“Flation” is guaranteed in the next few years. We will see in-flation,
stag-flation, hyperinflation and de-flation. Many of these flations will
happen simultaneously. Currently we have major monetary inflation combined
with asset inflation. Credit growth and money printing have in recent years
benefited the ailing banking system but have not yet reached consumer prices
and therefore there is no ordinary price inflation.
This is why Italy, Greece, Spain, Portugal and many more EU countries are
totally bankrupt. These countries have been forced to use a currency which
has made them completely uncompetitive and unable to export or function. At
the same time, Germany has benefited from a weak Euro which has made their
export industries very successful.
Velocity of money will accelerate in 2017
In 2017, velocity of money is likely to increase, leading to stagflation
which is higher prices without growth. But as the problems in the financial
system deteriorate, hyperinflation in most major economies is virtually a
certainty. The build-up of debt and derivatives in the last quarter of a
century guarantees that desperate governments will print unlimited amounts of
money in a frantic attempt to save the financial system. What has happened to
the banking system in Italy in recent years makes the Medicis look like
saints. Mismanagement and corruption has driven Italian banks to insolvency.
The problem is the same in Greece, Spain, Portugal, France, Germany etc as I
discussed in last week’s article.
Hyperinflation will be fast and furious
But these problems are not limited to Europe. Banks in Japan and China
will have the same pressures and so will the financial system in the US and
emerging markets. The last financial crisis started in 2006. Since then
global debt has gone from $140 trillion to around $240 trillion. Those extra
$100 trillion should have led to massive hyperinflation already. Instead all
central banks are complaining about deflation and are doing all they can to
create inflation. There is a misconception that inflation is good for the
economy. Inflation is a disease that leads to the destruction of money and of
savings. Lost central bankers have no other solution for a failing financial
system. But to solve a problem with the same methods that created it in the
first place is the road to ruin. And this is what will happen in coming years
and most likely start in 2017. Hyperinflation when it starts normally
accelerates very quickly and might last for only 2-4 years until the printed
money becomes totally worthless. Hyperinflation affects mainly goods and
services. In real terms, all the assets that have been financed by the credit
bubble will deflate. Simultaneously debt will implode leading to banks
defaulting. Eventually hyperinflation will turn to a total deflationary
implosion when all prices go down together with money supply. This will be a
devastating period for the world since for a period there will be no money
and most people will have to revert to barter.
During the hyperinflationary period, gold will reach unimaginable levels
in paper money terms like in the Weimar republic:
Gold in the Weimar Republic went from 170 Mark in 1919 to 87
trillion Mark in 1923
When hyperinflation ends and the deflationary implosion starts, gold will
fall from the dizzy highs. But since there is likely to be an extended period
without any paper currency in many countries, gold will be the only real
money and will therefore be very highly valued in relation to rapidly falling
prices.
Although there is no sign of hyperinflation in any major economy, there
are countries like Argentina and Venezuela where it is already happening.
The Venezuelan Bolivar has been totally crushed since 2011. In August
2012, there were 10 Bolivars to the dollar. Today there are 4,250 Bolivars to
one dollar in the unofficial market. As the graph shows below the fall of the
Bolivar and the rise of the dollar is now exponential. In mid-2015 there were
700 Bolivars to $1 and today the dollar is 6x higher at 4,250. Since Aug
2012, the monthly inflation rate has been 16%.
In gold, 17,000 Bolivars bought one ounce in 2012. Today one ounce of gold
costs 5 million Bolivars.
A sign of things to come to many major economies in the next few years?
Physical Silver is now an attractive investment
As I have advocated since 2002, gold is the best way to preserve wealth
and to insure against the coming collapse of paper currencies as well as the
financial system. We have as a rule advised clients to hold gold rather than
silver for wealth preservation purposes. The volatility of silver has made it
an unsuitable investment for normal investors. In 2001 silver was $4, in Feb
2008 it reached $21 and in Aug 2008 silver was down to $8. Then back to $50
in April 2011 to again fall precipitously to under $14 in Dec 2015. For
anyone seeking a thrilling roller coaster ride, silver is perfect since these
massive swings will give most investor the fright of a lifetime. Because
silver is also much heavier in relation to its value, it is less convenient
to store and carry than gold. In addition, there is Vat (value added tax) on
silver in Europe although this can be avoided legally by storing in bonded
vaults.
Silver will appreciate at twice the speed of gold
The risk/reward situation for silver changed at the beginning of 2016.
Silver has now reached a point where relative to gold it represents excellent
value. What is particularly interesting is that silver is now in a position
to move twice as fast as gold.
The Gold /Silver ratio chart below shows how it has peaked 4 times in the
last 20 years at or slightly above the 80 level (gold price = 80x silver
price). The last time this happened was in February 2016. Since then the
ratio has fallen to 68 but this is just the beginning. It is likely that
before a major correction of the ratio, it could move down to 30 which we saw
in 2011 when the silver price reached $50.
The ratio can move extremely fast. In September 2010, it was at 68 and in
April 2011 it had reached 30. Once the current move down in the ratio
accelerates, it could reach 30 very quickly. Longer term the ratio is likely
to reach 15 which is an important historical level or it could even overshoot
to 10.
If gold reaches $10,000 which I believe is a minimum without
hyperinflation, that would give a silver price of $666 to $1,000. These are
clearly levels that sound totally unrealistic currently with silver at $17
but are likely to be achieved within 5 years or so.
Silver is extremely scarce
What makes silver particularly interesting is its scarcity. Around 170,000
tons of gold have been produced in history and virtually all of this quantity
is still around in one form or another. This is not the case with silver.
There are no significant silver stocks anywhere in the world. Almost 60% of
the silver produced is consumed, the rest goes to silverware, jewellery and
investment. Central banks hold no silver stocks. The annual global silver
production is 27,000 tons which at $17 is $15 billion. As a comparison,
annual gold mine production is $114 billion. More silver has been consumed
globally than has been produced for a number of years. Investment demand for
silver is only $2.5 billion annually. The total size of the silver market is
miniscule in relation to world financial assets. That is why it has been very
easy for Deutsche Bank, UBS, Barclays and a few other banks to manipulate
this market. Deutsche has admitted their rigging of the silver market but
since they have implicated a number of other banks, we haven’t seen the end
of this story which is very likely to spread to the gold market also.
Silver is normally the leading metal. It moves faster down in a bear
market for precious metals and when the market turns bullish, it outperforms
gold. The fall of the gold / silver ratio indicates that the manipulation
might soon come to an end which will lead to increased physical demand. That
in turn will put the paper silver market under severe pressure. As physical
demand rises, the silver price will increase rapidly. Even today it is
difficult to find big quantities of physical silver and as price rises there
will be no silver available at current prices. Any surge in demand will only
be satisfied at substantially higher prices.
Silver should not be bought for speculative purposes but for long term
wealth preservation. Due to the volatility of silver, 15-25% of total
precious metals holdings is the right level in our view. For any investor who
doesn’t hold silver, it is my strong belief that now is an excellent time to
buy physical silver at a price that will never be seen again and for a
journey which will be extraordinary.
Egon von Greyerz
Founder and Managing Partner
Matterhorn Asset Management AG
matterhorn.gold
goldswitzerland.com