There are a lot of people who are concerned about the performance of gold
and the fact that the price after four years of correction is still so far
from the high. The mistake that most people make is to measure gold in US
dollars. We are seeing currently very temporary dollar strength. But the US$
is a weak currency in a mismanaged economy. Just look at the dollar in Swiss
Francs. Since 1970 the dollar has lost 77% against the Swissy. That can
hardly be called dollar strength.
The dollar is a very weak currency
If we measure the dollar in real money which is gold of course, the not so
mighty dollar has lost 80% in this century.
So to talk about a strong dollar is totally ridiculous. The dollar is in a
long-term downtrend which will continue for many years until it reaches zero.
The temporary dollar strength gives the appearance that gold is currently
weak. But we must remember that gold should be measured in your home currency
and not only in dollars. It is pure laziness that makes non-Americans quote
gold in dollars. International media don’t make it easier since they always
show the dollar price.
The US population is less than 5% of world population and most of the
remaining 6.7 billion people are not linked to the dollar. If we instead use
GDP as a measure, the US represents around 25% of global GDP but that still
leaves 3/4 of global GDP which is not dollar based. My point is that gold in
dollars is only relevant to a minority of the world and the rest of us should
measure gold in our home currency.
Gold in pounds up 47% in 2016
Let us look at gold in UK pounds for example. Any Brit who has kept his
money in gold since December 2015 had gained a staggering 47% in
the last ten months. Had he instead kept his money in the UK stock market, he
would have made just 13% which is 1/4 of the gain he could have made in gold.
The chart of gold in pounds below is an excellent example of the wealth
preservation properties of gold. When a currency weakens, most investors
don’t realise how much real value this is costing them. As opposed to most
governments, gold tells the truth and the truth is that for UK citizens,
their currency has lost a huge 1/3 of its purchasing power in the last 10
months measured in gold.
But it is not just gold’s performance in pounds this year which is
significant. Since 1999, gold in pounds is up 6.6x. That means that the pound
has lost 85% of its purchasing power when measured in gold. During the same
period, the FTSE100 index has gone nowhere since it is today at the same
level as it was in 1999.
UK stock market investors are deluding themselves when they believe they
have preserved capital with a market that has gone sideways for 17 years when
in real money – gold – they could have made almost seven times their
investment. Also, since most investors around the world only look at the gold
price in dollars, they believe that gold is far from the 2011 highs. But
looking at the chart above, gold in pounds for example is only 8% from the
September 2011 peak.
Few UK investors, and that includes institutional investors, realise that
if they had just kept their funds in real money – gold – for the last 17
years, they would have outperformed all other asset classes. That trend will
continue for many years as all the bubble assets such as stocks, bonds and
property will lose another 50-90% against gold.
Gold is near the 2011 highs in many currencies
But it is not just in pounds gold is doing well. In many other currencies
gold is near the 2011 peak. The table below shows that gold in Australian and
Canadian dollars for example is only 3% and 5% respectively from the peak.
The temporary rise of the dollar gives a skewed picture of gold’s
performance since the 2011 peak. The dollar’s current strength leaves gold at
31% below the peak. But this is a very temporary situation and will be
rectified when the dollar starts to fall. It is possible that we will see
dollar strength for a while still but thereafter the world’s reserve currency
will join the race to the bottom in earnest.
I am also showing in the table what is likely to happen to gold against
all currencies in coming years. Gold in Argentine pesos is up 6,500% in the
last 14 years. This is what happens when governments mismanage the economy
and print money to make ends meet. I expect that we will see similar
percentages for the dollar, pound, euro and most currencies in the next five
years.
Inflation – Deflation
The battle between deflation and inflation is continuing. Despite massive
money printing and credit creation in many countries like Japan, China, the
EU and the US, there is little sign of conventional inflation. The official
figures show non-existent inflation in most countries. The fact that we have
had the most incredible asset inflation in stocks, bonds and properties is
not counted in these figures. Most of the printed money has pushed asset
prices to levels which have made a small minority incredibly wealthy at the
expense of the masses who have been landed with massive debts, both private
and public.
QE to save European banks
As the European financial system is on the verge of collapse, central
banks are standing ready to crank up the printing presses. These central
banks are totally aware that an extended deflationary period would be
the end of many major European banks and therefore also the global financial
system. We are at the point now when a deflationary implosion could
happen any time, caused by the collapse of Deutsche Bank or a major Italian
or Spanish bank. European governments are not going to let this happen and
therefore a major European and global money printing package is not far away.
My view has not changed for a very long time. I believe we will have
unlimited money printing in the next few years which will lead to
hyperinflation. Thereafter we are likely to see a deflationary implosion. But
if I will be wrong and severe deflation comes first, the world financial
system will not survive. In that case, gold will become the only money
available and therefore extremely valuable. Thus, physical gold will be the
best protection both against inflation and deflation.
Egon von Greyerz
Founder and Managing Partner
Matterhorn Asset Management AG
matterhorn.gold
goldswitzerland.com