Virtually no investor studies history and the few who do always think it
is different today. The most important lesson is that people never
learn. If they did, they wouldn’t be invested in a stock market that
on any criteria is now at a bubble extreme. And they wouldn’t be invested in
a global debt market which has grown exponentially in recent decades and
which will become worthless in the next few years as debtors default. Nor
would anyone hold paper money which is down 97-99% in the last 100 years and
which is guaranteed to soon fall the final bit to take the value to zero.
The history of money clearly illustrates that “Plus ça change,
plus c’est la même chose” (the more it changes, the more it is the
same thing). The most constant factor in the history of money is the cycle of
boom and bust or euphoria and despair. Cycles are part of nature just like
the change of seasons.
But throughout history, mankind has always believed that they know better
than previous generations and can eliminate the cycle of boom and bust. This
is what the British prime minister Gordon Brown proudly declared before the
economy collapsed in 2007. And the Nobel Prize winner in Economics, Paul
Krugman, also believes that eternal prosperity can be generated by creating
endless debt and printing unlimited money.
But history has time and time again turned hubristic know-it-alls
into humbled has-beens.
FOR 6,000 YEARS GOLD HAS OUTLIVED ALL CURRENCIES
Whenever mankind has deviated from sound money, the consequences
have without fail been catastrophic. The only money which has survived since
it first came into use around 6,000 years ago is gold. All other
money has been destroyed by greed and economic mismanagement. I believe I
have quoted Voltaire for over 20 years and will continue to do so: “Paper
Money Eventually Returns to its Intrinsic Value – ZERO”. Whether we
go back 100 years, 300 years or 2,000 years, those superb 9 words is the most
exact and scientific definition of economic history. This is the most
important lesson that any student of Economics should learn. Armed with that
knowledge, anyone can forecast the likely outcome of an economic cycle and
especially the current one.
TULIP BULBS AND BITCOINS WILL NEVER PRESERVE WEALTH
So why are investors not taking heed and protecting themselves against
risks that on a global scale have never been greater. The first reason is
greed. Whether it is stocks, tulip bulbs or bitcoins, people never
learn. Greed takes over and numbs any rational thinking. And that is
why most investors will ride the bubble markets until they are virtually
worthless.
Experience and a long professional life is a great advantage when it comes
to understanding risk. Nothing beats personally experiencing major market
crashes of 50% or more like in 1973, 1987, 2000 and 2007. This certainly makes
you more aware of risk and therefore also the necessity to preserve wealth.
STOCKS ALWAYS GO UP!
Looking back at say the Dow since 1971, it is up 29x or 2,800 percent. So
why worry because “stocks always go up”. Yes, it is absolutely true that in
the last 47 odd years since Nixon took away the gold backing of the dollar,
asset markets have boomed. But most of these gains have been illusory and due
to credit expansion, money printing and currency debasement.
So investors are still certain that stocks will continue to grow over
time. But they don’t realise what will happen to their investments when the
punchbowl is taken away and interest rates increase substantially. Because
that is what we will see in the next few years. Stocks have been going up
only because of credit expansion and artificially low interest rates. These
two factors are unlikely to be in play in coming years. Yes, central banks
will panic and print unlimited amounts of money but the market will soon
realise that this money is worthless and therefore will have no effect.
What investors don’t realise is that it can take a very long time for
stocks to climb back up that high wall of worry after a big fall. In 1929 the
Dow peaked at 481 and then fell 90% over less than three years to bottom at
40 in 1932. But what few investors realise is that it took 26 years before
the Dow was back to the 1929 high.
THE DOW TOOK 26 YEARS TO GET BACK TO 1929 PEAK
The
almost 1,000 points drop in the Dow last Monday was a foretaste of things to
come. We might not see the end of the multi decade bull market quite yet but
risk is today colossal. Once the bear market starts, the Dow will experience
days of several thousand points decline. The 1929 crash was 90% but since the
current bubble is so much greater by any measure, the coming fall of US stock
markets is likely to be at least 95%.
NIKKEI STILL 40% BELOW 1989 PEAK
A more recent example of a stock market not recovering is the Nikkei which
topped at 39,000 in 1989. Today, 29 years later the Nikkei is still 40% below
that level after having been down as much as 80% from the high. In spite of
massive money printing with debt well over Yen 1 quadrillion and zero or
negative interest rates for most of the last 29 years, the Japanese stock
market is still in the doldrums. The most likely outcome for Japan is that
the economy will collapse with stocks going down 95% or more with the value
of debt going to zero followed by the Yen which will also go to zero.
THE DOLLAR HAS BEEN FALLING FOR HALF A CENTURY
Looking at the dollar since 1971, it has lost 78% against the Swiss franc
and 56% against the DMark/Euro.
If we measure against real money – gold – the dollar has lost 98% in the
last 100 years. Most of that fall took place after Nixon’s fatal decision in
1971.
PAPER MONEY – FROM 100 TO ZERO IN ONE CENTURY
It is clear that the dollar will lose the additional 3% against gold to
make it reach ZERO intrinsic value. But we must remember that this means the
dollar will fall 100% from current level. And that fall is virtually
guaranteed. It is only a question of how long it will take. The biggest part
of the dollar decline could happen very rapidly, within 3 to 7 years. At the
same time US debt will go to zero and interest rates will reach infinity.
THE DOLLAR – FROM BOHEMIA TO OBSCURITY
Interestingly,
the word dollar came from the Czech Kingdom of Bohemia where silver coins
were minted in the early 1500s. The area was called Joachimsthal (Joachim’s
valley) and the money Joachimsthaler shortened to Thaler or Daler (Dollar).
This word for money was used in many countries in the world. It came to
America as the Spanish American Peso which became the Spanish dollar. In 1785
it was adopted in the US as the official currency – the American dollar. When
the US dollar collapses in coming years, it will be interesting to see how
long it will take for the dollar to totally disappear just as the Denarius
did when the Roman Empire collapsed.
THE DENARIUS – FROM SILVER TO DUST
The
silver coin Denarius was first minted in 211 BC. As the finances of the Roman
Empire deteriorated, the Denarius was gradually debased. During the 100 year
period, 180 to 280 AD the silver content of the Denarius went from 87% to 0%.
This is exactly what is happening to the currency system today with all major
currencies down 97-99% measured in nature’s money – Gold. But we still have
the final 1-3% to come which will be extremely painful for the world.
WORLD ECONOMY – FROM EUPHORIA TO DYSPHORIA
We are now in the final phase of manic euphoria. Within the next 6 to 18
months the euphoria will turn into dysphoria as 100 years of economic
mismanagement and manipulation come to an end. It will not only severely
affect financial markets and the world economy but also the fabric of society
in most countries. I have talked about this many times and it certainly is a
depressing scenario. The world is likely to experience very high
unemployment, no or little money for most people, disease, famine, no social
security, no pension, little medical care, social unrest, wars etc.
No one, absolutely no one, can prepare fully for this or avoid it. We will
all suffer. As I have stressed many times, the circle of family and friends
is the best protection and more important than anything else. For the few who
are privileged to have savings, it is still not too late to acquire some
physical gold and silver. As the financial system crashes, precious metals
will resume their role as money. Not only will gold and silver become
extremely valuable and desired, but more importantly, it will maintain
purchasing power as it has for 6,000 years.
Investors must not be influenced by short term fluctuations in the
gold and silver price. Without warning gold will one day start moving up 100s
of dollars and silver 10s of dollars over a very short period. Gold and
silver must be acquired today at current low prices. When the real move
starts, it will be impossible to get hold of physical gold and silver at any
price.
Egon von Greyerz
Founder and Managing Partner
Matterhorn Asset Management AG
GoldSwitzerland.com
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