U.S. Dollar: Decline and Fall

Theme and Background

This chapter focuses on the fact that after gold broke through a four-year trading range to hit an all-time high in the first half of 2024, mainstream markets still largely overlook the significance of its rise. The report notes that despite gold outperforming stocks and bonds (since 2000), holdings of gold in Western capital markets remain at extremely low levels, mining stock valuations are well below their peaks four years ago, and market sentiment is deeply pessimistic.

Core Thesis

The author’s core judgment is: Gold remains significantly undervalued, and mining stocks offer notable leverage opportunities. Counterintuitive views include:

• Gold’s inflation-adjusted price is still below its 1980 and 2011 peaks, and the current level of approximately $2,400 may continue to rise.
• Since 2009, gold prices have risen 150%, but mining stock valuations have fallen over 40%, creating a historic divergence.
• Western investor participation is extremely low (GLD holdings are down 38% from their 2011 peak), and a return would significantly boost gold prices.
• The role of U.S. Treasuries as a safe-haven asset and the dollar’s reserve currency status are facing fundamental challenges.

Key Arguments and Data

1. Divergence Between Gold and Mining Stock Valuations

Indicator	2009	2024	Change
Gold Price	Approximately $960	Approximately $2,400	+150%
Mining Stock Valuation (P/NAV)	Relatively High	Down Over 40%	-40%+

2. Extremely Low Western Investor Holdings

• From 2005 to 2011, GLD saw inflows of approximately 38.1 million ounces, driving gold prices from $535 to over $1,800 (+300%).
• Since the 2011 peak, GLD assets have declined 38%, yet nominal gold prices have still risen 30%.
• The U.S. dollar money supply has grown substantially, while physical gold supply has increased only modestly, widening the supply-demand gap.

3. Macro Environment Shifting in Favor of Gold

• U.S. Treasuries may have entered a long-term bear market, with gold consistently strengthening against TLT (20+ Year Treasury Bond ETF) since 2020.
• The U.S. CBO raised its budget deficit forecast by 27% in the mid-2024 fiscal year update, with government spending up over 20% year-over-year.
• BRIC nations are promoting de-dollarization, and the weaponization of the dollar (following the Russia-Ukraine conflict) has undermined its status as a neutral reserve asset.

4. Market Consensus vs. Reality

• Bloomberg consensus forecasts long-term gold prices below the current $2,400/oz (see Figure 6).
• Mining stock valuations trade at a discount of over 50% relative to the S&P 500.

Companies/Assets Involved

• SPDR Gold Shares (GLD): The largest gold ETF, serving as a key indicator of Western investor participation. Current holdings are low, and the report argues that a return would drive a substantial gold price rally.
• iShares 20+ Year Treasury Bond ETF (TLT): As a proxy for U.S. Treasuries, gold’s sustained strength against it signals a weakening of Treasuries’ safe-haven status.
• GDX: The largest gold mining ETF, up 9.42% in the first half of 2024, still well below its peak four years ago.

Investment Implications

• Long Gold: The report believes the current $2,400 level may continue to rise, with inflation-adjusted prices far below historical peaks and a favorable macro environment (de-dollarization, fiscal deficits, potential recession).
• Long Gold Mining Stocks: Valuations are at historic lows (over 50% discount to the S&P 500), offering high leverage to gold price gains. Low valuations are a strong signal for contrarian investors.
• Caution on U.S. Treasuries: The long-term safe-haven status is under question, with de-dollarization trends and fiscal deterioration potentially pushing long-term rates higher, posing risks to traditional 60/40 portfolios.
• Watch for Recession Risk: Market consensus is mispriced, with government spending being the sole support factor. A recession would trigger a new wave of money creation, benefiting gold.

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Theme and Background

This chapter focuses on the currently undervalued state of gold mining stocks and the macro environment where multiple catalysts could trigger a new rally. The report notes that despite gold reaching all-time highs, market sentiment remains pessimistic, investor positioning is extremely low, and macroeconomic risks are widely overlooked.

Core Thesis

The author believes gold is in the middle of a multi-year bull cycle, not at its end. Counter-intuitive judgments include: gold mining stock valuations (EV/EBITDA) are at near-decade lows, while gold prices have broken through historical highs; Western investor participation is extremely low, and their return would generate significant momentum; changes in the U.S. political landscape (e.g., a Republican victory) could accelerate dollar depreciation, benefiting real assets and gold.

Key Arguments and Data

1. Valuation Comparison: The EV/EBITDA ratio of gold mining stocks relative to the S&P 500 Index has been declining since 2012, indicating that mining stocks are severely undervalued compared to the broader market (see Figure 7, data as of June 30, 2024).

2. Catalyst List:

• Secular bear market in bonds
• Unexpected recession
• Potential negative consequences of de-dollarization
• Geopolitical risks
• High concentration and valuation bubble in U.S. equities
• U.S. political division

3. Political Signal: Republican vice-presidential candidate J.D. Vance questioned the "strong dollar" policy during a Senate hearing, arguing that the dollar's reserve currency status acts as a subsidy for U.S. consumers and a tax on U.S. producers. Analyst Simon Mikhailovich judges that if the Republicans win, they may tolerate higher inflation and dollar depreciation to subsidize domestic production, benefiting real assets and gold.

4. Earnings Inflection Point: Upcoming Q2 earnings reports will showcase profitability levels not seen in the mining industry for a decade, forcing sell-side analysts to revise earnings forecasts and precious metals price targets upward.

Indicator	Gold Mining Stocks (GDM Index)	S&P 500 Index
EV/EBITDA (2012)	Higher	Moderate
EV/EBITDA (June 2024)	Near-decade low	Historical high
Relative Valuation Trend	Declining	Rising

Companies/Assets Involved

• Gold Mining Stocks (GDM Index): Bullish as a whole, with valuations at historical lows and earnings poised to surge.
• S&P 500 Index (SPX): Implied to be overvalued with high concentration risk, standing in stark contrast to gold mining stocks.
• U.S. Dollar/U.S. Treasury Bonds: Their status as "safe assets" faces challenges, and Republican policies could actively drive dollar depreciation.

Investment Implications

• Increase allocation to gold mining stocks: Current valuations are extremely low, and improving earnings will soon trigger upward revisions by sell-side analysts; the window of opportunity is narrowing.
• Beware of concentration risk in U.S. equities: The S&P 500 is at historically high valuations, while gold mining stocks are relatively cheap, presenting a rotation opportunity.
• Monitor U.S. election impact: A Republican victory could accelerate dollar depreciation, directly benefiting gold and real assets; positioning ahead of time is advisable.
• Wait for Q2 earnings catalyst: Mining companies' earnings beats will serve as the trigger for market repricing.