Both Western and Eastern central banks are now fully supporting gold.
Precious metals investors can with total confidence buy and hold physical
gold, silver and platinum in the firm knowledge that central banks both in
the West and the East will by their actions guarantee that the price can only
go up. But the support from West and East is very different. Western central
banks have not been friendly to gold for decades as they have significantly
reduced their holdings.
As the chart below shows, central banks’ total gold holdings went from a
peak of 38,000 tonnes in the early 1960s to 30,000 tonnes in 2006. The
sellers were almost exclusively Western banks.
What the chart above also shows is that the central banks were selling
into a falling market and in fact causing the rapid drop in the gold price.
Both the Bank of England and the Swiss National Bank sold most of their gold
at the very lows. So much for Western Central Banks understanding gold!
MONEY PRINTING IS SUPPORTIVE FOR GOLD
So how can Western banks be seen as supportive of gold when they sold for
40 years? For two reasons. Firstly they ceased selling physical gold in the
late 1990s and early 2000s and are thus no longer pushing the price of gold
down overtly. But they are of course actively selling gold in the paper
market.
Secondly and more importantly, they have through their
irresponsible actions of money printing and credit expansion created the
perfect backdrop for an accelerating currency debasement in the next 5-7
years which will continue to make gold more valuable in fiat money.
THE HIGHER THE DEBT THE HIGHER GOES GOLD
Debt has grown exponentially since Nixon’s fatal decision to end the gold
backing of the dollar and the currency system in 1971. The chart below shows
how debt is now reaching intolerable levels. Just in this century, debt has
trebled from $80 trillion to $250 trillion today. Since 2006 when the
financial crisis started, debt has doubled.
With manipulated interest rates from negative to just a few percentage
points in most countries, the interest burden is already more than most
nations can afford. The 35 year interest cycle turned up in 2015 and we are
now likely to reach at least the 15-16% as in the late 1970s and early 1980s.
GALLOPING DEBT CANNOT BE FINANCED
Let’s assume that debt will “only” double between today and 2030. Probably
much too conservative with the problems that the world will encounter in the
next decade. Nevertheless, a doubling would mean global debt of $500
trillion by the late 2020s. Half a quadrillion debt is a figure that
virtually nobody can fathom today. But let us assume that interest
rates go to 15% “only” by that time. That would mean a global interest bill
of $75 trillion! If we relate that to current global GDP of $80 trillion, it
means that the future interest cost would almost be equal to today’s global
production of goods and services.
It is likely that global GDP will have increased by then but an implosion
of the world economy could easily reduce GDP by 30-50%. The biggest reason
for GDP to increase in nominal terms would be hyperinflation. But
hyperinflation normally only lasts a few years and thereafter an implosion of
the economy follows. We can speculate about these figures, but nobody will be
able to forecast the exact course of events. What is very clear though is
that the world will not be in a position to finance the enormous debts that
it will face in the next ten years.
The consequences will be unlimited money printing leading to the
final destruction of paper money since the creation of the Fed in 1913.
Remember that all major currencies are already down 97-99% against gold in
the last 100 years. The remaining fall of 1-3% will take place within the
next 10 years and probably within the next 5-7 years. But what is important
to understand is that 1-3% measured from 1913 is 100% from today which means
that currencies will go to ZERO.
A TOTAL CATASTROPHE OF THE CURRENCY SYSTEM
As von Mises said in 1949:
“There is no means of avoiding the final collapse of a boom
brought about by credit expansion. The alternative is only whether the crisis
should come sooner as the result of voluntary abandonment of further credit
expansion, or later as a final and total catastrophe of the currency system
involved.”
So there we have it, “a final and total catastrophe of the currency
system”. This is what we the world will experience in coming years. Nobody
must believe that it is different today and that central banks won’t let it
happen. On the contrary, it is central banks that have created this situation
and will guarantee that it will happen. This is nothing new in history, all
“paper money eventually returns to its intrinsic value of ZERO” as
Voltaire said in 1729.
For example in 180 to 280 AD, the silver Denarius went from almost 100%
silver content to 0%. This is how the Romans printed money. So it is a major
mistake to believe that it will not happen this time after the biggest global
credit expansion in history.
The consequence will be that all currencies will become virtually
worthless just like in Venezuela today. And gold will shine like it always
has by maintaining purchasing power as the currencies become totally debased.
Because of the severity of the coming crisis, gold and the other precious
metals are likely do a lot better than just maintaining purchasing power.
Venezuela, an oil rich and once prosperous country, has collapsed
economically, politically and morally under the socialist regime. Around 80%
of the people don’t get enough food and both crime and disease are rampant.
So the above explains how Western Central Banks will underwrite the gold
price also in coming years. And the East, which has understood the
consequences of foolish Western policies for quite some time, continue to buy
quantities which almost equal the annual mine production of gold. As the
Chart shows below, China has bought 17,000 tonnes of gold since 2008. China’s
purchases have accelerated since 2013. In the six years between 2013 and 2018
China bought 13,000 tonnes which is virtually total global mine production
excluding China’s own.
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WESTERN BANKS REDUCING GOLD HOLDINGS
Western central banks are clearly still reducing their physical gold
holdings. We see regular high exports coming out of the UK. There are no gold
mines of any significance in the UK. So the exports are clearly central bank
gold held in London which is either leased to the market or sold covertly.
This gold is bought by primarily China and India who ship the 400 oz bars to
Switzerland to be broken down to 1 kg bars for onward export to the East. The
chart below show that the UK exported 88 tonnes to Switzerland in October and
the US 32 tonnes.
In 2017 Switzerland bought more gold from the UK than any other country
and this must be mostly central bank gold.
Thus the pattern is clear, gold continues to flow from West to East in big
quantities. Countries like China, India, Russia, Thailand and Turkey are
unlikely to stop buying gold. All these nations understand the importance of
gold and will continue to accumulate most of the gold production in the
world.
NEXT PHASE – GOLD BUYING IN WEST AND EAST
As the West accelerates its currency debasement by the massive money
printing which will take place in the next 3 to 7 years, gold buying also in
the West will grow substantially. So we will have gold demand coming both
from the East and the West. Add to that the panic which will follow when
paper gold holders ask for delivery from the banks and futures exchanges. We
know that there is much less than 1% physical gold available to cover all the
paper gold. The demand from East and West combined with panic in the
paper gold market, will lead to gold only being available at prices which
will be multiples of the current price. Whether that price in today’s money
will be $10,000, $50,000 or much more is not worth speculating about. But
what is clear is that gold at $1,220 is an absolute bargain.
BANKS CONTINUING TO BLOCK CLIENT ASSETS
In my article last
week, I discuss how we see Western banks blocking client assets. This is
now happening more frequently and this week another person got in touch with
us with a similar problem. He has for over four weeks tried to transfer a six
figure sum out of a major European bank in order to buy gold. But the bank
has until now refused to make the transfer, giving a number of different
excuses. The frequency of these cases is clearly accelerating and this is a
very strong warning signal that banks will make it increasingly more
difficult for clients to take out money or other assets like gold. Please
read my article from last week and take the necessary actions to protect your
assets before it is too late. I want to stress that every case I mention are
cases where we have had direct personal contact with the person who has
suffered the injustice.
I sometimes see the odd comment that we are only saying this to attract
clients. Let me categorically state that this is absolute nonsense. We set up
the system of buying and storing precious metals outside the financial system
17 years ago, in early 2002. At that time we devised the safest system
possible for the purpose of protecting our own assets and the assets of our
partners. So the system was created for private use. We only opened it to the
public in 2006 because of demand from many contacts around the world who
wanted to preserve their wealth. Thus we had no intention at the beginning to
make it a commercial venture open to outside investors.
But just like Jim Sinclair, we feel passionate about helping other people
to preserve wealth before it is too late. My good friend Jim has been
preaching this message for many years just like myself. Jim calls it GOTS –
Get Out of The System. GOTS goes a lot further than just gold and you can
find out about it on Jim’s website.
Most people are not protected and very few own gold. But there are of
course families who have been through wars, confiscation of all assets, bank
failures and hyperinflation and therefore understand that gold is life
insurance. We have many clients whose family has owned gold since well before
1971 when gold was still $35.
There is very little time now to take the necessary protection. As bubble
assets start imploding so will debt markets and the system will come under
more pressure than it can take.
So please, please, protect yourself and get out of the system
while it is still possible!
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 55 countries.
GoldSwitzerland.com
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