We now live in a world where
governments print worthless pieces of paper to buy other worthless pieces of paper
that combined with worthless derivatives, finance assets whose values are
totally dependent on all these worthless debt instruments. Thus most of
these assets are also worth-less.
So the world financial system is a house of cards where each instrument’s
false value is artificially supported by another instrument’s false
value. The fuse of the world financial market time bomb has been lit.
There is no longer a question of IF it will happen but only WHEN and
HOW. The world lives in blissful ignorance of this. Stockmarkets
remain strong and investors worldwide have piled into government bonds in a
perceived flight to safety. Due to a century of money creation (and in
particular since the 1970s) by governments and by the fractal banking system,
investors believe that stocks, bonds and property can only go up.
Understanding risk and sound investment principles has not been necessary in
these casino markets with guaranteed payouts for anyone who plays the game.
Maximum leverage and derivatives have in the last 10-15 years driven markets
to unfathomable risk levels, with massive rewards for the participants.
In the meantime central banks are cranking up the printing presses but
as Bernanke recently said quantitative easing is an
“inappropriate” description of what should be called
“securities purchases”! Who is he kidding? What the Fed is
buying has nothing to do with “securities”. There is no security
whatsoever in the rubbish the Fed is purchasing. They are buying worthless pieces
of paper with worthless pieces of paper. This is the Ponzi
scheme of all Ponzi schemes.
Let us be very clear, this financial Shangri-La is now coming to an
end. The financial system is broke, many western sovereign states are
bankrupt and governments will continue to apply the only remedy they know
which is issuing debt that will never ever be repaid with normal money.
So why does the world still believe that the financial system is
sound?
- Firstly,
because this is what totally clueless governments are telling everyone
and this is what investors want to hear.
- Secondly,
whether governments apply austerity like in parts of Europe or money
printing as in the US, investors want to believe that any action
by government is good, however inept.
- Thirdly,
market participants are in a state of false security due to
shortsightedness and limited understanding of history.
- Fourthly,
as long as they can benefit from inflated and false asset values, the
market participants will continue to manipulate markets.
- Fifthly,
there has been a very skilful campaign by the US to divert the attention
from their bankrupt economy and banks `to small European countries like
Greece, Ireland or Portugal. These nations, albeit in real trouble, have
problems which are miniscule compared to the combined difficulties of
the US Federal Government, states, cities and municipalities.
Euro zone members can’t print money. Many EU countries are
downgraded by US rating agencies which don’t dare to touch the US rating.
The AAA rating of the US is an absolute sham and totally politically
motivated. True to form, rating agencies will only downgrade debt once it has
become worthless but never before.
Hyperinflation Watch
The result of massive money printing is a collapsing currency, leading
to escalating prices and eventually hyperinflation. This is in simple terms
how every hyperinflationary period in history has happened. If in addition,
there are world shortages of food, energy and other commodities, this will accelerate
the process.
There are currently a number of indicators all pointing to escalating
money printing and an imminent start of a hyperinflationary era. Here are some of them:
- Fiscal Gap
widening at alarming rates in many major economies.
- Commodity
prices at all-time highs.
- Long term
interest rates rising.
- Most Currencies
falling.
- Precious
Metals at all-time highs against most currencies.
Fiscal Gap
Tax receipts are collapsing and government expenditure soaring in many
major economies including virtually all southern European countries as well
as in the UK. James Turk has produced on his fgmr.com site two excellent
graphs for the USA and the UK showing the extreme severity of these two
countries’ deficits.
US & UK ON THEIR WAY TO BANKRUPTCY
The USA and the UK are the favourites
to reach hyperinflation first amongst major economies. Both these countries
will experience major problems in 2011. Also many other nations have
unsustainable debt levels which will never be repaid with normal money.
GOVERNMENT DEBT WILL
NEVER BE REPAID
Commodity Prices
Commodity prices have increased 26% in the last 12 months
and 77% in the last 24 months based on the Continuous Commodity Index (CCI).
So whilst most economies publish inflation rates of 1-3%, the real cost of
food and energy is surging. The US government, which doesn’t eat or use
energy, recently published the adjusted 12 months’ Consumer Price Index
(ex food and energy) of 0.8% per annum. Whilst most people are struggling
with a massive increase in their cost of living, the US government is
continuously adjusting and manipulating the published figures. There
are lies damn lies and US government statistics. Who are they fooling!
Long Term Interest Rates
In spite of US government debt being totally worthless, investors have
bought more than ever, with virtually no return, in a world drowning in
sovereign debt paper. We have for some time stated that the US bond market is
one of the biggest financial bubbles ever. As we forecast back then, the
market turned down (rates up) in January 2009. A 14 month correction
ended in August 2010. Since then both the 10 year and 30 year US Treasury
bonds have moved up one full per cent. So investors are finally waking up to
the enormous risks in the financial system by selling government debt. We
expect both short and long interest to surge in 2011 in many countries and to
reach well into double digits in the next few years.
INTEREST
RATES WILL RISE STRONGLY
In spite of interest rates at minimal levels, both sovereign states and
individuals have major problems servicing current debt. With interest rates
likely to rise to at least 12-15% and probably higher, no one will be able to
service debt with “normal money”. Add to that the fact that
government debt will surge in most countries. The US debt is currently $ 14
trillion. It is likely to rise to at least $20 trillion in the next few years
and probably a lot higher. The interest cost for the US government at that
stage is likely to be at least double the tax revenue. One would assume that
the US government is well aware of what their ruinous actions are leading to.
But in spite of this, they continue to increase the deficit by reducing
fiscal revenues and increasing spending. What planet are they living
on! What is absolutely self-evident is that they will not clear up
their own mess, as the present government will be a one term wonder!
Currencies Declining
Since 1971, the value of the US dollar (paper money) has gone down
97.5% against real money (gold). Since Nixon abolished gold backing of the US
dollar in 1971, both the dollar and most other currencies have been totally
destroyed by reckless government. Nixon should not have been impeached for
Watergate. Instead he should have been prosecuted and jailed for destroying
the world’s currency system. Concurrently, banking developed into a
fractal system whereby banks could lend massive multiples of their deposits
and capital. All of this has served to drive up asset prices to totally
unsustainable levels.
All currencies are declining against gold but some faster than others.
The US dollar for example is down 78% against the Swiss Francs since 1972. During the same period the pound has
declined a massive 85% against the Swiss Franc. Both the
dollar and the pound are now at all-time lows against the Swiss currency. But
the Swissy is only strong relative to weak paper
currencies because against real money/gold the Swiss Franc has declined 87%
since 1972.
DOLLAR DECLINE WILL ACCELERATE IN 2011
As a consequence of accelerated money printing, all paper currencies
will fall precipitously against gold in the next few years. Therefore all paper
money should be avoided and especially the Dollar, the Pound and the Euro.
Precious Metals to reach unthinkable heights
Gold has gone up 40 times against the Dollar in the last 40 years and
almost 6 times in the last 11 years. Very few investors have participated in
this rise since the 1999 low at $ 250. Less
than 1% of world financial assets are invested in gold and gold stocks. Between
1920 and 1980 circa 25% of financial assets were invested in gold and gold
stocks.
THERE WILL NOT BE ENOUGH GOLD
The major rise in gold in the last 11 years has been a stealth move
with very few investors participating. The dilemma is that there is not enough
gold to satisfy the coming increase in demand. We have in previous articles
forecasted the gold price to reach anywhere between $ 6,000 and $ 10,000 in
the next few years – see “Gold entering a virtuous
circle”. As we explained at the time, these are totally
realistic targets without the effect of hyperinflation.
GOLD WILL
SURGE IN 2011
Bearing in mind that we are likely to see hyperinflation in the US,
the UK and many European countries, the $6-10,000 target for gold is much too
low. The dilemma is that it is absolutely impossible to predict how much
money will be printed by governments. In the Weimar republic gold reached DM
100 trillion. But it is really irrelevant what level gold and other precious
metals will reach in hyperinflationary money.
What is much more
important to understand is that physical gold (and silver) will protect
investors against losing virtually 100% of the purchasing power of their
money. Whatever real capital appreciation gold will have in the next few years
is of less importance. But what is vital, is that physical gold (stored
outside the banking system) is the ultimate form of wealth protection both
against a deflationary collapse and a hyperinflationary destruction of paper
money.
Throughout history gold has protected investors against various
calamities but this time, holding physical gold will be absolutely critical
to financial survival.
Egon von Greyerz
Mattherhorn Asset Management AG
Matterhorn Asset
Management has set up a separate Gold Division called GoldSwitzerland
(www.goldswitzerland.com) in order for
investors to purchase physical gold at very competitive prices and store it
in their own name in Zurich, Switzerland outside the banking system and with
personal access to their own gold bars.
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