The Stealth Market in Gold
Gold has gone up for 12 straight years in a stealth
market. In the last ten years gold has had a compound annual growth of 20.5%. This is
an absolutely outstanding return but investors should not look at gold as an
investment but as money. Gold reflects governments’ deceitful actions
in totally destroying the value of paper money by printing unlimited amounts
of it. With gold up 7 times since the bottom in 1999, is it too late to jump
on the Goldwagon?
The answer to the above question is a categorical
NO. Virtually no major investor group has participated in gold’s
spectacular rise. In spite of a seven fold increase in the gold price, only
circa 1% of world financial assets are invested in gold. Whenever I talk to
major institutional investors, not only do they not own gold, but they
don’t understand gold either. I was speaking at a conference for Family
Offices recently where there were circa 250 family office managers present
representing substantial funds. Not only did no one own gold, but they had no
understanding of gold’s role as an investment class or the fact that
measured in real money, i.e. in gold, their investments were declining
precipitously. It must be unprecedented that an important asset class can go
up for such a long period with so few investors participating. In my view
this is the most bullish sign ever for gold. The mess the world is in will
lead to unprecedented money printing in the US, EU, the UK and many more
regions. And gold will continue to reflect the destruction of paper money. In
addition, investors will increasingly mistrust paper gold and invest in
physical gold only. Due to the very limited availability of physical gold,
the increase in demand can only be satisfied at substantially higher prices.
Gold price projection
There are many ways to project how high the gold
price can reach. Adjusting gold for real
(not the published, manipulated) inflation the price would be circa $7,500.
At the recent GATA conference, Adrian Douglas put forward a target of $53,000
an oz based on M3. He said that that out of every
33 oz of gold traded 32 oz
are paper gold, which would lead to a price projection of $53,000 also, if
all trading were backed by physical gold.
The following chart shows where gold would be if the US gold reserves were at
the same percentage (52%) of us debt as in 1913 when the Fed was founded.
Gold would then be $27,000 today and going up to $33,000 in 2015 with a
projected increase in debt of $ 6.5 trillion (6.5T).
All of the above projections are subjective and
therefore somewhat arbitrary. However, whatever method is used, gold is
undervalued on any measure. We are not just talking about a substantial
undervaluation but more importantly that paper money is likely to be totally
destroyed in the next few years with the gold price reflecting this
obliteration. It is absolutely impossible to forecast how much money will be
printed but the flood of paper could lead to many zeroes being added to the
gold price just like in any hyperinflationary economy. For example, in 1923
in the Weimar Republic gold reached 100 trillion marks. Gold (and silver) is
a critical asset to hold in order to preserve wealth against such a
hyperinflationary destruction of paper money.
Physical versus Paper Gold
Circa 96% of all gold trading is paper. For anyone
who demands delivery, there will be no gold to deliver. At the GATA
conference in London Jim Rickards stated that
currency wars will lead to the US government taking back (confiscating)
whatever gold it has lent to bullion banks as well as gold it holds for other
nations (most of Germany’s gold is said to be held in New York). He
also mentioned a potential 90% windfall tax on gold. In a subsequent King World
interview (click to listen), Eric King
discussed with Rickards that the US government has
keys to Via Mat’s US vaults.
It is of course
not possible to predict what desperate governments will do, nor is it
possible to protect yourself against every eventuality. What is very clear is
that simple action can and will give investors a better chance of preserving
buy physical allocated gold/silver bars or coins
the gold outside the country where you are resident.
the gold in a country with a stable political system (like Switzerland)
the gold outside the banking system in vaults with no US connection.
sure you have personal access to your gold and/or silver
Gold Making New Highs
Gold has recently made new highs against most
currencies. In addition, after longer consolidations, the Dow is breaking
down against gold (down 85% in 12 years), and gold is breaking up against
both Oil and the Swiss Francs.
outs are potentially very significant and will most probably lead to a strong
up-move in the gold price in the next few months.
Kicking the Can
The world is in an absolute mess, economically,
financially, politically and morally. And let me be very clear; this has been
evident for at least 10-15 years. The only thing that has not been clear is
how long governments and central banks could deceive the people by kicking
the can down the road in an endless creation of worthless pieces of paper
that they call money. The lone voices of some market analysts, forecasting
that the manipulation and mismanagement of the people’s wealth would
end in disaster, have for long been silenced by the establishment in order to
betray the gullible masses.
Intellectually dishonest and corrupt politicians and
bankers have devised a system which has created perceived, debt-based wealth
for the people whilst buying votes and generating massive wealth for the
But this Ponzi scheme is now coming to an end. When
printed money can only be repaid with more printed money and when there are
no buyers for the worthless debt instruments created by governments except
for the government itself, then we have reached the end of the road with a
“can too big to kick”.
Two years’ ago in the summer of 2009, I wrote
an article called “The Dark Years Are Here” which outlined the
likely consequences of the excesses of the last century. Let us just look
back to understand the historical perspective.
Throughout history there have been regular periods
of credit creation and money printing resulting in a collapsing currency.
This happened for example as the Roman Empire was disintegrating starting
circa mid 200 AD. So destruction of money is not a new phenomenon as Voltaire
said already back in 1729 “Paper money eventually returns to its intrinsic
value – ZERO”. But so far in history these events have normally
been limited to one country or region. Never before in history has there been
a financial system which has made it possible for the whole world to
simultaneously create unlimited amounts of debt.
The graph below shows the effect of this money
creation in the US but the same applies for many parts of the world. Between
early 19th century and early 20th century there was virtually no inflation. A
house cost the same in 1910 as in 1810. But then in 1913 the fraud in the
financial system started. Private bankers in the US created a private central
bank owned by the bankers and for the benefit of the bankers. This was when
the Federal Reserve Bank was created with ultimate power to print money and
thus destroy the value of paper money. This was the most perfect way for
private bankers to control financial markets with the total blessing of the
government. Thus started a worldwide credit manufacturing scheme that
eventually will lead to a collapse of the financial system. In order to
inflate this bubble even faster, Nixon abolished gold backing of the dollar
exactly 40 years ago on August 15 1971. Nixon should not have been impeached
for Watergate but instead for destroying the world financial system and world
economy for many generations. Since
the closing of the gold window in 1971, total US Debt (private and public)
has gone from $10 trillion to almost $60 TRILLION today.
US DEBT CEILING
What has taken place in Washington in the last few
weeks is absolutely disgraceful. Irresponsible politicians have been spending
months bickering about the debt ceiling and disagreeing until the very end
how to solve a crisis that will bring the US down. It is appalling that they,
out of self-interest, take this issue to the wire when the country is in the
process of going under. The whole procedure is only about political posturing
and buying votes rather than caring about the good of the country. The
politicians are rearranging the deckchairs on the Titanic whilst the country
is sinking into the abyss.
The debt ceiling is totally irrelevant. US Federal
debt has increased every year since 1961. Thus for 50 years the debt has gone
up yearly and during that time the debt ceiling has been raised 79 times! The
real issue is that the US is bankrupt and raising the debt ceiling only
exacerbates the gravity of the country’s problems. What they should have
agreed instead is a substantial reduction of the debt ceiling. But that
doesn’t buy any votes.
Another debt rise agreed of $2.4 trillion (in two
stages) will probably last a year at best. Proposed spending cuts of $2.1
trillion will almost certainly never happen but if they do they will be after
2013 and probably mainly take place at the end of a 10 year period starting
from now. In the meantime the debt is likely to increase by tens of trillions
Sadly it doesn’t matter what
the reckless politicians do. This situation is unsalvageable.
The exponential growth in debt in the last 100 years
has created a false prosperity by mortgaging the future for many generations
for the benefit of current consumption. Wealth based on credit does not only
steal from future generations but creates the wrong values based on debt,
greed and materialism. Values such as honesty, integrity, courteousness,
righteousness, respect and kindness have totally disappeared in large groups
of the population. And the family is no longer the kernel of society. Recent
social unrest and riots in the UK is an inevitable consequence of this social
decadence. With youth unemployment at 25% in many countries and as high as
50% in the major cities, this problem will become unmanageable in the next
few years. Failing economies and empty stomachs will exacerbate the situation
Also, since government (and the
bankers) control the system by creating money out of thin air, major
resources in the economy are transferred from the productive and innovative
private sector to the totally inefficient, unproductive and bureaucratic
public sector. The public sector only consumes wealth and does not produce
anything. By taking invaluable resources from the private sector, consuming
most of what it takes and then giving the rest to the most unproductive part
of society (the weak, sick, unemployed, work shy etc.), government
perpetuates the worst part of the economy and destroys the ability of the
nation to expand.
The point I am making is that the last 100 years are
exceptional in history because this period is based on an unprecedented
worldwide debt creation and money printing but not on the natural laws of
supply and demand or saving and investment. Exceptional things never last
since the laws of nature can only be broken for a limited period. And we have
now come to the end of the world’s largest,
government sponsored, Ponzi scheme ever. The consequences will be felt in all
aspects of society and most likely last for a very long time, at least for
several decades and maybe longer.
Add to the US debacle, the problems in Europe which
are almost of the same severity. The European money markets are now starting
to seize up as pressure mounts on the Italian, Spanish and French banking
systems. It will be impossible for the milk cow of Europe to continue to
support all the weak European countries. Initially the EU will accelerate the
money printing because of political pride. But like all grandiose political
unions, the EU will eventually break up.
Courtesy BOB – Daily
The world is now staring into the abyss and we are
most likely entering the Dark Years which I wrote about two years ago. The consequences will almost certainly
be unlimited money printing and a hyperinflationary depression.
Egon von Greyerz
Mattherhorn Asset Management AG
Management has set up a separate Gold Division called GoldSwitzerland
(www.goldswitzerland.com) in order for
investors to purchase physical gold at very competitive prices and store it
in their own name in Zurich, Switzerland outside the banking system and with
personal access to their own gold bars.