What
is a Goldbug? If we look at Wikipedia, they define it as “a
person who is extremely bullish on the commodity gold as an investment and or
a standard for measuring wealth …… goldbug can also be used as a pejorative”.
Investopedia states that “A gold bug is an individual
who is very enthusiastic about gold as an investment and its prospects for
significantly increasing in value.”
Finally the Free Dictionary defines goldbug as “1. A
person, especially an economist or politician, who supports the gold standard
or 2. A person who believes in buying gold bullion as a personal investment
or 3. A gold beetle.”
Since less than 0.5% of world financial assets are in gold, most people
neither hold gold, nor understand the purpose of gold. The people who
understand the real value of gold could only agree with one of the
definitions above – a goldbug is a gold beetle. There could
be no argument about that clear definition.
Many people use goldbug scathingly as a pejorative as they have never
bothered to understand the significance of gold.
IF YOU UNDERSTAND GOLD – YOU ARE NOT A GOLDBUG
So why have I, and a few others, been advocating the ownership of gold for
the last 17 years without being goldbugs?
It is not because I am bullish on the gold price and want to make a quick
buck. Nor is it because I believe in the gold standard (see my
article about FreeGold).
No, gold has a much more profound significance. The simplest definition of
gold is JP Morgan’s: “Money is gold and nothing else.” But
his statement requires further clarification. Of course money is gold. That
is why gold is the only currency that has survived throughout history. All
other currencies have been destroyed by rulers or central bankers by issuing
endless amounts of credit and printed money until the currency has become
worthless. And this is happening now again as all currencies have lost 97-99%
in real terms since 1913 when the Fed was created.
If we are not Goldbugs, what is the purpose of holding gold? In simple
terms, gold is wealth preservation and insurance against a rotten financial
system, inflated by $100s of trillions of credit and printed money as well as
quadrillions of dollars of derivatives. If you understand the bubble that
this has created in all asset and debt markets, you will also understand that
gold is your best protection against the coming implosion of all these
markets.
For the ones who think it is different now, I beg you to study history.
Every single major asset and debt bubble in history has always resulted in a
collapse of the currency and the financial system, where it has occurred.
The big difference this time is that the problem is global. World
debt at $250 trillion is 3x global GDP – an all time record. And if we add
unfunded liabilities and derivatives, total debts and liabilities amount to
over $2 quadrillion which is 25x global GDP. So that is the risk that
potentially could erupt into the biggest financial and economic collapse in
history.
There is clearly no certainty that it will happen but the probability is
very high. Governments only have one remedy which is to print more money. But
even a child would understand that printing more money and issuing more debt
to solve a debt problem clearly doesn’t add up. Sadly the Keynesians like
Noble prize winner Krugman don’t get it. You can’t solve a problem by the
same means that caused it in the first place.
HOLDING GOLD – A SINE QUA NON
Let’s look at some of the reasons why it is critical to hold physical
gold:
Gold protects against:
1. Currency debasement
– The 97-99% fall of all currencies in the last 100 years will continue
until the currencies have reached Zero. So there is only 1% to 3% to go but
remember that this fall is a 100% loss value from today.
2. Bank failures – bail-ins
– With leverage of 10-50x banks will not survive the next credit crunch.
Add to that their derivatives exposure and a systemic failure is guaranteed.
3. Stock market collapse
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– Stocks have been fuelled by money printing and buybacks and are now
overvalued on all criteria. A 90% fall in real terms like in 1929 is likely.
The economic and financial risks in the world are today exponentially greater
than in the late 1920s.
4. Bond market failure
– The 35 year up-cycle in bonds is now a mega-bubble that will implode. It
turned down three years ago and rates are now on their way back to above the
early 1980s level of 16% for the 10 year US treasury. This is a long cycle
and will not happen immediately. As governments print unlimited amounts of
money, default or implement moratoria, bond market investors, including China
and Japan will dump their US bonds just like Russia has done already.
5. Inflation – hyperinflation
– As governments, in a desperate and futile attempt try to save the
system, print endless amounts of money, most major economies will have
inflation leading to hyperinflation. Anyone who has lived in a
hyperinflationary economy, like Argentina, Zimbabwe and Venezuela knows that
their money is totally destroyed. Sadly, few people realise that gold would
have saved them.
6. Deflation
– Contrary to what many people believe, gold has historically performed
very well in deflationary periods. In my opinion we will first have
hyperinflation as governments try to save the world with money printing. When
that fails and asset as well as credit markets implode we will have a severe
deflationary implosion. Banks are unlikely to survive this in their present
form. As banks fail, so will the money in the bank. Gold will then be money
used for payment or barter.
7. Peak gold
– Gold production has already peaked. There have been no major finds since
the 1990s. Even if unexpectedly there will be substantial new discoveries, it
takes at least 15 years from discovery to production. Thus we will see
substantial shortages of gold in coming years.
8. Paper gold
– The gold price is only at the currently ridiculously cheap level due to
a paper gold market which determines the gold price whether it is physical or
paper gold.. The price of gold adjusted for money supply is now at the same
level as in 1970 when gold was $35 and 2000 when gold was $280. Paper gold
outstanding is at least 100x the physical gold backing it. When paper gold holders
get worried and ask for delivery, there will be no gold available and price
will go “no offer” which means there is no gold available at any price. This
is when gold will go to multiples of the current price.
9. CORPORATE DEBT
– Corporate debt has exploded in most industrial nations and is now at danger
level. In the US for example corporate debt to GDP has doubled since the
1960s. Irrational optimism and share buy-backs have fuelled this debt boom.
10. Other risks
– There are a number of other major risks which can erupt at any time.
These include geopolitical risks civil war, social unrest, country risk in
China, Japan, USA, Middle East, Emerging Markets etc. Many of these things
have already started like the US government shutdown, the Brexit fiasco in
the UK, Yellow Vests in France and mass migration on several continents. All
this is just the beginning.
GOLD IS TODAY BOTH CRITICAL INSURANCE & SUPERB INVESTMENT
Gold is clearly not the panacea for all the problems listed above. But
there is no better insurance against the financial and economic risks in the
world today which are greater than any time in history. Especially in periods
of crisis, gold is the most important wealth preservation asset as well as a
store of value and medium of exchange.
My good friend Simon Mikhailovich’s describes the world’s
(mis-)understanding of gold perfectly:
“If one offered investors a fat tail put option that never
decays or expires, costs about -1% pa to carry, has no counter party risk
& no chance of ever becoming worthless, there would be a line out the
door. But when one explains that this option is physical gold… No interest.“
Despite, or maybe because of, most people’s total ignorance of
gold, it will be the most superb asset to hold in the next few years both as
insurance and for capital appreciation purposes. But remember to hold
physical gold and store is outside the financial system in a very safe vault
and jurisdiction.
Egon von Greyerz
Founder and Managing Partner
Matterhorn Asset Management
Zurich, Switzerland
Phone: +41 44 213 62 45
Matterhorn Asset Management’s global client base strategically stores an
important part of their wealth in Switzerland in physical gold and silver
outside the banking system. Matterhorn Asset Management is pleased to deliver
a unique and exceptional service to our highly esteemed wealth preservation
clientele in over 60 countries.
GoldSwitzerland.com
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