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
IS NOT GOING UP – PAPER MONEY IS GOING DOWN" :
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 accelerate 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)
