From Egon von Greyerz of Matterhorn Asset Management
GOLD ENTERING A VIRTUOUS CIRCLE
Fundamental and technical
factors for gold are now in total harmony and gold is entering a
virtuous circle that will drive the price up at its fastest pace since
this bull market started in 1999.
- It is a fact that gold in US dollars (and many other currencies) has gone up 400% in eleven years or 16% per annum annualised.
- It is a fact that the US dollar has declined 80% in value against gold since 1999.
- It is a fact that the dollar and most other currencies have gone
down 98-99% against gold since 1913 when the Federal Reserve Bank of New
York was created.
- It is also a fact that the Dow Jones (and many world stock markets) has declined over 80% against gold since 1999.
- It is a fact that gold has made a new all time monthly closing high in dollars in August 2010.
We expect gold to start a substantial rise now which will continue
for 5-10 months before any major correction. Gold’s technical picture is
extremely strong with a continuous rising pattern of higher highs and
higher lows with the steepness of the curve increasing. From much higher
levels we are likely to see a correction that could last up to a year
before the next rise which will last several years before we see a
significant peak. Once gold has topped we do not expect the same kind of
decline as after the 1980 peak since gold is likely to become part of a
future reserve currency. At that point gold will be a solid but
unexciting investment with very little upside potential. But that is
likely to be a few years away.
In spite of a 5 times increase in the
value of gold or an 80% decline against many currencies and stockmarkets
in the last 11 years, most investors own no gold and still do not
understand the importance and value of gold. In a world of constant
money printing and credit creation leading to devaluing currencies and
devaluing assets, gold reflects stability and is virtually the only
store of value that cannot be destroyed by governments.
The average asset manager, fund manager,
pension fund or private individual owns no physical gold and at best
has a very small exposure to some precious metals stocks. And in spite
of this gold has gone up over 400% in 11 years. How is that possible?
For the simple reason with the relatively modest demand that we have
seen in the last few years, there is not enough physical gold even at
these levels. The increase in demand that we have seen has most probably
been satisfied by central banks leasing or lending their gold to the
bullion banks. Central banks supposedly own 30,000 tons of gold but
unofficial estimates of their real holdings are at 15,000 tons or less.
So what are the factors that are likely to lead to a major rise in the gold price?
We have for several years outlined in
our Newsletters the problems in the world that inevitably will lead to
massive money printing and a hyperinflationary depression (see for
example “Alea Iacta Est” and “There Will Be No Double Dip…” on the
Matterhorn Asset Management website).
There are three insurmountable problems:
- Real unemployment at 22% in the US will continue to go up
- The budget deficit will increase dramatically due to the problems in
the economy and in a few years time the interest on the Federal Debt is
likely to be higher than tax revenues.
- None of the problems in the banking industry have been solved but
merely swept under the carpet by phoney valuations of toxic debt with
the blessing of governments. The circa $20 trillion that were pumped
into the world economy to save the financial system in 2008-9 have had a
very short term beneficial effect but solved none of the problems.
The effect of this massive $20 trillion
infusion has been ephemeral since we are entering the autumn of 2010
with virtually every single economic indicator and statistic in the US
deteriorating rapidly. With interest rates already at zero there is no
ammunition left but one. And it is this specific last bullet that will
be used to infinity in the next few years and starting very soon, namely
UNLIMITED MONEY PRINTING. Every single area of the US economy will need
support or printed money, whether it is the federal government, the
states, the municipalities, banks, pension funds, insurance companies,
the unemployed, corporations, health care, housing market, commercial
real estate, individuals, etc, etc, etc. The list is endless and many
other countries will follow.
Before we talk about gold in hyperinflationary terms, let’s look at where gold is likely to reach in today’s money.
Three realistic Gold targets: $6,000 – $7,000 – $10,000:
- In the 1971 to 1980 gold cycle, gold went from $35 per ounce
to $850 or up over 24 times. If we were to see the same increase in
this cycle, gold would rise to over $6,000.
- The gold peak at $850 in 1980 corresponds to over $7,000
today adjusted for real inflation based on the inflation rate as
calculated by John William’s Government Shadow Statistics (shadowstats.com)
- Gold and gold mining shares were an average of around 25% of world financial asset between 1921 and 1981. Today,
gold and mining shares are only 0.9% of world financial assets. If gold
and mining shares were to go to 25% of financial assets, gold would go to over $31,000. But even if we assume that world financial asset would go down by 2/3rds from here that would put gold at over $10,000.
The three historical comparisons above (and see chart below)
would put gold anywhere from $6,000 to $10,000 and this is without
inflation, or more likely hyperinflation. In a hyperinflationary
environment, the price gold will go to is really irrelevant since it
depends on how much money is printed. In the Weimar Republic for example
gold went to DM 100 trillion. What is more important is that gold is
likely to go up at least 5 times from today without inflation and with
hyperinflation gold will protect investors against the total destruction
of paper money and many other assets.
Gold must only be held in its physical
form and the holder of gold must have direct access to the gold. We
consider ETFs, gold in a bank (whether allocated or unallocated),
fractal ownership of physical gold, futures or any other form of paper
gold as very risky and a totally unsatisfactory method for owning gold.
Physical gold should preferably be stored outside your country of
residence and outside the banking system. The holder must have direct
access to the vaults where the gold is stored.
Silver has been lagging gold since its
peak at over $21 in 2008. For the last few months the gold/silver ratio
has been consolidating between 58 and 71. The ratio is currently around
64 and is likely to start a move down to new lows below the 2006 low at
just 44. So this is very good news for silver which is likely to
outpace gold substantially in the next few years. Silver is probably
the most undervalued precious metal today and has great potential.
But there are many caveats for silver:
- It is an extremely volatile metal and is definitively not for the fainthearted.
- We only recommend physical silver owned directly by the investor.
- Physical silver currently weighs 64 times more than gold for
the same amount invested and is circa 120 times bulkier (due to its
- Therefore silver is not as practical as gold as a means of payment.
- Also, silver is subject to Vat (value added tax) in all European countries. Thus silver cannot be moved freely across borders.
- Physical silver for investment purposes can be bought/sold
and stored tax-free in Switzerland but if the investor takes possession,
Vat must be paid.
- Due to the above factors investors should carefully consider the split between physical gold and silver.
At the beginning of July this year we
sent out a message to investors that, based on our proprietary
indicators, we expected stockmarkets to finish the correction up at the
end of July and resume the major downtrend in August. We also said that
gold would start its major rise in August. And this is exactly what has
happened so far.
We now expect major falls in all
stockmarkets worldwide over a sustained period. We would not be
surprised to see the Dow down to the 1,000 area (in today’s terms)
before this bear market in over. But it will not be a straight line and
there will be extreme volatility. When hyperinflation sets in,
stockmarkets will have a major but temporary surge.
The only stocks that investors should
hold are precious metals stocks and possibly some resource and food
stocks. But it must be remembered that stocks do not represent the same
degree of wealth preservation as physical precious metals held directly
by the investor.
Currencies should in the next few years
be looked upon as a necessary evil and not as a store of value. All
currencies will continue to decline against gold, just as they have in
the last 11 years and in the last 100 years. Due to money printing by
most governments, we will have a fierce game of competitive devaluations
by virtually all central banks. We have seen the Euro and the pound
weaken substantially and the next currency the speculators will jump on
is the US dollar. The dollar is grossly overvalued, partly due to the
weak Euro, and is likely to weaken significantly due to the problems in
the US economy.
Currencies only reflect relative value
and not absolute value since they can be and are printed until they
reach their intrinsic value of zero. It is a fallacy to measure the
value of a currency relative to another currency since they are all
losing value. Currencies should only be measured against real money
which is gold. This is the only method that reveals governments’
deceitful actions in destroying the value of paper money. Therefore it
is a mug’s game to speculate or invest in currencies since they will all
decline in an extremely volatile and unpredictable market.
So are there currencies which are likely
to perform better on a relative basis for funds that have to be held in
paper money? We believe that Norwegian kroner, Swiss Franc, Canadian
Dollar, Singapore Dollar, Australian Dollar and Renminbi will perform
relatively better than many other currencies.
Government Bond Markets
The bond market is the biggest bubble in
financial markets worldwide, in our opinion. Investors around the world
are worried about the state of financial markets and therefore believe
that government bonds represent a safe haven. These investors will
receive the most enormous shock on two accounts. Firstly, no government
will be able to repay the debts outstanding. So there will either be
government defaults, moratoria, or money printing that totally destroys
the value of the bonds. Secondly, interest rates are likely to go up
significantly to at least 10-15%, totally destroying the value of the
We are now entering a period when most
major asset classes and in particular stocks, bonds and currencies are
starting a major decline. Since most financial assets in the world are
invested in these three categories plus real estate which will also
decline, we are likely to experience major shocks and crises in the
financial system and the world economy. Wealth protection is now more
important than probably at any other time in history. Physical gold and
possibly other precious metals directly controlled by the investor will
be a vital part of a wealth preservation portfolio.