Egon von Greyerz, founder
of Goldswitzerland.com (Matterhorn Asset Management AG) and member
of the board of directors of Goldbroker.com published an article
headlined "GOLD ENTERING A
VIRTUOUS CIRCLE"
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 the equivalent of DM 100
trillion (Papiermark). 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.