OCM Perspective – In Gold We Trust Report

Last week, Incrementum published their annual in-depth “In Gold We Trust” report. This report is a fantastic overview of the precious metals sector and a good macroeconomic perspective.

We read the 417 page report and selected our 10 favorite charts, below.

“Financial history is full of precedents where flooding the markets with liquidity triggers an artificial boom. When the artificial stimuli are withdrawn, the misallocations are ruthlessly exposed and then cleaned up by painful price collapses, insolvencies, and recessions.

“Following the most drastic surge in interest rates in nearly four decades, the pressing question emerges of when and how swiftly the Federal Reserve will execute its monetary policy U-turn in order to address the ongoing weakening of the economy.”

“The figures are even more worrying if interest service is referred to tax revenues rather than GDP. Although referring to tax revenues is not common, it is economically and fiscally appropriate. After all, referring to GDP assumes, on the one hand, that the government has a claim on all economic output. On the other hand, it pretends that ever higher taxation – as a result of rising interest service – has no impact on the population’s eagerness to work and thus on GDP.”

“The spread between 10-year and 3-month bonds usually peaks just before the first rate cut by the Federal Reserve. If one believes the implied fed funds rates, the Federal Reserve made its last rate hike in May. So, the inversion may till further intensify. However, a strong inversion does not necessarily mean a severe recession, as there is no direct correlation between the strength of the inversion and the severity of the subsequent recession.”

“The realization of how short-lived most currency systems are leads us to the question of how and why a currency system will not only emerge but, more importantly, end. Examining all currencies currently in circulation, their average life span as of 2023 amounts to approximately 74 years (own calculation). In comparison, the life of an average S&P 500 company is much shorter, standing at18 years as of today.”

“Central banks have been net buyers of gold since 2009. This momentum has accelerated significantly again in the past year. In 2022, central banks increased their purchases by 152%, to over 1,136 tons. Foreign exchange reserves, on the other hand, fell by a record USD 950bn. Asian central banks again made the bulk of gold purchases. For the first time in many years, China also made an official appearance as a buyer. It is noteworthy that with Qatar, Iraq, and the United Arab Emirates, three major energy exporters are now among the top ten gold buyers. We expect that central bank demand will become a key driver of this gold bull market.”

“China has long been using the blocking of Russia’s US dollar reserves as a pretext to turn even further away from the US dollar. In January 2023, China only held US bonds worth USD 860bn – the lowest level in 14 years. This history probably explains why, after the meeting between Chinese President Xi Jinping and the King of Saudi Arabia, both countries made detailed statements – but did not address the use of the yuan as an oil currency. There was simply no need to make it explicit.”

“Gold looks clearly undervalued compared to US equities and may indeed have completed a secular turnaround. The downtrend seems to have been broken: The moving average has stabilized and is now pointing slightly upward again. The long-term gold/S&P 500 ratio stands at 1.66, but currently it is only 0.49. Based on the previous counter-trend rallies, gold could more than triple (if the S&P 500 remains unchanged) to reach its 123-year average.”

“The silver mining industry’s market capitalization of USD 18bn is dwarfed by its big brother gold and made to seem like a speck of dust when compared with Apple.”

OCM Perspective: Despite historically strong fundamentals, precious metal miners as an industry are finding it difficult to gain traction with investors.  The relative market capitalization chart showing the  entire gold mining industry trading at 16% of Apple’s market cap illustrates investors have yet to rotate out of Big Tech and into basic industry.  A cycle that has taken place after previous tech booms.

“The commodity sector as a whole generated negative free cash flows in2012–2016. Even after that, free cash flow was marginal and limited to low-cost companies; but by spring 2021 at the latest, gold and silver miners became true cash flow monsters. In 2022, profitability suffered from high inflation, yet total FCF was around USD 24bn.”

Important Disclosures:

Investors should carefully consider the investment objectives, risks, charges, and expenses of the OCM Gold Fund. This and other important information about a Fund are contained in a Fund’s Prospectus, which can be obtained by calling 1-800-779-4681. The Prospectus should be read carefully before investing.

The Fund invests in gold and other precious metals, which involves additional risks, such as the possibility for substantial price fluctuations over a short period of time and may be affected by unpredictable international monetary and political developments such as currency devaluations or revaluations, economic and social conditions within a country, trade imbalances, or trade or currency restrictions between countries. The prices of gold and other precious metals may decline versus the dollar, which would adversely affect the market prices of the securities of gold and precious metals producers. The Fund may also invest in foreign securities which involve greater volatility and political, economic, and currency risks and differences in accounting methods. The Fund is non-diversified, meaning it may concentrate its assets in fewer individual holdings than a diversified fund. Therefore, the Fund is more exposed to individual stock volatility than a diversified fund. Prospective investors who are uncomfortable with an investment that will fluctuate in value should not invest in the Fund.
XAU Index is the Philadelphia Gold and Silver Index. It is an unmanaged capitalization weighted index composed of 16 companies listed on US exchanges involved in the gold and silver mining industry.
HUI Index also known as gold BUGS index is the NYSE Arca’s index measuring gold companies that do not hedge their gold production beyond a year and a half.

The S&P 500 Index, a registered trademark of McGraw-Hill Co., Inc. is a market capitalization-weighted index of 500 widely held common stocks. You cannot invest directly in an index.
Barron’s Gold Mining Index (BGMI) is an industry average of publicly traded gold mining stocks.

Investments cannot be made in an index. Unmanaged index returns do not reflect any fees, expenses, or sales charges.
Past performance is no guarantee of future results.

A cryptocurrency is a digital representation of a stored value secured through cryptography. Although Bitcoin might be one of the most widely known cryptocurrencies today, there are many others. The markets for cryptocurrencies remain highly volatile and risky. Before turning your hard-earned cash into crypto, use the resources below from FINRA and other regulatory authorities to learn more about these markets and products.

Past performance is no guarantee of future results
“The Morningstar Rating for funds, or “star rating”, is calculated for managed products (including mutual funds, variable annuity and variable life subaccounts, exchange-traded funds, closed-end funds, and separate accounts) with at least a three-year history. Exchange-traded funds and open-ended mutual funds are considered a single population for comparative purposes. It is calculated based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a managed product’s monthly excess performance, placing more emphasis on downward variations and rewarding consistent performance. The top 10% of products in each product category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. The Overall Morningstar Rating for a managed product is derived from a weighted average of the performance figures associated with its three-, five-, and 10-year (if applicable) Morningstar Rating metrics. The weights are: 100% three-year rating for 36-59 months of total returns, 60% five-year rating/40% three-year rating for 60-119 months of total returns, and 50% 10-year rating/30% five-year rating/20% three-year rating for 120 or more months of total returns. While the 10-year overall star rating formula seems to give the most weight to the 10-year period, the most recent three-year period actually has the greatest impact because it is included in all three rating periods.”
OCM Gold Fund: Advisors Class Best Fund out of 17 eligible investment companies for the three and five-year periods and 15 eligible investment companies for the ten-year periods ending 11/31/2022 based on consistent annualized total returns.

The Refinitiv Lipper Fund Awards, granted annually, highlight funds and fund companies that have excelled in delivering consistently strong risk-adjusted performance relative to their peers. The Refinitiv Lipper Fund Awards are based on the Lipper Leader for Consistent Return rating, which is a risk adjusted performance measure calculated over 36,60 and 120 months. The fund with the highest Lipper Leader for Consistent Return (Effective Return) value in each eligible classification wins the Refinitiv Lipper Fund Award. For more information see lipperfundawards.com Although Refinitiv Lipper makes reasonable efforts to ensure the accuracy and reliability of the data contained herein, the accuracy is not guaranteed by Refinitiv Lipper

Past performance is no guarantee of future results. There is no guarantee that the Fund will achieve its objective. Diversification does not ensure a profit or guarantee against loss. The prices of securities of gold and precious metals producers have been subject to substantial price fluctuations over short periods of time and may be affected by unpredictable international monetary and political developments, such as currency devaluations or revaluations, economic and social conditions within a country, trade imbalances, or trade or currency restrictions between countries. The prices of gold and other precious metals may decline versus the dollar, which would adversely affect the market prices of the securities of gold and precious metals producers. Because the Fund concentrates its investments in the gold mining industry, a development adversely affecting that industry (for example, changes in the mining laws which increase production costs) would have a greater adverse effect on the Fund than it would if the Fund invested in a number of different industries.

The thoughts and opinions expressed in the article are solely those of the author as of June 1, 2023.


Funds are distributed by Northern Lights, LLC, FINRA/SIPC. Orrell Capital Management, Inc. and Northern Lights Distributors, LLC are not affiliated.

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