In
a world based on fake paper and fake electronic money as well as fake asset
values, the real significance of gold has got lost. With endless credit
expansion and money printing, all asset prices have exploded and investors
have made fake profits that seem real. But the imminent secular downturn of
debt and asset markets as well as the world economy will reveal how unreal
these profits were as 90% or more of all the paper wealth in the world will
go up in smoke. So investors should now prepare for the biggest wealth
destruction in history and also the biggest wealth transfer.
GOLD IS NOT AN INVESTMENT
Gold is not an investment, it is the only money that has ever survived
throughout history. So anyone who just buys gold to make speculative profits
does not understand the significance of gold. For 5000 years gold has been a
medium of exchange and a store of value. These attributes are unlikely to
change in the foreseeable future as it is a tradition based on sound values
and principles which has lasted for millennia.
Having invested important amounts into gold for clients and ourselves at
the beginning of 2002, at $300 per ounce, not once since then have we had any
concern that this bull market is over. In the late 1990s, when gold was
totally forgotten as well as unloved and undervalued, it was clear to me that
buying gold would be extremely low risk.
GOVERNMENTS GUARANTEE RISE OF GOLD
As a matter of fact, gold is always low risk to hold, whenever you buy it.
Because governments and central banks give a permanent guarantee to
underwrite the gold price. They do this by continuously issuing credit and
printing money which guarantees that over time the gold price will always go
up, measured in fiat or paper money. As a result, governments also guarantee
that paper money will always be debased until it reaches zero, as it has
throughout history.
PAPER MONEY EVENTUALLY REACHES ITS INTRINSIC VALUE – ZERO
Voltaire 1729
Therefore, anyone who buys gold will know that he can’t lose as
long as he has patience and holds it for the right reasons. For the
people who buy gold for speculation, many will buy high and sell low. Very
few, except for the wealth preservationists, looked at gold in 2000 or 2002.
But as gold doubled to $600 in 2006 and then doubled again to $1,200 in
2009-10, more and more people bought the yellow metal. The best time to buy
anything is when nobody is interested and the media don’t talk about it. But
the average investor will wait until something has gone up substantially and
becomes headline news.
WITHOUT A GOLD STANDARD DEBT AND GOLD WILL SURGE
But whether you bought gold at $300 or $1,900, the good news is that it
doesn’t matter. Because governments around the world will continue to
guarantee that your gold will rise dramatically in value in relation to paper
money.
There are periods when owning gold just represents a safe asset that holds
its value but doesn’t appreciate in relation to paper money. These are the
very rare periods of sound money when governments don’t spend money they
haven’t got. But no one should be concerned that this is the period we are in
now. Since Nixon took away the gold backing of the dollar in 1971, that was
the Eureka moment for all the central bankers. They now had a free for all
for all to crank up the printing presses around the world and print unlimited
amounts of money. From that day on global debt grew exponentially and gold
went from $35 to $850 within 9 years.
Since 2006 when we saw the beginning of the Great Financial Crisis, global
debt has doubled from $125 trillion to $250 trillion. If we include
derivatives and unfunded liabilities, total global debt and liabilities are
$2 – 2.5 quadrillion. The current gold price in no way reflects this massive
expansion of credit. Nor does it reflect risk which has grown exponentially
in the last 12 years.
GOLD WILL GO “NO OFFER”
As a wealth preservationist and long term holder of gold we are not
concerned about short term fluctuations or even extended periods of
corrections which we have seen since 2012. But it is only natural and human
that even the people who hold gold for the right reasons sometimes can be a
bit impatient.
It is clearly frustrating to see the gold price held down by a paper
market which is 100s of times bigger than the physical gold available to
cover the outstanding paper commitments. But chickens will always come home
to roost. And when they do, all hell will break loose in the gold
market. Gold will go “No Offer” which means there is no physical gold
available at any price. The longer it takes for this to happen, the
bigger will be the move. The inevitable will always happen. That is the law
of nature and the law of supply and demand. In a market with a strong and
persistent demand for the physical or real product and very limited supply
except for fake paper gold, it is guaranteed that the market will break at
some point.
GOLD READY FOR NEXT MOVE UP
As wealth preservation investors we are not really concerned that the
market takes its time to reveal the real truth. We know it will come. So we
can afford to wait patiently. But it now looks like our patience will soon be
rewarded. The gold market correction bottomed between 2013 and 2015 depending
on which currency you measure it in. Since then it has spent a long time
gathering the energy for the next leg up in this long term bull market.
Technically it now looks like that the waiting is finally over and the
explosive phase of this market is about to start. If this analysis is
correct, we will soon see a quick move to $1,350 and then straight on to
above $1,650. How long it will take to get to the all time high of $1,920 is
hard to say but it is very clear that we will reach that level in the not too
distant future. Thereafter, gold will go to $3,000, $5000 etc on its way to
levels that no one can imagine today.
With the gold/silver ratio again getting above 85 in the last week, we
know that this area is likely to be rejected. As I have said previously, the
metals will only start a sustained move if silver is the leading metal and
that is now likely with another rejection of the 85 level in the ratio. Once
the metals move up in earnest, silver is likely to move up twice as fast as
gold as the ratio collapses.
On an official inflation adjusted (CPI) basis, the 1980 high in gold would
today be $2,950. Based on the Shadow Statistics real inflation figures the
1980 gold high would today be $17,200 – see chart above. Even more
significant in this chart is that inflation adjusted gold is now at a
historic low and thus an absolute bargain.
MOST INVESTORS WILL MISS NEXT GOLD RALLY
So the scene is now set for the next explosive rally in gold and silver as
well as platinum and palladium. Most investors will be left behind as they
fail to catch the early fast gains. They will wait for pullbacks but miss
these lower entry points too. Thus many people will not catch the Gold Wagon
until much higher prices.
IMMINENT MARKET TURNS
The next few weeks could be significant in markets. The result of the
mid-term US election has created a stalemate situation which markets don’t
like. This also coincides with potential cycle and technical turning points.
My view is that events don’t actually cause market turns but only act as
catalysts for things that would have happened in any case. Before the year we
could see not only a rally in the precious metals but also a crash in the
stock market as well as a dollar turn to the downside. It is of course
possible that this turn, which seems imminent, will take longer to develop.
That would not change the bigger picture but only the timing.
PROTECT YOURSELF WHILE THERE IS STILL TIME
For the long term wealth preservationist, it really doesn’t matter if a
major turn starts next week or sometime later. Global risk is greater than
ever in history and the times of easy gains in markets are gone. Now is the
time for protection of wealth and being out of stock and bond markets as well
as paper money. Investors should instead hold real assets and keep them
outside the financial system.
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Yes, precious metal mining stocks are likely to explode. But they are held
within the financial system and are therefore subject to both counterparty
risk as well as the risks of any paper asset. Thus holding these stocks is a
lot riskier than having real tangible assets like gold and silver outside the
financial system.
Everywhere we now look, we see risk escalating dramatically. And risk is
not just, junk bonds, equities and real estate. No, risk is all debt and
especially government debt, student debt, auto debt, mortgage debt and other
consumer debt. Risk is also Brexit, the EU which will not survive, trade
wars, unfunded and funded pension liabilities etc. When asset markets
collapse, even well funded pension funds (which is very rare), will lose most
of their assets. Risk is also a war with Iran or Saudi Arabia or the in the
South China Sea. The likelihood of social unrest is also increasing around
the globe.
WILL CHINA COLLAPSE
A major risk is also China. The Chinese economy is built on debt levels
which are unsustainable. A lot of this debt has been spent on wasted
infrastructure projects. Growth in China has slowed down dramatically. The
real figures are probably a lot worse than the official ones. Trump is
determined to break China’s unfair competitive advantage. That can seriously
hurt an economy which is already suffering. If the Chinese economy collapses,
there is a risk of empty stomachs leading to a revolution. As we know from
Chinese history, this is not as farfetched as it might sound.
END OF A SUPERCYCLE
Whether markets start a major secular bear market in the next few weeks or
months, it is irrelevant. What is clear is that we are at the end of a
supercycle of several hundred years. Once it turns, the down cycle is likely
to last for decades and be devastating for the world.
Global debt has trebled since 1999 to $240 trillion. Before the coming
secular downturn is over, the majority of this debt will have disappeared and
also the associated assets.
IT WON’T BE THE END OF THE WORLD
But if this happens, it will not be the end of the world. Just the end of
a major era. An era that has been exacerbated by governments’ and central
banks’ interference with the cycles of nature and the natural laws of ebb and
flow. It will be horrendous and effect all us for several decades. The implosion
of the massive debt bubble as well as the asset bubbles is the only chance
for the world to regain a sound platform for continued progression. Until the
debt has disappeared, there can be no real and sound growth.
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.
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