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There is really only one government in the world
that understands the virtues of gold – China. Not only is the country
buying all the gold that they can without pushing the price up but they are
also encouraging the Chinese people via the media to buy gold and silver.
Power corrupts
Let us first look at the US and ex Fed Chairman Greenspan
to demonstrate how sound individuals become totally corrupt and dishonest
once they become politicians. (Yes, the chairman of the Fed is political
position which permits no integrity).
In 1966 Greenspan wrote an essay – “Gold
and Economic Freedom”- in which he spells out the importance of
gold. Here is a quote from the essay:
“In the
absence of the gold standard, there is no way to protect savings from
confiscation through inflation. There is no safe store of value.”
Then 21 years later Greenspan started his 19 year
reign as chairman of the Fed. During that period he was instrumental in creating
or exacerbating one financial crisis after the other. First the stockmarket
and Nasdaq bubble, then the housing bubble, the credit bubble, the
derivatives bubble and finally the banking and financial system bubble.
Greenspan fuelled one bubble after the next by printing more money and
lowering interest rates each time there was pressure in the economy.
Every time there was a hearing in front of
congressmen or senators Greenspan spoke his gobbledygook that no one
understood. But they all (except for Ron Paul) licked his boots and
loved him since his money printing and unsound monetary policies created a
false prosperity which all their voters believed was real.
Now, 43 years after his essay praising the virtues
of gold, Greenspan just said in a speech that “Gold is the ultimate
currency”. But during his 19 years as chairman of the
Fed he acted like printed paper was the ultimate currency. This is why you
can never, ever trust a politician. Political power totally corrupts human
beings and whatever integrity, honesty or soundness they had before totally
disappears as soon as they take on the political mantle. Bernanke who was
once an honest academic is continuing in exactly the same tracks and is doing
all he can to make the financial crisis bigger by printing trillions of
dollars.
China understands
gold
China has recently announced that they have
increased their gold reserves by 76% to 1054 tons. But that is just the
beginning. China is likely to be a major buyer of gold for the foreseeable future.
Chinese government officials who normally keep a low profile have recently
become more vociferous about the total mismanagement of the US economy and
the US dollar. China is now openly criticising US monetary policy. The former
vice-chairman of the Standing Committee, Mr Cheng Siwei, that China is
dismayed by the Fed’s credit easing (as reported by Ambrose
Evans-Pritchard in the Telegraph). Mr Cheng said: “If they keep
printing money to buy bonds it will lead to inflation and after a year or two
the dollar will fall hard”. He went on to say: ” We will
diversify incremental reserves into Euros, Yen and other currencies. Gold is
definitively an alternative but when we buy the price goes up. We have to do
it carefully so as not to stimulate markets”.
So China buys other currencies, they use their
reserves to buy real assets, especially in the ground, in Africa, South
America and other continents and they buy gold. The Chinese government
understands what is happening in the world and they have a long term plan to
apply their reserves to areas which have real value and which will benefit
their economy for years to come. Of course, they have the advantage of not
having to worry about short term pressures such as being re-elected.
China is promoting gold and silver on state
television. They are urging their people to buy gold and especially silver
which they consider very cheap currently (we agree). They are also buying
gold with their reserves and they are getting out of the dollar as quickly as
they can.
The message can’t be more clear. China with
its $2 trillion of reserves and with a population of 1.3 billion are major
buyers of gold and silver. The effect of this is that the gold price is
underwritten for some time to come.
Stockmarket in real money
Most world stockmarkets have been on a slippery
slope against real money for the last 10 years. The chart below shows the Dow
Jones against gold since the peak of this ratio in 1999. Since then the Dow
has lost almost 80% against gold. Other world markets have had similar
percentage falls against gold. We project that the Dow/Gold ratio will
fall to 0.5 – 1 which entails another 90 – 95% fall of the Dow
against gold.
Asia versus the USA
China is a major buyer of gold as we have just
outlined. So is India where the tradition to buy gold makes the country the biggest
jewellery buyer in the world by a big margin. In 2008 India bought circa 700
tons of gold or 25% of total supplies.
China and India together have a population of almost
2.5 billion people who buy gold and put their savings in gold and jewellery.
In addition the Chinese government is a major buyer of gold. Against that,
there are 300 million Americans and most of them don’t understand gold
or the value of it. Add to that the US government which hasn’t
got a clue about real money. Instead they believe that all their financial
problems, all their deficits and all their bubbles can be solved by pressing
a button and creating a few more $ trillions of paper that they call money.
So who should we back, the 2.5 billion responsible
and thrifty Chinese and Indians or the irresponsible US government? Not a
very difficult choice!
“Paper money eventually returns to its intrinsic
value – ZERO”
Voltaire 1729
Egon von Greyerz
Mattherhorn Asset Management AG
Also
by Egon von Greyerz
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