“The Die is Cast” for Europe and the EU. This is what Caesar said when he
crossed the Rubicon in 49 BC marching towards Rome, leading to a major change
in Europe’s history. The Italian referendum which took place on December 4
had a similar significance. The Brexit vote in which Britain decided to
divorce from the EU started the breakup of the artificial construction of 500
million people being ruled by an unelected and unaccountable elite in
Brussels. Even worse is an artificial paper currency, the Euro, which is used
by 19 out of the 28 EU countries. All paper currencies are of course
artificial constructions that eventually become worthless but to have a
currency for 19 countries with different cultures, different growth rates and
productivity and vastly different inflation rates is a total disaster.
This is why Italy, Greece, Spain, Portugal and many more EU countries are
totally bankrupt. These countries have been forced to use a currency which
has made them completely uncompetitive and unable to export or function. At
the same time, Germany has benefited from a weak Euro which has made their
export industries very successful.
A dire destiny for Europe
The referendum in Italy last Sunday changes the destiny not only for Italy
but for Europe and also the world. The Brexit vote was the first indication
that governments and the elite in the West are totally out of touch with the
people. Trump’s win in the US presidential election confirmed the same
phenomenon. In Italy, people are fed up with the Renzi government which lost
the referendum on the Italian constitution. In itself, the referendum is not
that significant but it is seen as a protest vote against the Renzi
government. Interestingly, Renzi is the only European leader that officially
backed Hilary Clinton and this is likely to cost him dear. Most of the
European leaders hated Trump but no one was stupid enough to officially back
Clinton.
With Renzi losing the referendum and resigning, it will likely lead to an
election which the actor Beppo Grillo would win. His party is anti-globalism,
anti-establishment and anti- immigration and anti-EU and Euro. In Austria’s
presidential election last Sunday, Norbert Hofer lost by a small margin.
Hofer is on the far Right and also anti-immigration and anti-Muslims. Many
European countries already have Eurosceptic governments like Hungary,
Croatia, Poland and Slovenia. In 2017 there will be elections in France where
Marine le Pen’s National France is well placed. In Holland the Party for
Freedom which is anti EU is also well placed. And in Germany there will also
be elections in 2017. There is strong opposition to Merkel due to the major
immigration problems that Germany is now suffering, all of Merkel’s making.
Italy’s insolvent financial system
Italy crossing the Rubicon is yet another confirmation that the trend has
changed and that the peoples in Europe are now turning against the
establishment and the elite. In addition to the unhappiness in Europe with
politicians who are not in touch with the people, there are major problems in
the financial system. One of Europe’s biggest banks, Deutsche Bank, is very
much looking like Lehman. Both the share price and the derivative position
are giving indication of a bank on its way to bankruptcy. And in Italy, the
whole banking system is insolvent. It is not just Italy’s oldest bank Monte
dei Paschi which is virtually bankrupt but impaired loans for all Italian
banks are at least €360 billion which is around 20% of the Italian banking
system. Monte dei Paschi is desperately trying to raise €5 billion and
UniCredit, Italy’s biggest bank, needs €13 billion.
So Europe is in major trouble both politically and financially. When the
difficulties start unravelling in Europe, the rest of the world should not
feel confident that this is an isolated local problem. The global economy and
financial system is totally interconnected and a problem in a country like
Italy will have repercussions around the world. Take Deutsche Bank’s
derivative position of $50 trillion for example which is around 20 times
German GDP and 70% of global GDP. This is not just too big for Germany, it is
too big for the world. A problem erupting in Deutsche would spread like
wildfire throughout the global financial system. The 5 largest US banks have
a derivatives’ portfolio of $1/4 quadrillion at least and probably double
that. That is 3.5 times global GDP and obviously too big for the global
financial system.
$ 1.5 quadrillion of derivatives will implode
There are only two ways to deal with a problem in a financial system which
has total derivatives of $1.5 quadrillion on top of already insolvent bank
balance sheets.
The cube below shows the amount of global derivatives outstanding. $1.5
quadrillion is an astronomical amount in relation to all the gold ever
produced or to the gold supposedly held by central banks. These derivatives
are just illusory contracts with no underlying real value. The attributed
gross value is assuming that an endless chain of counterparties will all
settle their part of the chain. It is sufficient that just a handful of major
counterparties fail for the whole daisy chain to collapse. This will result
in gross values of 70x global GDP disappearing into a black hole, never to be
seen again. When this happens, no financial institution will survive. I would
say that the likelihood of such an event is greater than 75%. The catalyst
could easily be the European financial system. What happened in Italy last
weekend could easily be seen as the shot in Sarajevo, an event that is the
trigger for a change in history.
A false and corrupt financial system
In a futile attempt to stop the inevitable collapse, central banks will
print unlimited amounts of money. This will lead to a short period of
hyperinflation before the financial system, including the currency system,
implodes. But since we are talking about a false and corrupt system that
manipulates every single market, a collapse of this system will be a godsend
and the only way to replace an irretrievably broken system. There is no
chance for the world to grow soundly before the current financial system has
been wiped off the face of the earth. In my view this must happen and any
attempt to save the system will just make the collapse bigger. The fall of
the financial system will obviously cause misery and major upheaval for most
people on earth but it is guaranteed to happen and is also necessary for the
world to start again with real markets and real growth.
To summarise, the changes that will take place in Europe over the next
year or so, are likely to be one of the catalysts that will trigger the
inevitable fall of the financial system as well as the world economy.
Obviously at some point in the future, there will be a Phoenix coming out of
the ashes of the present system which will hopefully lead to a better world
over time.
Paper money is dying
In the meantime, as paper money dies, protecting your assets is now more
vital than any time in history. All assets within the financial system will
implode. Debt and derivatives will implode under their own weight. All the
bubble assets that this debt has supported will also collapse. This includes
stocks, bonds and property. Anyone who holds anything within the financial
system is likely to lose a major part of their assets. And if anything
remains of value, it will take a very long time before liquidators have
sorted the mess out in order to pay out pennies on the dollar. Unencumbered
assets in the system should eventually be released but this could take many
years and there is a major risk that a bank under pressure has used these
assets as collateral.
To preserve wealth, hold unencumbered real assets
The best way to preserve wealth in coming years is to hold unencumbered
real assets outside the financial system such as property, land and mineral
rights. The ultimate wealth preservation asset is of course gold. Gold is the
only money which has maintained its value throughout history. Since paper
money will either be very scarce, especially since most governments will ban
it, or worthless, gold will become the only real medium of exchange. Gold
will be used as money and for barter. The collapse of paper currencies and
the financial system will make gold extremely desirable and valuable.
The current currency restrictions in India have had a major effect on the
gold price. Prices as high as $3,000 per ounce have been seen but currently
gold in India is $1,600-1,700. This is a premium of 35-45% on the current
spot of $1,177. There are of course concerns that import restrictions will
slow down demand. But according to my sources, the rampant corruption in
India makes it easy to pay the right official to let the gold in. Indians are
now likely to buy more gold rather than less as the Modi government has
virtually destroyed the paper currency system. Obviously, there is no premium
on paper gold in India. The Indians and the Chinese know that paper
gold is worth zero since this market will totally collapse.
China’s insatiable demand for gold
Also in China, premiums for physical gold have shot up and are at a
three-year high. Gold in China is today traded at $24 above spot. The chart
below shows the insatiable demand for gold in China which in recent years
have absorbed a major part of world production.
Swiss refiners report strong demand
Goldmine production is today around 3,000 tons annually. By 2025 it will
be down to 2,000 tons as we currently have reached peak gold. The refiners in
Switzerland who refine most of the gold bars in the world, report strong
demand currently. All the gold that is being produced is mainly bought by
China, India, Russia and a few other buyers. There are no stockpiles of
unsold gold in the world. But there are piles of paper gold that are at least
100 times greater than the physical gold available to settle the paper gold
claims. The paper gold market is corrupt and manipulated by central banks and
bullion banks. For the time being, this group has managed to keep gold $000s
below the real price that physical gold would fetch without the paper gold
manipulation.
As the problems in the financial system start unfolding, which could
happen at any time, the paper gold market will fail and the real gold price
for physical gold will be set by China. Once this happens, gold will climb
quickly towards $10,000 in today’s money and then much higher in inflationary
money.
Short-term, gold in the paper market can always be pushed down another
$100. But with a very limited downside and an upside of many thousand
dollars, at current levels of $1,175 physical gold is an absolute bargain. It
is also the best way to protect your wealth against the coming destruction of
asset prices and paper money.
Egon von Greyerz
Founder and Managing Partner
Matterhorn Asset Management AG
matterhorn.gold
goldswitzerland.com
