by Egon von Greyerz
At last we are here. It has been a long wait for gold and silver holders.
For the wealth preservationists who have held gold/silver since the beginning
of the 2000s, it has just been tedious since the highs in 2011. What has
happened in the last four years in the world economy has confirmed the
importance of capital preservation. But for precious metals investors who
came in nearer the top, it has clearly been a nerve racking time.
Whenever you invested in gold or silver won’t matter in the next few
years. Because we are likely to very soon start the rise of the precious
metals that in all likelihood will lead to new highs by 2016 or maybe even
before.
Governments are destroying the value of money
Since 2008 central banks, governments and commercial lenders have been
competing in throwing cheap or free money at the world of an unprecedented
magnitude. They have increased world debt in the last 7 years by almost 50%
to nearer $ 220 trillion. So that is a fresh $ 70 trillion that has been
created from nothing. No goods were produced, no services were provided
against these $ 70 trillion. Money is supposed to be a medium of exchange and
a store of value. It does act as a medium of exchange today but since
governments are determined to mismanage the economy and to issue fresh money
whenever they run out, it is the most useless medium of exchange imaginable.
Just in the last 100 years since the creation of the Fed, all currencies
in the world have lost 97-99% of their real purchasing power. Any cash saved
for the last 100 years is today virtually worthless.
That automatically deals with the point of money NOT being a store of value.
As long as the world has irresponsible governments, and that is the rule
rather than the exception, then money will never be a store of value. So
paper money, although convenient, is useless as a medium of exchange for
normal people. For governments it is a convenient short term method for
buying votes. For savers it has been a disastrous store of value but for the
wealthy and the risk takers it has been a marvellous way of multiplying
wealth using leverage and debt.
$ 500 million for an apartment and a painting
But back to today. In my view the 100 year experiment of central banking
and fractional banking system has now come to an end. The financial system
almost went under in 2008. But by issuing $25 trillion in loans and
guarantees, central banks staved off a disaster temporarily. That money gave
the banks a short term lifeline but did nothing to solve the problem. For a
privileged few people all this printed money has created a massive increase
in wealth with bubbles in stocks, bonds and property. Apartments in London,
New York and Monaco can be bought for a bargain price of around $ 200 million
and paintings by Gaugin, Cezanne or Picasso for $200-300 million seem to be a
bargain that can be bought with just a nod. So you can get an apartment in
London with a painting for a steal of just $ 1/2 a billion. When I started my
working life you could buy a major corporation for that kind of money.
An unreal world
So we live in an unreal world with unreal prices based on unreal (fake)
money. And this is why it will all come to a very abrupt end. That time could
start now at any time. Fundamentally it must happen. Every single major
government is running deficits and increasing debts exponentially. The US
hasn’t had a budget surplus for over 50 years and has no intention of
repaying the debt. Similar with many nations. I cannot for the life of me
understand how any investor can buy government bonds at zero percent yield
that will not and cannot ever be repaid with real money. The only way to
repay the debt is to print more money but that will make the debt larger and
not smaller and also make the money worthless.
Will Deus ex Machina save the world?
The world has never before in history been in a position when all
economies are bankrupt simultaneously. The debt and deficit trap exists in
every major nation, Japan, Europe, USA, China and all emerging markets. And
that is why the coming collapse will be “The Great Financial Disaster”. There
will be no government and no power that can save the world. Well the only one
would be Deus ex Machina but I doubt that will happen.
Stocks could fall 25% in the next few weeks
Thus fundamentally the collapse must happen. It is only a question of
when. Fundamentals don’t help us with timing but technicals and cycles can
do. There is now a confluence of these indicators that point to an imminent
fall of stock markets of probably 20-25% worldwide. And that is just the
beginning. Before the biggest debt and asset bubble in history has imploded totally,
we could see stocks down 75-95% and many bonds becoming worthless. But that
will take a few years, maybe 5-6 and maybe longer.
What the trigger will be is of course impossible to say. With a fragile
system in disequilibrium, very little is needed. It is that last snowflake
that creates the avalanche. Will it be a bank going under, bad economic news
or a catastrophic geopolitical event? All are possible.
Precious metals – the ultimate wealth preservation
With unprecedented risk in the world, wealth preservation will be critical
to avoid a total destruction of assets. The likely scenario in the next few
years is initially massive money printing worldwide in a futile attempt by
governments to save the world. But that will fail this time. We have reached
a point when it is not possible to push on the string any further. The coming
colossal money printing will lead to hyperinflation first. But as soon as the
world will discover that, what caused the problem cannot also be applied as
the remedy, there will be a deflationary implosion of assets and debts.
Physical gold and some silver stored outside the banking system will be
one of the few ways to preserve wealth. Since the peak of silver in April
2011, we have seen a 72% decline. Gold has “only” declined by 44% since the
peak in September 2011. In the precious metals mining stocks, there has been
a real massacre. The HUI or Gold Bugs’ Index declined a massive 84% from the
2011 high to the recent low.
Buying precious metals will not just preserve wealth in the next few years
but is likely to yield a very high real return. My target for gold, when we
invested in 2002, was already then $ 10,000 in today’s money. But since I
believe we will have hyperinflation, the actual price could be considerably
higher. That would give silver a potential target in today’s money of $ 500.
Silver is of course much more volatile therefore caution is required. Many
gold and silver miners could go up by much more than ten times. But remember
that stocks are not wealth preservation like physical gold or silver and
therefore much more risky in the ensuing economic environment.
The coming years will not be easy. I wrote an article a few years ago
called “The Dark Years Are Here” and I now really think they are imminent.
These will be difficult times for most of us. At least the privileged few who
have some savings have a chance to preserve these by owning physical gold and
silver.
Egon von Greyerz
Matterhorn Asset Management AG
GoldSwitzerland.com
