There is a total misunderstanding of the role of gold and why it is so
critical to own physical gold. Gold should not be bought or sold based on
rumours or events. In connection with the US election, gold moved for totally
the wrong reasons.
The whole Western world had forecast a Clinton victory. The Western media,
which does no analysis but only reports what they are fed, spent no time
trying to understand what the mood of the people was. It was exactly the same
with Brexit. The elite in London, New York and the big metropolitan areas has
totally different objectives to ordinary people.
Change in public mood
The trend change in public reaction, which we are seeing now, is not just
a temporary phenomenon. Ordinary people are tired of a small elite of
bankers, industrialists and politicians helping themselves to unlimited power
and wealth whilst normal people are just getting poorer with lower incomes
and more debt. And it is the masses which ultimately are responsible for repaying
debt which is increasing exponentially in most countries. They will of course
not repay the debt because they can’t. Instead, they will suffer immeasurably
when global debt of around $250 trillion implodes leading to a severe
depression. The gap between the rich and the poor in the West is wider than
ever. In the US, the top 0.1% have 22% of total wealth. US top professionals
have had an increase in real pay of 51% since 1973 whilst normal workers have
seen a reduction of 4.6%. This is a very dangerous trend and when the
economic downturn comes, it is likely to lead to violent protests and social
unrest.
The Trump win was totally unexpected in the US as well as in other
countries. Most politicians in Europe and around the world have ridiculed
Trump and assumed that he would never be elected. They all certainly must eat
humble pie now.
Investors must ignore paper gold volatility
Coming back to gold, we saw the most incredible volatility during last
week. As the Trump victory became clear, gold went from $1,270 to $1,335 in
under 4 hours’ overnight trading. Then massive selling of gold futures pushed
the price down to $1,270 where it started before election. On Friday last
week it was pushed down further to $1,225 which is $110 from the euphoric
election peak. Initially, heavy paper speculative buying of gold took place
around the world but very little serious physical buying. Some gold experts
predicted that gold would go up by at least $100 if Trump won. Well, it did
go up $65 but then declined over $100 from there. A dealer in London ran out
of physical stock due to panic retail buying. But when the stock markets
turned around from down 4-5% to up, the paper longs in gold were liquidated
and speculative funds flowed into stock markets instead. Two years of gold
production was traded after the election – all in the paper market.
As usual when gold is dumped in the futures market there is little selling
of physical. Thus, the paper price of gold is totally false and in no way
reflects what is happening in the physical market. It is likely that
commercial gold buyers, who are already long, will add to positions at these
suppressed levels. The paper market has 100-300 oz of paper gold for every 1
oz of physical gold. When the commercials add to positions at these
artificially low levels, there is likely to be a major short squeeze.
Gold investors should totally ignore these short term moves as well as any
news or events that temporarily move gold. Sadly, many investors buy gold
when it goes up and sell it when it goes down. This behaviour shows a total
ignorance of the role of gold and why it is so important to hold physical
gold. Because gold is not an investment and should definitely not be seen as
a speculative commodity. But futures traders and the bullion banks have no
interest in gold for wealth protection purposes. For them it is just a
commodity traded in the paper market with no intention of ever taking
delivery.
Obama achieved in 8 years what took the US more than 200 years
When gold moves strongly based on events, the move is seldom sustained.
Those moves are mostly speculative and in the paper market. Sustained moves
in gold are due to the debasement of paper money and nothing else. Since the
creation of the Fed in 1913, all major currencies have declined 97-99%
against gold. The US has not had a real budget surplus since 1960 so the
trend is very clear and unlikely to be reversed any time soon. Since 1971
when Nixon abolished the gold backing of the dollar US debt has grown by an
average of 9% per year. This means that US federal debt has doubled every
eight years. And Obama is no exception. He duly complied with the trend of
exponential debt increases and doubled US debt from $10 trillion to $20
trillion. It took the US 232 years to go from zero debt to $10 trillion and
Obama managed to double it in just 8 short years. What an achievement!
Neither Clinton nor Trump had any intention of breaking the trend of
massive debt expansion. Trump’s proposed tax reductions and major
infrastructure investments will add over $5 trillion to the debt. But with
this expansive policy, there is absolutely no reason why debt in the next
four years will grow by less than the 9% annual average. This would take the
US debt to at least $28 trillion by 2021.
But it is likely to get a lot worse. Rising interest rates, higher
unemployment, stress in the debt markets and major problems in the global
financial system are likely to lead to substantially higher debt as well as
massive money printing.
The 35 year interest rate cycle has turned up
Long term US interest rates turned up earlier this year with 10 year
Treasury yield up 63% from 1.4% to 2.28%. The 35 year rate cycle has now turned
and rates are likely to go back to at least the 16% we saw in 1980 but
probably a lot higher as the biggest bond bubble in history bursts. Due to
the massive size of this bubble on a global scale, the increase in rates
could happen very quickly. This will not just affect debt markets and the
ability of governments to pay the interest but also the derivatives market.
The $1.5 quadrillion of global derivatives are extremely sensitive to
interest rate increases and that market will not survive much higher interest
rates.
And if we look around the world, the risks are unprecedented. Japan is
totally bankrupt; China has a major debt problem and the European banking
system is unlikely to survive in its present form. Also, what started with
Brexit is likely to continue in many European countries. Just like in the US,
many Europeans are tired of an elite in Brussels ruling over 500 million
people with little understanding of the resentment that this unaccountable
and unelected elite is causing. The Italian election is next in December and
then we have France and Germany in 2017. The breakup of the EU and the end of
the Euro is just a matter of time and it could happen a lot faster than
anyone expects.
Trump will not reverse chronic trend of deficits and debts
With all these problems around the world, Trump will have major difficulties
reversing the trend of debts, deficits and no real growth of the US economy.
Global trade is already declining and is likely to deteriorate substantially
in the next few years. With both global and US problems of unparalleled
proportions, it is not the best time to become president of the biggest and
most indebted economy in the world. Clearly, Trump is determined to succeed
but running an insolvent economy in a virtually bankrupt world will be a lot
harder than building a property empire. But he has made it clear that he is
hell-bent on expanding the US economy at all costs. The problem is that he
will probably spend more money than anyone can imagine. But sadly, he will be
pushing on a string since borrowing and printing money can never repair an
economy which is fatally broken.
Reasons for holding gold more compelling than ever
As the world enters a period with risk exponentially greater than in 2006,
the reasons for holding physical gold as insurance and wealth protection are
more compelling than ever. The continued debasement of the currencies will
guarantee a higher gold price. During Obama’s eight years, gold went up by
36% only whilst debt doubled and Trump is likely to grow debt exponentially.
In addition, the failure of the paper gold market could happen at any time.
When this happens there will be no physical gold available at any price until
there is equilibrium in the physical market. At what price that will take
place is impossible to forecast but it is certain to be multiples of the current
price.
Egon von Greyerz
Founder and Managing Partner
Matterhorn Asset Management AG
matterhorn.gold
goldswitzerland.com
