This month we
will discuss the illusion of gold going up. We will examine the destiny
of the dollar and why it will reach its intrinsic value of zero. We will also
demonstrate why money printing will accelera
te rapidly in the
next 12-24 months.
Paper Money
Collapsing against Gold
The problem with
paper money is that governments can create unlimited amounts. This is what
they have done throughout history and especially in the last 100 years and
which has led to the total destruction of most currencies. Most people
don’t even understand that their government makes their money worthless.
Money printing gives them the illusion of being richer whilst all they have
are pieces of paper with more zeros on them. But there is one currency
that governments can’t print which is gold. Gold has been real money
for almost 5,000 years and it is the only currency that has survived
throughout history. Gold can’t be printed and no government controls
it. Therefore gold will, over time, always reveal governments’
fraudulent actions in creating money out of thin air. And this is what we are
experiencing currently. Gold is not going up. Instead gold is doing what it
has always done, namely maintaining its value and purchasing power.
What we are
seeing currently is the total annihilation of paper money whether it is
Dollars, Pounds or Euros etc. The chart below shows the US dollar against
gold. In the last 10
years the dollar has declined by 79% against gold. Most
currencies have declined by similar percentages. So it is an illusion to
believe that gold is going up when it is the value of paper money that is
going down. All gold is doing is to reflect the virtually limitless printing
of paper currencies. Since gold can’t be printed, it is the only honest
currency that exists. This is why many governments don’t like gold
increasing in value against their paper money since it exposes their total
incompetence in running their country’s economy.
The chart above
shows how the purchasing power of the dollar has declined in real money
– gold – in the last 10 years. And if we take the period from
1909 to 2009 it shows the total destruction of paper money. In 1909, $1,000
bought 50 ounces of gold. Today it buys 0.83 ounces. This means that in the last 100
years the dollar has declined by 98.3% against gold. So in real money terms
the dollar is now only worth 1.7% of what it was worth a century ago. Thus,
the US government (as well as most other governments) has totally destroyed
the value of real money by issuing unlimited amounts of paper money and in
the next few years they will also kill off the remaining 1.7% of value to
make the paper dollar reach its intrinsic value of zero. The chart below
reflects various currencies fall against the dollar since from 1900 to 2004.
To talk about
gold being over-extended at these levels is in our view absolute nonsense. As
we will discuss later, money printing can only accelerate in the coming
months and years. And when worthless pieces of paper are printed, gold will
always reveal such a fraud by maintaining its value against the ever
increasing supply of paper called “money”.
The Real Move in
Gold is Still to Come
In our view we
have not seen the real move in gold yet although we have gone from $250 to
$1,226. The reasons are many:
- Money printing will accelerate as government
deficits increase and problems in the financial system re-emerge.
- There is a high risk of default of major
financial institutions or sovereign states with unpredictable
consequences for the world economy.
- The fourfold increase in gold since 1999 has
taken place without the participation of most investors. It has so far
been a stealth market. But this will soon change and there is likely to
be a major “gold rush” in the next couple of years.
- The average fund manager, pension fund manager,
asset manager or individual investor has virtually no exposure to gold
today but in the next couple of years they will all invest in gold.
- The gold market will soon become primarily a
physical market because no one will trust paper gold or quasi physical
gold such as Comex, ETF’s or unallocated gold. Nor will the market
trust governments many of which might have lent out most of their gold.
The last audit of the gold in Fort Knox was in 1953!
- Gold production is going down every year and is
currently only $90 billion p.a. There will not be sufficient physical
gold at current prices to satisfy increased demand.
- There is only $900 billion of physical gold
held privately for investment purposes. This is circa 0.7% of world
financial assets. A mere doubling of the allocation to gold, which is
likely, would make the gold price surge. See chart below.
- Central banks are now net buyers of gold. Many
countries which are underweight in gold such as China, India, Russia, Japan,
Singapore Brazil, Korea and many more are major buyers of gold. This
means that gold will be underwritten by several sovereign countries for
many years to come. Central banks are not fickle investors and a policy
decision to increase their gold holdings is unlikely to be reversed for
a very long time.
- Although difficult to predict, the geopolitical
risk in the next few years is substantial. Pakistan, Iran, Afghanistan,
Al Qaeda, Middle East, Israel, acts of terrorism in the West etc. The
preceding list is potentially explosive and the likelihood that
something will happen in one these areas is very high. This would have a
major effect on the gold price.
Gold has
outperformed most stockmarkets
In the last ten
years the Dow Jones has declined against gold by 80%. The graph below
shows gold expressed in local currencies against the Nikkei, Dax, FTSE and
S&P in the last 10 years (Nov 1999 – Nov 2009). For example gold in
yen has appreciated by 233% whilst the Nikkei has fallen by 46%. The graph
shows how badly most stockmarkets have performed measured in “real
money” i.e. gold.
The Precious
Metals market is minuscule
The graph below
shows how small the gold and silver industries and markets are in relation to
major US corporations and to total world financial assets. The market
capitalisation of the silver industry is only $ 9 billion and of the gold
industry $ 200 B whilst Microsoft is valued at $250 B and Exxon 350 B.
Both the silver
and gold industries as well as the physical markets are so small that any
increase in demand is likely to drive prices very substantially higher.
Quantitative
Incr-easing
Governments and
especially the US are making noises that money printing will soon cease. This
statement is as credible as their statement about “a strong dollar
policy”. Let us be very clear; just as there is no chance whatsoever
that they actually want a stronger dollar or that the dollar can go up. There
is even less of a chance that money printing or Quantitative Easing
will be withdrawn. Instead we will have what we call QI – Quantitative
Incr-easing. The Fed
will in the next couple of years do what Helicopter Bernanke always promised;
i.e. print unlimited amounts of worthless paper which will complete the move
of the dollar to its intrinsic value of zero. This will totally destroy
the US economy, thereby creating a frightening political and social climate.
The reasons for
an acceleration of money printing are manifold:
1. Unemployment
increasing
US unemployment
adjusted for short- and long-term discouraged workers is now 22% as shown in
the chart below. This is an absolute disaster and will have very severe
ramifications for the US economy. And it is likely to get a lot worse. During
the 1930s depression non-farm unemployment reached 35%. Since the real
problems in the economy have not started we would expect the US unemployment
to reach at least 35% in the next 2-3 years and possibly a lot higher. With
over 30 million people unemployed, this will put enormous strain on the US
economy with a major reduction in GDP and tax revenues and a major increase
in social payments. A country that is already bankrupt today is unlikely to
cope with this additional burden. Currently 36 million Americans receive food
stamps, an increase of almost 3 million in the last 6 months.
2. Financial
system still very vulnerable
The $12 trillion
which the US government has injected to stave off an implosion of the
financial system and economy has only benefited the financial sector. Banks
that have received these funds have not lent them on to the real economy.
All they have done
is to prop up their balance sheets and pay out record bonuses. But even with
this massive injection of funds into the banking system virtually all banks
are still bankrupt if their assets are taken at market value:
- With the blessing of the government, banks have
been allowed to value their toxic assets at totally phoney amounts.
Instead of valuing these assets at market value they can be valued at
expected maturity value which of course banks assume is 100%. This is
just another fraudulent collusion between government and banks.
- Mortgage loans are deteriorating at a rapid
rate. In October 2009 another 330,000 properties went into foreclosure.
There are 7 million US homes waiting to be repossessed. Resets of
interest rates on Option ARM and ALT A mortgages in 2011-12 will lead to
a massive increase in foreclosures and mortgage lender losses.
- Commercial property values are declining fast
and vacancy rates and defaults are surging. Values have declined by
35-50% but banks are so far not recognising the full reduction in
values. For smaller banks, which make up 90% all US banks, 74% of loans
are in commercial real estate. There is $1.4 trillion to be refinanced
in the next four years much of which is property which is in negative
equity or empty. It will be virtually impossible to refinance this
amount.
- More derivatives are being issued by the banks.
The top four US banks now have $200 trillion outstanding. A big
percentage of this could not be sold at anywhere near market value.
- Over 130 US banks have failed so far in 2009.
Values realised when the assets are sold are substantially below the
stated values, making a mockery of the current valuation rules. Not to
value at market is a crime and against all sound accounting principles.
But this is of course done with the total blessing of the government
since, if assets were valued at market, there would be no banking
system.
3. Government
Deficits will escalate
The increase in
unemployment and the continued problems in the financial system are two of
the major contributing factors that will make government deficits surge. But
there are many other problem areas that will necessitate acceleration in
money printing:
- Tax revenues are falling rapidly
- Many states in the US are already bankrupt and
most others will follow.
- Cash for clunkers and tax credits to new
housing buyers are just two of many schemes that the government will
launch to support failing industries.
- Pension fund deficits will escalate rapidly and
the government will need to subsidise pensioners.
- Insurance companies will fail and the
government will need to step in.
The list of areas
which will need government support is endless and the US government
will inevitably print money to “save” the economy.
Zero percent
interest rates and unlimited money-printing = Lunacy
To artificially
set interest rates at zero and to print whatever money is needed goes against
every single principle of sound money and a sound economy. Interest should be
set by the market in order not to violate the laws of supply and demand. And
money printing should be totally illegal. So why is it done? For
governments to stay in power and bankers to prosper! Nobody else is
prospering. Normal people are being conned into taking enormous debts that
they will never be able to repay. And the value of their paper money is being
totally destroyed as we have demonstrated above.
We have in the
last few years made clear to our investors and readers that there will be
very serious consequences
arising from the actions of the government:
- Government deficit will surge. The current borrowings of $12 trillion are
likely to increase to over $30 trillion as we have discussed in previous
reports. Interest rates could then be 20% or more and the US government
would have absolutely no possibility to finance the interest on this
debt.
- The dollar will collapse. It is only due to the fact the dollar is the
reserve currency of the world that the US has been able to dupe the rest
of the world into accepting its worthless currency and financing its
enormous debts. But this will not last much longer.
- There will be hyperinflation. A deflationary implosion of credit and assets
financed by a credit bubble is the necessary precondition to
hyperinflation. In order to counteract these deflationary factors, the government
will be printing unlimited amounts of money. It is the fall of the
currency that causes hyperinflation and the US will be no exception. The
fall of the dollar will lead to a hyperinflationary depression in the
US.
- There will be major social and political
consequences. The
economic devastation caused by the mismanagement of the economy will not
only create poverty and famine but also social unrest. There will be
major changes in the political system and leadership.
Protection
This report has
mainly discussed the United States since what happens there has major
consequences for the rest of the world. But what is likely to happen in the
US is just as likely to happen in the UK and many other countries.
Many investors
now feel that the worst is over with stockmarkets recovering. In our January
2009 Newsletter we forecast that the stockmarket could have a 50% recovery.
We have now had that recovery, mainly fuelled by massive liquidity injection
by the government and cost savings in corporations. In our view the
resumption of the downtrend could start at any time.
It is not our
purpose to frighten investors or to be sensational in our views and reports.
Our purpose is to warn investors of the major dangers which make asset
protection absolutely vital for financial survival in the next few years.
“THERE IS
NO MEANS OF AVOIDING THE FINAL COLLAPSE OF A BOOM BROUGHT ABOUT BY CREDIT
EXPANSION. THE ALTERNATIVE IS ONLY WHETHER THE CRISIS SHOULD COME SOONER AS
THE RESULT OF A VOLUNTARY ABANDONMENT OF FURTHER CREDIT EXPANSION OR LATER AS
A FINAL AND TOTAL CATASTROPHE OF THE CURRENCY SYSTEM INVOLVED.”
Ludwig von Mises
– Austrian Economist (1881- 1973)
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