1. Egon von Greyerz’ Newsletters

The precious metals markets have now been going sideways for around 7 months. No investors like corrections but in all bull markets there will always be periods when the price corrects. Some of these moves are bigger like in 2008 when gold in dollar terms corrected by 34% from $1,032 to $681. Silver which is always more volatile corrected by 60% in 2008.

The correction, in dollar terms, is so far 17% in gold and in silver 42% . In Euros gold is down only 10%. If we look at the long term charts of gold starting back in 1999, these corrections look like at little wiggle at the top of the chart. Thus the correction in gold is totally insignificant in this major bull market and absolutely nothing to be concerned about.

The physical precious metals market is still very strong with Swiss refiners working around the clock and central banks around the world continuing to buy. Chinese imports this year so far are up 6 times on last year. The selling that we are currently seeing is primarily in the gold paper market. This is short term speculators in precious metals that are getting out of their positions. We saw the same in the 2008 correction when gold came down as many investors liquidated positions in all investment classes. So the real gold market continues to be very strong and at some point the paper gold market will be exposed for what it is; worthless paper with no gold backing.

I can understand that investors who entered the gold market in the $1,600 to $1,900 range might feel a little bit uncomfortable at these levels. And even at the current price of $1,585 there might be a further downside risk of $50-$100 at the very most. But the upside in the next few years is likely to be in excess of $10,000 as I have been forecasting for many years and it could be a lot higher depending on how fast governments will run the printing presses.

As I said in my King World News interview yesterday all the dominoes are falling as predicted which will necessitate unlimited money printing. Just in the last few days we have seen Greek and French voters throwing out austerity programmes and we have also seen a Spanish bank having to be saved again. All of this is very bullish for gold and silver in the longer term.

Link to the KWN interview

More importantly, a very big domino fell yesterday with JP Morgan having lost US$ 2 billion on a derivative position that was taken to hedge their portfolio. JP Morgan do not even know the size of their exposure but they admit that their losses could be a lot bigger. (No doubt the rocket science employee who lost this amount in the bank’s London office has been earning millions in bonuses every year for taking positions that nobody understood).

I have warned investors for more than a decade that the current $1 quadrillion plus (the $700 trillion figure is incorrect) of outstanding derivatives is a timebomb of colossal magnitude. It is guaranteed that we will see losses in the trillions in the next few years. That is why wealth preservation is so critical and investors should not worry about a relatively small correction in the price of precious metals. The most important investment you can hold today is physical gold and silver stored outside the banking system. This is the only investment that protects your wealth against the destruction in value of most asset including paper money and also avoids counterparty risk. Investments within the banking system will always involve major counterparty risk. And with most banks having massive toxic loan books with nowhere near adequate provisions and derivatives in the trillions with no provisions, the whole financial system is today extremely fragile. Central banks and governments are fully aware that without money printing in the trillions of dollars and more likely in the tens of trillions, the banking system is unlikely to survive.

So if investors are nervous about this correction in gold and silver, take my advice; stop looking at the price and go on holiday. Economically and socially times will soon be a lot worse so enjoy the “good times” when you still can.

Egon von Greyerz

DEUS EX MACHINA

by Egon von Greyerz – December 2011

With most of the world’s major economies as well as the financial system bankrupt, there is only one solution that can save the world economy. Like in the Greek tragedies, Deus ex Machina is now the only way that the world can avoid a total economic collapse. This would involve God being lowered down onto the world stage and miraculously saving the plot.

DEUS EX MACHINA by Leo Lein – www.leolein.se

For those few who believe in this, may God bless them. But since this is a very unlikely solution most people will instead rely on governments and central banks to save us. But how can anyone possibly believe that totally incompetent and clueless politicians and central bankers could solve anything. They created the problem in the first place and are therefore totally unsuitable to play the role of Deus. The main objective of governments is to stay in power and thus to buy votes. Therefore they are incapable of taking the right decisions. And the opposition, aspiring to power is even less suitable since they will lie through their teeth and promise the earth in order to be elected. (We know that there are exceptions like Ron Paul, but the voters will most probably find his medicine too strong to swallow.)

What about central bankers, can’t they save us? Unfortunately any sensible person who becomes a central banker loses all his senses and becomes a prisoner of the political system.

Solution?

So if there is no Deus ex Machina and if governments or bankers can’t rescue the world, who can and what is the solution. Let us return to the wise von Mises to look at the options available now:

“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 A RESULT OF A VOLUNTARY ABANDONMENT OF FURTHER CREDIT EXPANSION, OR LATER AS A FINAL OR TOTAL CATASTROPHE OF THE CURRENCY SYSTEM INVOLVED”

Ludwig von Mises

Mises is absolutely correct: “There is no means of avoiding a final collapse of a boom brought about by credit expansion”. Whatever politicians, bankers, economists or others experts say, there is no solution to this crisis. We have reached the end of the road and are now staring into the abyss.

The credit manufacturing system that started in 1913 when the Fed was founded, began its terminal phase in 1971 when Nixon abolished gold backing of the dollar. It has been clear to us for at least 20 years that the outcome was inevitable. It was never a question of “if” but only “when” it would happen. It is now clear to us that the false prosperity that the world has experienced by printing unlimited amounts of money will very soon come to an end. Thus the “if” and “when” conditions are now satisfied so the remaining question is HOW?

To try to answer this let’s return to Mises: “The alternative is only whether the crisis should come sooner as a result of voluntary abandonment of further credit expansion ….”

To stop the money printing and credit creation would be the only sensible way of ending the failed quasi-capitalist, socialist experiment which is in the process of destroying the structure of the Western world. For almost 100 years we have lived on a system based on debt. This has created a false prosperity as well as false values. The transfer of capital from private enterprise to government by massive taxation is approaching 50% in many countries (see table). The average for 18 industrialised countries is almost 40%. This means that on average 40% of the productive economy is transferred to a non-producing entity (government) which wastes most of the money in the process of redistribution. But not only that, since the state has taken over up to 50% of the economy in these countries, the desire to work, to strive, to take risk and to invent has been taken away from a major part of the population.

TOTAL-TAXATION-AS-percentage-of gdp-gs061111

For a great many people it is now totally natural to rely on the state for their needs rather than on themselves. And the state needs to borrow/print ever increasing amounts to perpetuate this economy based on an illusion. This situation is totally untenable. Since any additional money printing will only exacerbate the crisis and make the final collapse so much greater, the swiftest solution would be let the financial system implode now. We need to reset the world to a level which is sustainable. The consequences of this implosion would be a collapse of the financial system and a reset of debt to zero. Although this is unthinkable to any government or politician, it would be by far the quickest way to get the world back on its feet with no major debts, minimal government interference, and no central bank that can print money. It would be like a forest fire getting rid of all the dead wood. Out of that would rise masses of green shoots in the form of strong unchequered growth. The transition will of course be traumatic and the current generation will experience enormous hardship. But not voluntarily abandoning the money printing now will just delay the inevitable and the consequences will be dramatically greater and affect many future generations.

Anyone who has followed my articles will know my view that governments worldwide are totally incapable of stopping the money printing. This is their only means of staying in power and buying votes. But not only that, this is the only method they know. This has been their patent solution to all economic problems in the last decades. Not that this is new in history. Most empires have resorted to diluting the value of money by reducing the gold/silver content of coins or printing paper money. But as far as I know it has never before been done by so many countries simultaneously to such an extent.

Since there won’t be any voluntary abandonment of credit creation what will the likely outcome be? Again let’s use Mises words: “…… a final or total catastrophe of the currency system involved”. The problem this time is that we are not talking about one currency or one country. No, we are talking about most of the world’s major currencies. We have been used to measuring currencies and economies on a relative basis i.e. against each other. But this is a total fallacy since all major currencies have been in a race to the bottom for the last 100 years. Most currencies have lost between 97% and 99% against real money –GOLD – since 1913. And since 1999, most currencies have lost 80% or more against gold. So paper money has been a very poor measure of wealth in the last 100 years. Governments are creating credit and paper money and consequently through their fraudulent actions “stealing” from the people whilst at the same time increasing the people’s dependence on the state. And the people does not understand that the value of paper money is declining continuously. But gold reveals the deceitful destruction of paper money. This is why governments do not like gold and try to suppress the gold price.

Endless Money Printing – QE

And how will the currency system collapse? The answer to this question is very simple – through endless money printing. There will be no lasting austerity programmes in any country that can print money. Governments are incapable of sticking to austerity measures since in the end that is a guaranteed way of losing power. As power is the main purpose of all governments, they will use any method to retain it. Within the Eurozone, individual countries can of course not print money but the ECB and the IMF will take care of that. So whilst world leaders are procrastinating and bickering in G8, G20 and all other “summit” meetings, it is absolutely guaranteed that the final outcome will be one QE package after the next. Governments and central banks know that without limitless money printing there would be a deflationary collapse of the banking system and world economy.

The table below shows the financing requirements of the PIGS countries in the next few years. Just Italy and Spain will require €1 trillion in the next 4 years and of that 1/2 trillion Euros in 2012. Only printed money will take care of that.

For many years it has been absolutely crystal clear to some of us (sadly a very small minority) that many major sovereign nations are bankrupt as well as the world financial system. Banks are only surviving because they, with the blessing of governments, are allowed to value trillions of dollars of toxic and worthless assets at full value. And on top of that there are more than $1 quadrillion outstanding in derivatives. These are outside the banks’ balance sheets and there are virtually no reserves against them. The banks are netting the value down to virtually nothing and then applying a miniscule reserve against this net amount. First of all, the netting is only valid when the counterparty pays. When there is a counterparty failure, which is very likely in the coming financial collapse, gross remains gross and the $1 quadrillion remains $1 quadrillion. Secondly, a major part of the derivatives are worthless or not protecting the investors as we have seen with for example Freddie Mac, Fannie Mae, Lehmans and lately MF Global. MF Global had bought CDs to hedge their investment in Greek debt. But they hadn’t understood what they had bought and it turned out it offered no protection at all.

Hyperinflation

The “final or total catastrophe of the currency system” will occur as a result of the QE or unlimited money printing that will very soon start in the EU, USA, UK, Japan and many more countries. And this currency destruction will lead to hyperinflation as I have stated for many years. Throughout history, substantial government deficits leading to money creation or printing have always been the cause of hyperinflation. Because hyperinflation is always the result of a collapsing currency and not of excess demand.

To any thinking individual, it is totally incomprehensible that governments and central banks believe that an insolvent world can be saved by debt issued by bankrupt nations and then bought by the issuers themselves as there is no other buyer. This is the perfect recipe for self-destruction and “total catastrophe of the system.”

IMF, EU and other failed monstrosities

Time and time again, the world creates massive costly, bureaucratic and unaccountable structures that have idealistic and totally unrealistic objectives.

Take the IMF for example. This is what their mission statement states: “The International Monetary Fund (IMF) is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.”

If financial stability, high employment, sustainable economic growth and reducing poverty are the objectives of the IMF, then they have failed on every single point. So here we have an organisation that receives/borrows money from mainly bankrupt states and then lends the money to countries that cannot or will not ever repay the funds. And in order to carry out this totally futile task, the IMF takes a major cut in between to finance its costly and failed operation. The world does not need monstrous and costly structures that totally fail in their mission. Thus, the IMF should be closed.

Turning to the EU, they state on their website: “The main objectives of the Union are now to promote peace, the Union’s values and the well-being of its peoples”. There are other stated objectives such as: “sustainable development, based on balanced economic growth and price stability, a highly competitive social market economy, aiming at full employment and social progress, and a high level of protection and improvement of the quality of the environment.”

The EU or the EEC as it was first called was created in the late 1950s. This was a prosperous period in the world economy based on real growth (not debt). As often is the case, politicians with illusions of grandeur create superstructures which only function in good times. The EU’s main objective of creating peace and well-being of the people is now being severely tested. If we for example asked Spanish youth (50% unemployed) about their well-being or Greek people or the Portuguese etc, we would get a tirade of abuse and complaints about the EU. Instead of “creating peace”, we are seeing major tension within the EU that could lead to serious conflicts. And as to “balanced economic growth and full employment”, this has all come to an end. The false prosperity, mainly based on debt, has also come to an end and the EU can only survive intact with the aid of endless money printing. But even that would only be a temporary reprieve. The EU is a failed experiment which is extremely costly and inefficient. The economic ruin of Ireland, Greece, Spain, Portugal, Italy, France etc would not have happened to the same extent without the EU. Like all artificial fiat currencies, the Euro was doomed to fail. Without the Euro, countries like for example Ireland, Spain or Greece would have recovered much faster.

Final or total catastrophe

So we are heading to the final stage or as Mises says a “final or total catastrophe of the currency system involved”. I don’t think that even Mises envisaged at the time that this could involve a major part of the world rather than just one country. This is why this catastrophe will be unprecedented in world history and have consequences that will affect the world economically, socially and geopolitically for a very long time.

Wealth Preservation – Gold

Since 2002 we have advised investors to put up to 50% of their assets into physical gold, stored outside the banking system. Gold has appreciated between 15% and 20% per annum since 2002 depending on the base currency. And most stock markets have declined 70-85% against gold in the last ten years. In spite of this most major investor groups (institutional, funds, asset managers or individuals) own no gold. Gold is money and reflects the total destruction of paper money. But most investors do not understand gold. Common arguments I hear is that “you can’t eat gold” or that “gold pays no return.” It seems that these investors prefer to eat paper money. And as to the argument that there is no yield on gold, who needs yield on an asset that has massively outperformed all major asset classes in the last 11 years. And if we look at 2011, gold has greatly outperformed stock markets in most major countries. Whilst stock markets are down between 1% and 24% in 2011, gold is up more than 20% against all major currencies. So in real terms (gold) all stock markets are doing very badly but still investors persist in riding these falling trends.

Stock markets will benefit temporarily from QE but it is still our view that they will fall another 90% against gold in the next few years.

The correction in the precious metals is now likely to be over and we should see the metals going to new highs in 2012. I had the pleasure of becoming acquainted with Alf Field at the recent Gold Symposium in Sydney where we were both speakers together with Eric Sprott, John Embry and Ben Davies amongst others. Alf is one of the few in the world, if not the only one, who knows how to apply the Elliott Wave principle successfully to gold. Alf’s next intermediate target is at least $4,500 and the ascent to this target could be rapid. That would probably mean a silver price of $150. These technical forecasts certainly confirm the fundamentals as outlined in this article.

The world is in a total mess and there is absolutely no solution to this unprecedented crisis. The hyperinflationary depression that we will experience in the next few years will totally destroy the majority of the credit based wealth that has been created in the last few decades.

In order to preserve wealth and keep capital intact, it is critical to keep a major part of investment assets in precious metals held outside the banking system. But for investors who continue to follow conventional wisdom, they will sadly find that their investment strategy was merely conventional and contained no wisdom.

TOO LATE TO JUMP ON THE GOLDWAGON?

by Egon von Greyerz – August 2011

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?

By Leo Lein

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 wealth:

Only buy physical allocated gold/silver bars or coins
Store the gold outside the country where you are resident.
Store the gold in a country with a stable political system (like Switzerland)
Store the gold outside the banking system in vaults with no US connection.
Make 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.

These break 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 bankers.

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”.

BEFORE

NOW By Leo Lein

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 of dollars.

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 dramatically.

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.

Europe

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.

Benefits Supervisor
by Lucian Freud

In Conclusion

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.

APRES NOUS LE DELUGE

by Egon von Greyerz

Happy days are here again! Stock markets are strong, company profits are up, bankers are making record profits and bonuses, unemployment is declining, and inflation is non-existent. Obama and Bernanke are the dream team making the US into the Superpower it once was.

Yes, it is amazing the castles in the air that can be built with paper money and deceitful manipulation of all economic data. And Madame Bernanke de Pompadour will do anything to keep King Louis XV Obama happy, including flooding markets with unlimited amounts of printed money. They both know that, in their holy alliance, they are committing a cardinal sin. But clinging to power is more important than the good of the country. An economic and social disaster is imminent for the US and a major part of the world and Bernanke de Pompadour and Louis XV Obama are praying that it won’t happen during their reign: “Après nous le déluge”. (Warm thanks to my good friend the artist Leo Lein).

Moral and financial decadence

A deluge of an unprecedented magnitude is both inevitable and imminent. The consequences of the economic and political mismanagement will have a devastating impact on the world for a very long time. And the consequences will touch most corners of the world in so many different areas; economic, financial, social, political and geopolitical. The adjustment that the world will undergo in the next decade or longer, will be of such colossal magnitude that life will be very different for coming generations compared to the current social, financial and moral decadence. But history always gives us lessons and the one that is coming will be necessary and eventually good for the world. But the transition and adjustment will be extremely traumatic for most of us.

We have reached a degree of decadence that in many aspects equals what happened in the Roman Empire before its fall. The family is no longer the kernel of society. More than 50% of children in the Western world grow up in a one parent home, either being born by a single mother or with divorced parents. Children are neither taught ethical or moral values nor discipline. Many children consider attending school as optional and education standards are declining precipitously. Most families do not have a meal around the dinner table even once a week. Sex and violence are common place on television and in real life. Both press and television create totally false values and ideals. Everyone must be young and beautiful often enhanced by surgical or digital means. Old people have little value and their wisdom is not benefitting the younger generations.

The Golden Calf or materialism is the ultimate value that is worshipped and no means are eschewed to attain material goals. Since most of the prosperity that has been achieved in the last 40 years is based on printed money and debt, it is totally false and unsustainable. A major part of the Western world has improved their living standard, by exchanging services and swapping houses at ever rising prices financed by printed paper and credit. The perceived wealth that is created out of this is illusory and ephemeral. We have created a world economy which is based on debt and thin air.

(Click image to enlarge)

The Gini coefficient of income and wealth is now reaching extremes in many countries. This measures the inequality between the rich and the poor. In the US the Gini coefficient is now at the same level as in the 1920s before the depression. In countries like the US, the rich are getting richer whilst 45 million people live below the poverty line, 43 million receive food stamps and over 700,000 are homeless. With a real unemployment rate of 22% and urban youth unemployment much higher, the US will soon experience social unrest.

But it is not only the US that will experience financial misery, famine and social unrest. This will also hit most European countries and in particular the UK, southern Europe, Eastern Europe and the Baltic States as well as African countries, the Middle East, Asia, yes in fact the whole world.

Are boom and busts inevitable?

Well if you listened to the former British Labour Prime Minster Gordon Brown, he proudly declared that he had abolished booms and busts and thus economic cycles. But he was expeditiously thrown out at the next bust which of course had nothing to do with him since he blamed the US sub-prime market for his ill-fated destiny.

Cycles or ebbs and flows are a natural part of both economic life and nature. And right at the point when something could be done to limit the damage, most nations seem to have the uncanny knack of selecting the political individuals who will put fuel on the fire and make the situation catastrophically worse.

Greenspan was one such individual. During his 19 years as Chairman of the Fed, he could have limited the economic and social damage that the US would suffer. Instead he took every single measure possible to ensure that there would be a catastrophe with uncontrollable consequences. But we shouldn’t just blame the incompetence of Greenspan. It was sickening to watch every sycophantic congressman and senator licking Greenspan’s boots and praising his wisdom. Because Greenspan’s money printing and incompetent interest rate management created one of the biggest financial bubbles in world economic history. But the politicians loved this. It made the stock market boom, and house prices surge. Thus the politicians were all loved by their voters who did not understand the dire consequences that were looming. And Bernanke de Pompadour is continuing the same disastrous policies of creating money out of thin air. When will they ever learn that creating money out of thin air and running astronomical deficits that never will be repaid with normal money leads to the road of total ruin? When will they ever learn? The very sad answer is that they won’t and therefore they are leading the world into a hyperinflationary depression that will have uncontrollable and cataclysmic consequences for current and future generations.

Empty stomachs are rioting

We have for years warned about hyperinflation leading to famine, misery and social unrest. Well, this is exactly what is happening in many parts of the world. The protests and overthrowing of regimes in Tunisia, Egypt and Libya are primarily due to a major part of the peoples of these nations having no job, no money and little food. It is their empty stomachs that are rioting. In addition they are protesting against the leaders of these countries stealing from the people.

It is virtually certain that these riots will spread to many countries in the Middle East, Africa and the developing world. This will lead to new regimes and new political orders that could either be far left or far right politically or religious extremists. But the new regimes will not be in a position to change the root of the problem which is famine and poverty. In Egypt for example there has been a quiet military coup. It is unlikely that a democratic regime will take over from the military. So the people will protest again and again. And this will be the same in most countries. Eventually the people will take the law into their own hands since no regime will be able to give them the food that they need.

The hyperinflationary deluge is imminent

Although food and fuel inflation is rampant worldwide already, we are only seeing the very beginning. Massive oil price rises are likely to continue as a result of the geopolitical situation as well as peak-oil. The Middle East is a time bomb waiting to go off. Israel is in an extremely precarious position and the involvement or non-involvement of the US in this conflict would both have dire consequences for Israel and peace in the world. Food prices will continue to rise dramatically. Major parts of the world are living below the poverty line today and this will increase exponentially.

The lethal concoction of rising food and fuel prices is already affecting the Western world. The Continuous Commodity Index – CCI, (60% food, 17% energy and 23% metals) has almost doubled since the low in early 2009 and has gone up 42% in the last 12 months. The almost vertical rise of the CCI is one of the best indicators of hyperinflation being imminent. A catastrophe of astronomical proportions is looming. This will hit the world at a time when there is no capacity whatsoever to take any real measures that could alleviate the problems.

(Click image to enlarge)

Most countries are already running major deficits which will increase dramatically in the next few years. The banking system is bankrupt and is only holding together due to false valuations of toxic debt and derivatives. This is done with the blessing of governments since virtually no major bank could face an honest valuation of its assets. Unemployment and especially youth unemployment is currently a problem worldwide and it will get much worse. In 2010, the US government spent 60% more than its revenues. In order to balance the budget individual and corporate income taxes would have to double.

Never before in history has the world run out of real money as well as (affordable) food and fuel simultaneously. But his is exactly what is happening now and it will get substantially worse in the next few months and years.

Financial misery, famine and high unemployment combined with governments that will not be in a position to give real help are a recipe for disaster that will lead to social unrest and revolutions not only in developing countries but also in the West. Hungry people are desperate people and desperate people do desperate deeds. We could see already in 2011 food shortages, and riots both in Europe and in the US.

Hyperinflation Watch

The following are INDISPUTALBLE FACTS:

The US dollar is down 82% against gold since 1999
The US dollar is down 49% against the Swiss Francs since 2001
The Dow Jones is down 81% against gold since 1999
The Continuous Commodity Index is up 100% since 2009

The above facts are clear evidence of an economy that has been totally mismanaged. But more importantly most of these trends are now starting to accelerate – a clear sign that hyperinflation is just around the corner.

With years of negative net worth and negative cash flow, the US is bankrupt today. The Federal deficit is forecast to increase by at least another $ 5 trillion in the next 5-7 years. Add to this the State deficits, the Municipal and City deficits that are rising at a galloping rate and we have a country that is going to haemorrhage to death in the next few years. One wonders when the totally ineffective and clueless rating agencies are going to fathom this. Not that it will matter if they once do. One also wonders what Mme Bernanke de Pompadour and his court are thinking. “She” and her courtiers should have above average intelligence and could not possibly avoid seeing the facts that we all see today (of course, some of us have seen it coming for over a decade). But “she” has to please her master King Louis XV Obama and her devotion to the king goes above all reasonable common sense, or rationale. So the two of them will continue to crank up the printing press and drown their people and the world in worthless paper.

Stock Market

To believe that the current money printing liquidity boom is real and sustainable would be a very serious and expensive mistake. The temporary and illusionary pickup that we are now seeing in the economy and stock market is the normal initial phase of a hyperinflationary economy. It must not be mistaken for a real improvement in the economy.

The normal pattern at the beginning of a hyperinflationary period is that stock markets surge. This is the result of the increased liquidity and a flight to more inflation proof assets. This was the case in for example the Weimar Republic and Zimbabwe. Just look at the chart below of the Zimbabwe stock exchange that went from 1,420 in January 2005 to 5.4 trillion in June 2008, a 3 billion per cent increase. That was of course in Zimbabwe dollars. In US dollars the stock exchange went sideways with major volatility. So in hyperinflationary terms stock markets could continue to rise initially thus making them a better investment than cash. However, measured against real money, the Dow has gone down 82% against gold since 1999 and 86% against silver since 2001 (see chart above). We are currently seeing a dead cat bounce but we expect the Dow to decline a further 90%, at least, against gold in the next few years. So even if stock market investments will initially give the illusion of protecting investors, it will be a very poor hedge against the ravages of hyperinflation in real terms.

ZIMBABWE STOCK INDEX 2007-2008

Bond market

In January 2009, we warned investors that long term interest rates were bottoming. Since then the 30 year bond yield is up from 2.6% to 4.6% an 80% rise. But more importantly the 30 year is currently in the process of breaking a 17 year downtrend line which dates back to 1994. This confirms that rates will now start a major and rapid rise which is likely to reach the mid-teens or higher. Governments will attempt to keep short rates low due to weak economies but eventually the rising long rates will put strong upward pressure on the short rates. So the flight to government bonds that we have seen in the last few years will soon reverse into a massive rush for the exit. This will coincide with rapidly increasing financing requirements by the US, UK, EU and many other governments. The poisonous concoction of rising rates and rising financing needs will create a vicious circle of collapsing bond markets and unsustainably high financing cost. This will continue to drive interest rates even higher which will further increase deficits and necessitate even faster running printing presses. Add to that a collapsing currency and the hyperinflationary picture is complete. It is our very strong view that investors should exit bond markets entirely if they want to avoid a total destruction of their assets.

(Click image to enlarge)

Currency Market

As we have explained for many years, hyperinflation is created by the government destroying the currency as a result of money printing to finance deficits. This leads to the cost push inflation that we are now experiencing. Add to that, shortages in commodities worldwide, thus creating the perfect hyperinflationary scenario. The Dollar, the Pound, the Euro and many other currencies will continue to decline. They can’t all decline against each other at the same time so the market will take turns in attacking one currency at a time. But all currencies will continue to decline against gold. We believe that the dollar will soon start a very rapid fall against gold and against many currencies. Investors should exit the Dollar and also the Pound and the Euro. There is no currency better than gold or silver but for any small amounts of cash we prefer the Swiss Franc, the Norwegian Krone, the Singapore dollar and the Canadian dollar.

Wealth Protection

A hyperinflationary depression will destroy the value of money as well as most assets that were financed by the credit bubble (property, stock market). Wealth protection is now critical and urgent. We see no better way of protecting assets against total destruction than physical gold and silver stored outside the banking system. Thereafter, precious metals, energy and food stocks are our preference. But it must be remembered that any asset including stocks that is held through a bank is dependent on a sound and surviving banking system.

The real move in precious metals is still to come as we have outlined in many articles. Less than 1% of investors own gold. Before this economic cycle is over we are likely to see a mania in physical precious metals that will drive prices exponentially higher. And luckily for investors, this is a mania which is unlikely to end in a collapse since gold most probably will be part of a future reserve currency.

Finally we are again quoting von Mises who clearly understood that “le déluge” is inevitable:

“There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency system involved.” – Ludwig von Mises

GoldSwitzerland is the precious metals investment division of Matterhorn Asset Management AG which specializes in wealth management and wealth preservation and is part of Aquila & Co AG, one of Switzerland’s largest independent asset management groups.

HYPERINFLATION WILL DRIVE GOLD TO UNTHINKABLE HEIGHTS

by Egon von Greyerz

We now live in a world where governments print worthless pieces of paper to buy other worthless pieces of paper that combined with worthless derivatives, finance assets whose values are totally dependent on all these worthless debt instruments. Thus most of these assets are also worth-less.

So the world financial system is a house of cards where each instrument’s false value is artificially supported by another instrument’s false value. The fuse of the world financial market time bomb has been lit. There is no longer a question of IF it will happen but only WHEN and HOW. The world lives in blissful ignorance of this. Stockmarkets remain strong and investors worldwide have piled into government bonds in a perceived flight to safety. Due to a century of money creation (and in particular since the 1970s) by governments and by the fractal banking system, investors believe that stocks, bonds and property can only go up. Understanding risk and sound investment principles has not been necessary in these casino markets with guaranteed payouts for anyone who plays the game. Maximum leverage and derivatives have in the last 10-15 years driven markets to unfathomable risk levels, with massive rewards for the participants.

In the meantime central banks are cranking up the printing presses but as Bernanke recently said quantitative easing is an “inappropriate” description of what should be called “securities purchases”! Who is he kidding? What the Fed is buying has nothing to do with “securities”. There is no security whatsoever in the rubbish the Fed is purchasing. They are buying worthless pieces of paper with worthless pieces of paper. This is the Ponzi scheme of all Ponzi schemes.

Let us be very clear, this financial Shangri-La is now coming to an end. The financial system is broke, many western sovereign states are bankrupt and governments will continue to apply the only remedy they know which is issuing debt that will never ever be repaid with normal money.

So why does the world still believe that the financial system is sound?

Firstly, because this is what totally clueless governments are telling everyone and this is what investors want to hear.
Secondly, whether governments apply austerity like in parts of Europe or money printing as in the US, investors want to believe that any action by government is good, however inept.
Thirdly, market participants are in a state of false security due to shortsightedness and limited understanding of history.
Fourthly, as long as they can benefit from inflated and false asset values, the market participants will continue to manipulate markets.
Fifthly, there has been a very skilful campaign by the US to divert the attention from their bankrupt economy and banks `to small European countries like Greece, Ireland or Portugal. These nations, albeit in real trouble, have problems which are miniscule compared to the combined difficulties of the US Federal Government, states, cities and municipalities.

Euro zone members can’t print money. Many EU countries are downgraded by US rating agencies which don’t dare to touch the US rating. The AAA rating of the US is an absolute sham and totally politically motivated. True to form, rating agencies will only downgrade debt once it has become worthless but never before.

Hyperinflation Watch

The result of massive money printing is a collapsing currency, leading to escalating prices and eventually hyperinflation. This is in simple terms how every hyperinflationary period in history has happened. If in addition, there are world shortages of food, energy and other commodities, this will accelerate the process.

There are currently a number of indicators all pointing to escalating money printing and an imminent start of a hyperinflationary era. Here are some of them:

Fiscal Gap widening at alarming rates in many major economies.
Commodity prices at all-time highs.
Long term interest rates rising.
Most Currencies falling.
Precious Metals at all-time highs against most currencies.

Fiscal Gap

Tax receipts are collapsing and government expenditure soaring in many major economies including virtually all southern European countries as well as in the UK. James Turk has produced on his fgmr.com site two excellent graphs for the USA and the UK showing the extreme severity of these two countries’ deficits.

US & UK ON THEIR WAY TO BANKRUPTCY

The USA and the UK are the favourites to reach hyperinflation first amongst major economies. Both these countries will experience major problems in 2011. Also many other nations have unsustainable debt levels which will never be repaid with normal money.

GOVERNMENT DEBT WILL NEVER BE REPAID

Commodity Prices

Commodity prices have increased 26% in the last 12 months and 77% in the last 24 months based on the Continuous Commodity Index (CCI). So whilst most economies publish inflation rates of 1-3%, the real cost of food and energy is surging. The US government, which doesn’t eat or use energy, recently published the adjusted 12 months’ Consumer Price Index (ex food and energy) of 0.8% per annum. Whilst most people are struggling with a massive increase in their cost of living, the US government is continuously adjusting and manipulating the published figures. There are lies damn lies and US government statistics. Who are they fooling!

Long Term Interest Rates

In spite of US government debt being totally worthless, investors have bought more than ever, with virtually no return, in a world drowning in sovereign debt paper. We have for some time stated that the US bond market is one of the biggest financial bubbles ever. As we forecast back then, the market turned down (rates up) in January 2009. A 14 month correction ended in August 2010. Since then both the 10 year and 30 year US Treasury bonds have moved up one full per cent. So investors are finally waking up to the enormous risks in the financial system by selling government debt. We expect both short and long interest to surge in 2011 in many countries and to reach well into double digits in the next few years.

INTEREST RATES WILL RISE STRONGLY

In spite of interest rates at minimal levels, both sovereign states and individuals have major problems servicing current debt. With interest rates likely to rise to at least 12-15% and probably higher, no one will be able to service debt with “normal money”. Add to that the fact that government debt will surge in most countries. The US debt is currently $ 14 trillion. It is likely to rise to at least $20 trillion in the next few years and probably a lot higher. The interest cost for the US government at that stage is likely to be at least double the tax revenue. One would assume that the US government is well aware of what their ruinous actions are leading to. But in spite of this, they continue to increase the deficit by reducing fiscal revenues and increasing spending. What planet are they living on! What is absolutely self-evident is that they will not clear up their own mess, as the present government will be a one term wonder!

Currencies Declining

Since 1971, the value of the US dollar (paper money) has gone down 97.5% against real money (gold). Since Nixon abolished gold backing of the US dollar in 1971, both the dollar and most other currencies have been totally destroyed by reckless government. Nixon should not have been impeached for Watergate. Instead he should have been prosecuted and jailed for destroying the world’s currency system. Concurrently, banking developed into a fractal system whereby banks could lend massive multiples of their deposits and capital. All of this has served to drive up asset prices to totally unsustainable levels.

All currencies are declining against gold but some faster than others. The US dollar for example is down 78% against the Swiss Francs since 1972. During the same period the pound has declined a massive 85% against the Swiss Franc. Both the dollar and the pound are now at all-time lows against the Swiss currency. But the Swissy is only strong relative to weak paper currencies because against real money/gold the Swiss Franc has declined 87% since 1972.

DOLLAR DECLINE WILL ACCELERATE IN 2011

As a consequence of accelerated money printing, all paper currencies will fall precipitously against gold in the next few years. Therefore all paper money should be avoided and especially the Dollar, the Pound and the Euro.

Precious Metals to reach unthinkable heights

Gold has gone up 40 times against the Dollar in the last 40 years and almost 6 times in the last 11 years. Very few investors have participated in this rise since the 1999 low at $ 250. Less than 1% of world financial assets are invested in gold and gold stocks. Between 1920 and 1980 circa 25% of financial assets were invested in gold and gold stocks.

THERE WILL NOT BE ENOUGH GOLD

The major rise in gold in the last 11 years has been a stealth move with very few investors participating. The dilemma is that there is not enough gold to satisfy the coming increase in demand. We have in previous articles forecasted the gold price to reach anywhere between $ 6,000 and $ 10,000 in the next few years – see “Gold entering a virtuous circle”. As we explained at the time, these are totally realistic targets without the effect of hyperinflation.

GOLD WILL SURGE IN 2011

Bearing in mind that we are likely to see hyperinflation in the US, the UK and many European countries, the $6-10,000 target for gold is much too low. The dilemma is that it is absolutely impossible to predict how much money will be printed by governments. In the Weimar republic gold reached DM 100 trillion. But it is really irrelevant what level gold and other precious metals will reach in hyperinflationary money.
What is much more important to understand is that physical gold (and silver) will protect investors against losing virtually 100% of the purchasing power of their money. Whatever real capital appreciation gold will have in the next few years is of less importance. But what is vital, is that physical gold (stored outside the banking system) is the ultimate form of wealth protection both against a deflationary collapse and a hyperinflationary destruction of paper money.

Throughout history gold has protected investors against various calamities but this time, holding physical gold will be absolutely critical to financial survival.

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.

Gold trend

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 2/3^rdsfrom 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 the equivalent of DM 100 trillion (Papiermark). 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.

Wealth Protection

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

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 lower density).
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.

Stockmarkets

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

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 bonds.

Conclusion

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.

GoldSwitzerland is the precious metals investment division of Matterhorn Asset Management AG
which specializes in wealth management and wealth preservation and is part of the Aquila group,
one of Switzerland’s largest independent asset management groups.

A Newsletter “THERE WILL BE NO DOUBLE DIP…..” by Egon von Greyerz has been posted on the Matterhorn Asset Management website:

“YNo, there will be no double dip. It will be a lot worse. The world economy will soon go into an accelerated and precipitous decline which will make the 2007 to early 2009 downturn seem like a walk in the park…… ”

To read the Newsletter on MAM click the following link:

http://matterhornassetmanagement.com/2010/08/16/there-will-be-no-double-dip/

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