Fundamental and technical factors for gold are now
in total harmony and gold is entering a virtuous circle that will drive the
price up at its fastest pace since this bull market started in 1999.
- It is a fact that gold in US dollars (and many
other currencies) has gone up 400% in eleven years or 16% per annum
annualised.
- It is a fact that the US dollar has declined
80% in value against gold since 1999.
- It is a fact that the dollar and most other
currencies have gone down 98-99% against gold since 1913 when the
Federal Reserve Bank of New York was created.
- It is also a fact that the Dow Jones (and many
world stock markets) has declined over 80% against gold since 1999.
- It is a fact that gold has made a new all time
monthly closing high in dollars in August 2010.
Gold trend
We expect gold to
start a substantial rise now which will continue for 5-10 months before any
major correction. Gold’s technical picture is extremely strong with a
continuous rising pattern of higher highs and higher lows with the steepness
of the curve increasing. From much higher levels we are likely to see a
correction that could last up to a year before the next rise which will last
several years before we see a significant peak. Once gold has topped we do
not expect the same kind of decline as after the 1980 peak since gold is
likely to become part of a future reserve currency. At that point gold will
be a solid but unexciting investment with very little upside potential. But
that is likely to be a few years away.
In spite of a 5
times increase in the value of gold or an 80% decline against many currencies
and stockmarkets in the last 11 years, most investors own no gold and still
do not understand the importance and value of gold. In a world of constant
money printing and credit creation leading to devaluing currencies and
devaluing assets, gold reflects stability and is virtually the only store of
value that cannot be destroyed by governments.
The average asset
manager, fund manager, pension fund or private individual owns no physical
gold and at best has a very small exposure to some precious metals stocks.
And in spite of this gold has gone up over 400% in 11 years. How is that
possible? For the simple reason with the relatively modest demand that we
have seen in the last few years, there is not enough physical gold even at
these levels. The increase in demand that we have seen has most probably been
satisfied by central banks leasing or lending their gold to the bullion
banks. Central banks supposedly own 30,000 tons of gold but unofficial
estimates of their real holdings are at 15,000 tons or less.
So what are the
factors that are likely to lead to a major rise in the gold price?
We have for several
years outlined in our Newsletters the problems in the world that inevitably
will lead to massive money printing and a hyperinflationary depression (see
for example “Alea Iacta Est” and “There Will Be
No Double Dip…” on the Matterhorn Asset Management website).
There are three
insurmountable problems:
- Real unemployment at 22% in the US will
continue to go up
- The budget deficit will increase dramatically
due to the problems in the economy and in a few years time the interest
on the Federal Debt is likely to be higher than tax revenues.
- None of the problems in the banking industry
have been solved but merely swept under the carpet by phoney valuations
of toxic debt with the blessing of governments. The circa $20 trillion
that were pumped into the world economy to save the financial system in
2008-9 have had a very short term beneficial effect but solved none of
the problems.
The effect of
this massive $20 trillion infusion has been ephemeral since we are entering
the autumn of 2010 with virtually every single economic indicator and
statistic in the US deteriorating rapidly. With interest rates already at
zero there is no ammunition left but one. And it is this specific last bullet
that will be used to infinity in the next few years and starting very soon,
namely UNLIMITED MONEY PRINTING. Every single area of the US economy will
need support or printed money, whether it is the federal government, the
states, the municipalities, banks, pension funds, insurance companies, the
unemployed, corporations, health care, housing market, commercial real
estate, individuals, etc, etc, etc. The list is endless and many other
countries will follow.
Before we talk
about gold in hyperinflationary terms, let’s look at where gold is
likely to reach in today’s money.
Three realistic Gold targets: $6,000 – $7,000
– $10,000:
- In the 1971 to 1980 gold cycle, gold went from
$35 per ounce to $850 or up over 24 times. If we were to see the same
increase in this cycle, gold would rise to over $6,000.
- The gold peak at $850 in 1980 corresponds to
over $7,000 today adjusted for real inflation based on the inflation
rate as calculated by John William’s Government Shadow Statistics (shadowstats.com)
- Gold and gold mining shares were an average of
around 25% of world financial asset between 1921 and 1981. Today, gold
and mining shares are only 0.9% of world financial assets. If gold and
mining shares were to go to 25% of financial assets, gold would go to
over $31,000. But even if we assume that world financial asset would go
down by 2/3rds from here that would put gold at over $10,000.
The three
historical comparisons above (and
see chart below) would put gold anywhere from $6,000 to
$10,000 and this is without inflation, or more likely hyperinflation.
In a hyperinflationary environment, the price gold will go to is really
irrelevant since it depends on how much money is printed. In the Weimar
Republic for example gold went to DM 100 trillion. What is more important is
that gold is likely to go up at least 5 times from today without inflation
and with hyperinflation gold will protect investors against the total
destruction of paper money and many other assets.
Wealth Protection
Gold must only be
held in its physical form and the holder of gold must have direct access to
the gold. We consider ETFs, gold in a bank (whether allocated or
unallocated), fractal ownership of physical gold, futures or any other form
of paper gold as very risky and a totally unsatisfactory method for owning
gold. Physical gold should preferably be stored outside your country of
residence and outside the banking system. The holder must have direct access
to the vaults where the gold is stored.
Silver
Silver has been
lagging gold since its peak at over $21 in 2008. For the last few months the
gold/silver ratio has been consolidating between 58 and 71. The ratio is
currently around 64 and is likely to start a move down to new lows below the
2006 low at just 44. So this is very good news for silver which is
likely to outpace gold substantially in the next few years. Silver is
probably the most undervalued precious metal today and has great potential.
But there
are many caveats for silver:
- It is an extremely volatile metal and is
definitively not for the fainthearted.
- We only recommend physical silver owned
directly by the investor.
- Physical silver currently weighs 64 times more
than gold for the same amount invested and is circa 120 times bulkier
(due to its lower density).
- Therefore silver is not as practical as gold as
a means of payment.
- Also, silver is subject to Vat (value added
tax) in all European countries. Thus silver
cannot be moved freely across borders.
- Physical silver for investment purposes can be
bought/sold and stored tax-free in Switzerland but if the investor takes
possession, Vat must be paid.
- Due to the above factors investors should
carefully consider the split between physical gold and silver.
Stockmarkets
At the beginning
of July this year we sent out a message to investors that, based on our
proprietary indicators, we expected stockmarkets to finish the correction up
at the end of July and resume the major downtrend in August. We also said
that gold would start its major rise in August. And this is
exactly what has happened so far.
We now expect
major falls in all stockmarkets worldwide over a sustained period. We would
not be surprised to see the Dow down to the 1,000 area (in today’s
terms) before this bear market in over. But it will not be a straight line
and there will be extreme volatility. When hyperinflation sets in,
stockmarkets will have a major but temporary surge.
The only stocks
that investors should hold are precious metals stocks and possibly some
resource and food stocks. But it must be remembered that stocks do not
represent the same degree of wealth preservation as physical precious metals
held directly by the investor.
Currencies
Currencies should
in the next few years be looked upon as a necessary evil and not as a store
of value. All currencies will continue to decline against gold, just as
they have in the last 11 years and in the last 100 years. Due to money
printing by most governments, we will have a fierce game of competitive
devaluations by virtually all central banks. We have seen the Euro and the
pound weaken substantially and the next currency the speculators will jump on
is the US dollar. The dollar is grossly overvalued, partly due to the
weak Euro, and is likely to weaken significantly due to the problems in the
US economy.
Currencies only
reflect relative value and not absolute value since they can be and are
printed until they reach their intrinsic value of zero. It is a fallacy to
measure the value of a currency relative to another currency since they are
all losing value. Currencies should only be measured against real money which
is gold. This is the only method that reveals governments’ deceitful
actions in destroying the value of paper money. Therefore it is a mug’s
game to speculate or invest in currencies since they will all decline in an
extremely volatile and unpredictable market.
So are there
currencies which are likely to perform better on a relative basis for funds
that have to be held in paper money? We believe that Norwegian kroner, Swiss
Franc, Canadian Dollar, Singapore Dollar, Australian Dollar and Renminbi will
perform relatively better than many other currencies.
Government Bond Markets
The bond market
is the biggest bubble in financial markets worldwide, in our opinion.
Investors around the world are worried about the state of financial markets
and therefore believe that government bonds represent a safe haven. These
investors will receive the most enormous shock on two accounts. Firstly, no
government will be able to repay the debts outstanding. So there will either
be government defaults, moratoria, or money printing that totally destroys
the value of the bonds. Secondly, interest rates are likely to go up
significantly to at least 10-15%, totally destroying the value of the bonds.
Conclusion
We are now
entering a period when most major asset classes and in particular stocks,
bonds and currencies are starting a major decline. Since most financial
assets in the world are invested in these three categories plus real estate
which will also decline, we are likely to experience major shocks and crises
in the financial system and the world economy. Wealth protection is now
more important than probably at any other time in history. Physical gold and
possibly other precious metals directly controlled by the investor will be a
vital part of a wealth preservation portfolio.
Egon von Greyerz
Mattherhorn Asset Management AG
Matterhorn Asset
Management has set up a separate Gold Division called GoldSwitzerland
(www.goldswitzerland.com) in order for investors to purchase physical
gold at very competitive prices and store it in their own name in Zurich,
Switzerland outside the banking system and with personal access to their own
gold bars.
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