had during the great financial (debt) crisis of 2008.
  • Inflation has been delayed because money's "velocity/turnover" has been so low. Now the amount of money is decreasing somewhat (due to higher interest rates/amortisations/QT), but before that, the speed started to increase, which caused price inflation to pick up.
  • High debt levels and high-interest rates have a deflationary effect as the consumption space is drastically reduced. The only question is whether the rising inflation came from increased consumption or whether it comes from the central banks printing so much money that each "unit" of money simply became less valuable.
  • Here are some factors that we believe will make it difficult for central banks to bring inflation down in the long term:
    • De-globalisation leading to more local production (safer but more expensive)
    • An end and a coming reversal of the 40-year trend of cheaper labour
    • Larger and richer middle class in China/India leads to increased competition and thus higher prices
    • Government budget deficits to stimulate the economy to avoid recessions (in the interest of politics)
  • In addition, the Central Banks will quickly change direction and lower interest rates again as soon as the financial system can no longer cope with the cost burden from high prices and high debt with high interest. Since the financial crisis, their new "tools", such as zero interest rates and bond purchases (QE), will be used again, which is inflationary.

AuAg Trends

  • Inflation is not a new phenomenon but has followed humanity and the rise and fall of various empires. Today, it is easy to create money because it is so digital, and it only takes a click of a button to increase the amount.
  • Throughout history, gold and silver have been money. Silver has the most extended history of being money, and they are so interconnected that silver and money are the same word in 14 different languages.
  • History tends to repeat itself. An example is the Roman Empire, where there was 90-100% silver in the coins at the beginning. The Roman Empire's downward spiral with worse and worse finances meant that over time the amount of silver in the coins was reduced (inflation), and at the end of the empire, there was only 0-10% silver in the coins.
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