Last week, we were again reminded of the global instability and
disequilibrium. In the UK, the conservative Prime Minister Theresa May
decided 9 weeks ago to call an election. This was done due to the
conservatives being 20 percentage points ahead of their Labour rivals in the
opinion polls which would have led to a strong backing for the Brexit
negotiations as well as another five years in power. But things went
disastrously wrong. An extremely badly run campaign by Mrs May and an
opportunistically clever campaign led by the Labour leader Corbyn have led to
a hung parliament. Like all socialists, Corbyn promised the earth and no one
cared about that this would bankrupt the country. The conservatives are now
dependent on a small Northern Ireland party as well the Scottish
conservatives. The effect of the election is total political chaos that will
weaken a UK which is already in a mess with a high debts and untenable budget
and trade deficits. But the EU bureaucrats led by Mr Junker are of course
delighted. They know now that Mrs May who was for a hard Brexit will have to
go at some point and the EU will have the upper hand to reach a soft Brexit
or no Brexit at all.
The Globalists and Deus ex Machina
So again, the globalists have sadly won, just like they did in the
Netherlands and France recently. The unelected and unaccountable Brussels
bureaucrats are absolutely elated. They can now continue to run Europe
irresponsibly with open borders for anyone who wants to enter, with a
currency which only benefits the Germans, and with a financial system which
is rotten in its core and totally bankrupt. But it is not just the financial
system which is bankrupt because so are most major EU nations from Greece,
Italy, Spain, Portugal, France, UK etc. The illustration to my article “Deus ex
Machina” written in December 2011 tells the story:
Events might have taken a bit longer to unravel but the trend is
irreversible. Country after country will crash under the burden of debt and
this is not just European countries but also China, Japan, Emerging Markets
and the US of course.
Who will be global liabilities of $2.5 quadrillion
We are now at a time in history when extraordinary events will be the
norm. The world is currently as far from a harmonious equilibrium as it has
ever been in history. The masses are ultimately responsible for $2.5
quadrillion of debts derivatives and unfunded liabilities. None of this will
of course ever be repaid and that astronomical sum will grow exponentially as
governments accelerate their money creation in their futile attempt to save
the world. On the other side of the scale, is a very small elite, being a
fraction of 1%, who owns most of the assets in the world. But they are of
course not responsible for the debt which is being created so that the
wealthy can continue to grow their capital at the cost of ordinary people who
in real terms are worse off every year.
Politics has become a farce, better than TV shows
But the disequilibrium in the world is not just financial, it is also
moral, ethical and political. In the final stages of an era, all values
disappear and the ugliest side of mankind appears. We see this currently all
around us. US politics has become a total farce better than any television
drama. It is hard to believe what is happening is actually real. The problem
is that what we are seeing is a stark reality that has serious consequences
for the US as well as for the rest of the world. It will not only lead to
financial disaster but also serious political and geopolitical disasters.
Only afterwards will the historians know if the cyclical peak in the world
economy that we are experiencing now is just the end of a 100-year era from
the creation of the Fed in 1913 or a 700 year period from the beginning of
the Renaissance or from the Roman Empire 2000 years ago.
Whatever cycle we are in, it will lead to a very extended period of misery
and economic hardship for the world. Since the $2.5 quadrillion liabilities
can never be repaid or run down in an orderly fashion, we will in the next few
years experience a debt implosion which will be totally devastating. Not only
will debt implode but also all the assets that have been fuelled by the debt
bubble. Hopefully it will not take 500 years like the Dark Ages after the
fall of the Roman Empire. But the world is likely to see an extended decline
that will affect all of us.
All the gold in the world can’t cover US debt
It
is primarily the disastrous US monetary policy since 1913 which has created
the biggest debt mountain in history. It is not easy to illustrate what $2.5
quadrillion actually means but we can start with the US Federal debt of $20
trillion. The illustration shows the size of the US debt in $100 bills in
relation to the statue of liberty. The statue is standing on a pedestal of
gold worth $20 trillion. The cube has 30 meter sides and weighs 500,000 tonnes.
There is only one problem – 500,000 tonnes of gold do not exist. All the gold
ever produced in the world is estimated at 170,000 tonnes.
So if the US debt would be backed by gold, it would require 3x more gold
than what has ever been produced. Remember that it was de Gaulle demanding
payment in gold of the US debt to France that made Nixon close the gold
window. If we then look at the total gold required to cover all global
liabilities of $2.5 quadrillion, it would be 125x greater at $62 million tonnes.
That is 365 times more gold than exists. If we were back to the gold standard
rather than fiat money with zero intrinsic value, gold would need to be worth
365x $1,270 or $463,000. That price of gold is based on all the
gold in the world including jewellery but if we just take sovereign gold of
officially 30,000 tonnes backing global liabilities, the gold price would
need to be 5.7 times higher or $2.6 million.
You could of course argue that a 40% gold backing would be sufficient.
Against that, central banks are unlikely to have anywhere near the official
30,000 tonnes in physical gold. All they have are IOUs from bullion banks
which have leased the gold from central banks and sold it to China. Bearing
that in mind the $2.6 million price is still valid even at a 40% gold backing
of the debt and liabilities.
Gold $150,000 or $2.6 million
I do realise that liabilities are not the same as debt and that global
debt is ONLY $250 trillion. But I expect that in the next few years central
banks will need to print at least a couple of quadrillion dollars to cover
all outstanding liabilities and derivatives.
No, I am not dreaming. I am not expecting a gold price in today’s money of
$2.6 million anytime soon. I am just proving that as the world went from real
money to phoney money, the value of real money or gold does not in any way
reflect the incessant creation of paper money. In the superb “In
Gold we Trust” report, Ronni Stoeferle and Mark Valek show how a gold
price between $50,000 and $150,000 can be justified.
Whatever the real, unmanipulated price of gold would be, it is likely to
be multiples of the current price, whether that is $10,000, $150,000 or $2.6
million.
Gold – investment of the century
What few people realise is that gold has been the best investment in this
century in all major economies. Gold in pounds for example is up 5.7X since
2000 whilst the FTSE 100 is only up 8%. This is an outstanding return and
also the ultimate wealth preservation insurance. But it must obviously be
physical gold, stored outside the banking system. We went seriously into gold
in 2002 for our UK investors at £200 per ounce against the current £1,000.
Since we were both concerned about the pound as well as the UK and global
economy, we recommended up to 50% in gold at the time. But even at a much
lower percentage, the investors have done remarkably well. The unique
advantage UK investors have is that they can buy Sovereign gold coins which
are exempt from capital gains tax.
There is clearly no science to determine what percentage of investment
assets should be in gold. My recommendation is that investors should buy
enough gold to fall back on if there are major problems in the financial
system.
In my view 10% into gold is an absolute minimum but preferably it should
be much more. Since our investors are strong believers in wealth
preservation, the majority hold at least 25%.
For anyone who lives in a hyperinflationary economy like Venezuela or
Argentina, gold is an absolute life saver and thus a necessity for the ones
who have surplus funds. But you don’t need to be wealthy to own gold. For $40
anyone can buy a one gram gold bar per month for example. Over time that
could become an important sum as gold rises and the crisis comes.
The coming six month period and especially the autumn, is likely contain a
lot of shocks. The investment community is totally oblivious of the risks
they are taking by having most of their money in assets that have reached
stratospheric values whether it is the stock market at a 30 p/e or property
prices at bubble values worldwide or bonds at zero percent. All these asset
markets only have one way to go and that is massively down. Investors must
not believe that they will be saved by central banks again. The world is past
the point of being saved and must now suffer the consequences for the
excesses of the last 100 years. If there was a Deus ex Machina, he needs to
come down soon but sadly I don’t think that will happen.
Egon von Greyerz
Founder and Managing Partner
Matterhorn Asset Management AG
GoldSwitzerland.com
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