Egon von Greyerz: If You Understand Gold – You Are Not A Goldbug
“…you will also understand that gold is your best protection against the coming implosion of all these markets.”
What is a Goldbug? If we look at Wikipedia, they define it as “a person who is extremely bullish on the commodity gold as an investment and or a standard for measuring wealth …… goldbug can also be used as a pejorative”.
Investopedia states that “A gold bug is an individual who is very enthusiastic about gold as an investment and its prospects for significantly increasing in value.”
Finally the Free Dictionary defines goldbug as “1. A person, especially an economist or politician, who supports the gold standard or 2. A person who believes in buying gold bullion as a personal investment or 3. A gold beetle.”
Since less than 0.5% of world financial assets are in gold, most people neither hold gold, nor understand the purpose of gold. The people who understand the real value of gold could only agree with one of the definitions above – a goldbug is a gold beetle. There could be no argument about that clear definition.
Many people use goldbug scathingly as a pejorative as they have never bothered to understand the significance of gold.
IF YOU UNDERSTAND GOLD – YOU ARE NOT A GOLDBUG
So why have I, and a few others, been advocating the ownership of gold for the last 17 years without being goldbugs?
It is not because I am bullish on the gold price and want to make a quick buck. Nor is it because I believe in the gold standard (see my article about FreeGold).
No, gold has a much more profound significance. The simplest definition of gold is JP Morgan’s: “Money is gold and nothing else.” But his statement requires further clarification. Of course money is gold. That is why gold is the only currency that has survived throughout history. All other currencies have been destroyed by rulers or central bankers by issuing endless amounts of credit and printed money until the currency has become worthless. And this is happening now again as all currencies have lost 97-99% in real terms since 1913 when the Fed was created.
If we are not Goldbugs, what is the purpose of holding gold? In simple terms, gold is wealth preservation and insurance against a rotten financial system, inflated by $100s of trillions of credit and printed money as well as quadrillions of dollars of derivatives. If you understand the bubble that this has created in all asset and debt markets, you will also understand that gold is your best protection against the coming implosion of all these markets.
For the ones who think it is different now, I beg you to study history. Every single major asset and debt bubble in history has always resulted in a collapse of the currency and the financial system, where it has occurred.
The big difference this time is that the problem is global. World debt at $250 trillion is 3x global GDP – an all time record. And if we add unfunded liabilities and derivatives, total debts and liabilities amount to over $2 quadrillion which is 25x global GDP. So that is the risk that potentially could erupt into the biggest financial and economic collapse in history.
There is clearly no certainty that it will happen but the probability is very high. Governments only have one remedy which is to print more money. But even a child would understand that printing more money and issuing more debt to solve a debt problem clearly doesn’t add up. Sadly the Keynesians like Noble prize winner Krugman don’t get it. You can’t solve a problem by the same means that caused it in the first place.
HOLDING GOLD – A SINE QUA NON
Let’s look at some of the reasons why it is critical to hold physical gold:
Gold protects against:
1. Currency debasement
– The 97-99% fall of all currencies in the last 100 years will continue until the currencies have reached Zero. So there is only 1% to 3% to go but remember that this fall is a 100% loss value from today.
2. Bank failures – bail-ins
– With leverage of 10-50x banks will not survive the next credit crunch. Add to that their derivatives exposure and a systemic failure is guaranteed.
3. Stock market collapse
– Stocks have been fuelled by money printing and buybacks and are now overvalued on all criteria. A 90% fall in real terms like in 1929 is likely. The economic and financial risks in the world are today exponentially greater than in the late 1920s.
4. Bond market failure
– The 35 year up-cycle in bonds is now a mega-bubble that will implode. It turned down three years ago and rates are now on their way back to above the early 1980s level of 16% for the 10 year US treasury. This is a long cycle and will not happen immediately. As governments print unlimited amounts of money, default or implement moratoria, bond market investors, including China and Japan will dump their US bonds just like Russia has done already.
5. Inflation – hyperinflation
– As governments, in a desperate and futile attempt try to save the system, print endless amounts of money, most major economies will have inflation leading to hyperinflation. Anyone who has lived in a hyperinflationary economy, like Argentina, Zimbabwe and Venezuela knows that their money is totally destroyed. Sadly, few people realise that gold would have saved them.
6. Deflation
– Contrary to what many people believe, gold has historically performed very well in deflationary periods. In my opinion we will first have hyperinflation as governments try to save the world with money printing. When that fails and asset as well as credit markets implode we will have a severe deflationary implosion. Banks are unlikely to survive this in their present form. As banks fail, so will the money in the bank. Gold will then be money used for payment or barter.
7. Peak gold
– Gold production has already peaked. There have been no major finds since the 1990s. Even if unexpectedly there will be substantial new discoveries, it takes at least 15 years from discovery to production. Thus we will see substantial shortages of gold in coming years.
8. Paper gold
– The gold price is only at the currently ridiculously cheap level due to a paper gold market which determines the gold price whether it is physical or paper gold.. The price of gold adjusted for money supply is now at the same level as in 1970 when gold was $35 and 2000 when gold was $280. Paper gold outstanding is at least 100x the physical gold backing it. When paper gold holders get worried and ask for delivery, there will be no gold available and price will go “no offer” which means there is no gold available at any price. This is when gold will go to multiples of the current price.
– Corporate debt has exploded in most industrial nations and is now at danger level. In the US for example corporate debt to GDP has doubled since the 1960s. Irrational optimism and share buy-backs have fuelled this debt boom.
10. Other risks
– There are a number of other major risks which can erupt at any time. These include geopolitical risks civil war, social unrest, country risk in China, Japan, USA, Middle East, Emerging Markets etc. Many of these things have already started like the US government shutdown, the Brexit fiasco in the UK, Yellow Vests in France and mass migration on several continents. All this is just the beginning.
GOLD IS TODAY BOTH CRITICAL INSURANCE & SUPERB INVESTMENT
Gold is clearly not the panacea for all the problems listed above. But there is no better insurance against the financial and economic risks in the world today which are greater than any time in history. Especially in periods of crisis, gold is the most important wealth preservation asset as well as a store of value and medium of exchange.
My good friend Simon Mikhailovich’s describes the world’s (mis-)understanding of gold perfectly:
“If one offered investors a fat tail put option that never decays or expires, costs about -1% pa to carry, has no counter party risk & no chance of ever becoming worthless, there would be a line out the door. But when one explains that this option is physical gold… No interest.“
Despite, or maybe because of, most people’s total ignorance of gold, it will be the most superb asset to hold in the next few years both as insurance and for capital appreciation purposes. But remember to hold physical gold and store it outside the financial system in a very safe vault and jurisdiction.
The paper gold market is a casino that has nothing to do with the real price of gold. How do we get to the real price of gold? Here’s Egon to explain…
We are now in the very final stages of the most remarkable era of alchemy in the history of finance. This cycle started in 1913 with the creation of the Fed and had its death knell in 1971 when Nixon took away the gold backing of the dollar. It has been a long and slow 50 year death of the world economy and the patient has only been kept alive due to the creation of fake money, fake assets, fake (paper) gold, fake wealth, fake valuations, fake balance sheets, fake bankers, fake politicians all built on a colossal mountain of fake debt.
What will be the trigger for the coming biggest financial crisis in history? There are so many time bombs around the globe that it really doesn’t matter where and how it starts. Because when it starts, there will be a chain reaction that will lead to the most spectacular economic fireworks in history.
FAKE GROWTH BASED ON FAKE MONEY
Central banks around the world have already set the coming fall in motion. What has kept the world going for so long, in spite of being bankrupt, is the massive liquidity that all central banks have added to the system. The world economy can only grow, albeit artificially, by a constant injection of liquidity. Without that the patient would die quickly. This has created an illusion of growth but all that has grown is debt. In real terms the world economy is hardly growing and how could it just based on fake money.
But central banks are now creating the perfect situation for the coming collapse. They are taking away the punch bowl that has fed all the asset and debt bubbles in recent years. It is not just the US where liquidity growth has reversed abruptly by the quantitative tapering. Also in the Eurozone, Japan, and China liquidity growth is slowing down significantly. This is all that is needed to create the perfect setup for the coming collapse. The bubbles will implode if they are not constantly expanding.
MONEY PRINTING WILL RETURN BUT TO NO AVAIL
Yes, there will be a point when stock and bond markets collapse and central banks will start wild money printing again. But since they are always behind the curve, it will all be too late and what the world economy will experience is a hyperinflationary depression that eventually leads to a deflationary implosion of the system.
So what will be the initial specific events that starts the coming fall of the world economy? Will it be Japan’s economy sinking into the pacific, or the Chinese debt dragon catching fire or maybe some little boy who will proclaim that Uncle Sam has no clothes. The Brussels elite is certainly doing a superb job in destroying Europe both economically and socially. They will clearly cause the fall of the Rome Empire. Not that Italy is much of an empire these days. But just like all empires collapse under its own debt, so will Italy.
With Italian debt to GDP the second highest (after Greece) in the Eurozone of 130% with Target 2 loans (Italian loans financed by Bundesbank via ECB) at Euro 500 billion, plus, plus plus, Italy will have no chance to even service its debt. The Eurozone QE has grown to Eur 2.5 trillion since 2015 and the ECB has virtually been the lone buyer of Italian debt. Yield on the debt has surged and many European banks are heavily exposed, especially the French ones.
Germany has long been the milk cow of the Eurozone but even Germany is now coming under pressure. The manufacturing sector has been hit with a weakening of some German export markets like China, Turkey and Italy. The PMI (purchasing managers) survey for Europe has just dropped to a four year low.
NOT THE FIRST TIME ROME WILL BURN
In a bunch of sick economies, it is always difficult to determine who should get the prize for the sickest. Italy certainly has a good chance to win that obscure prize. That they can never repay the debt is a certainty and this will soon lead to Rome burning and the rest of the EU also catching fire.
EUREXIT NEXT
The Brexit saga is a symptom of how desperate Brussels is to hold the EU together. The EU elite has pushed Theresa May to accept an exit deal which is totally unacceptable to the British people as well as to the British parliament. Brussels is extremely frightened that the UK leaving the EU on good terms will not only open the flood gates for other countries to do the same. It will also lead to the failure of the Brussels’s attempt to create a European Superstate, led by an unelected and unaccountable elite. So Eurexit or the breakup of the EU is coming, that is certain. It is not going to happen overnight, but the bursting of market bubbles combined with weakening economies across the board will most likely precipitate the collapse.
History tells us that when you reach the end of a global economic cycle, the whole world is super bullish. Virtually no one can, or wants to see, the coming collapse. We know that from peaks like 1929 or 1973 when all market observers were certain that the golden era they were in will go on forever – “Because it is different today”.
“IT’S DIFFERENT TODAY”
I certainly concur that it is different today. But not from a positive point of view. Sadly the world economy is living a lie and will soon have the most horrendous awakening. The laws of nature always win in the long run. The manipulation of the world economy in the last 100 years is now coming to an end and nature will open the flood gates to flush out all this falsity, dishonesty and hypocrisy. This cleansing process will create a lot of suffering for quite a long time, but is the only way for the world to get back to a sound system with sound real growth that is not based on money printing and debt.
GOLD BACKED ECONOMIES EVENTUALLY FAIL
The basis of a sound system is sound money. Throughout history the monetary system has always functioned better when gold has been backing the currency? So why has every currency system in history then failed and why have all currencies always gone to their intrinsic value of zero?
The explanation is simple. Soundly based economies with budget and trade surpluses carry the seeds of their own destruction. Once the economic cycle has peaked, the country continuous to spend money it doesn’t have and deficits are created. This becomes a vicious circle, more deficits lead to more money printing which in its turn increases the deficits. At that point the country abandons the gold backing of the currency in order to print more money and this eventually leads to the collapse of the country’s economy. This cycle has happened throughout history and we are seeing the perfect example of this cycle since 1971. Both US and global credit have grown exponentially since then and only since the beginning of this century, global debt has tripled to a staggering $250 trillion.
THE US DOESN’T HAVE THE GOLD BUT CHINA DOES
So once the current cycle has run its course and bottomed, are we likely to have a new gold backed reserve currency? Well, it won’t be the dollar, that is certain. Because the dollar will disappear into the Atlantic and Pacific as the US economy collapses. Yes, the US will try to resurrect the dollar like a Phoenix but that would soon fail. Also, the US would then need to prove that they have the 8,000 tonnes of gold that they claim to have. But they are unlikely to have even half of that. The rest has been sold covertly or leased to the market and is now in China or India and will thus never come back. China on the other hand has officially 1,800 tonnes but the real figure could be substantially higher. Some market observers estimate that China has up to 20,000 tonnes but no one really knows what the true figure is. China will only reveal their gold position when they call the US bluff of 8,000 tonnes.
Personally I am not in favour of a gold backed reserve currency. Because eventually, the country will mismanage its economy and live above its means. This will necessitate the abandonment of the gold backing and the start of money printing and currency debasement.
Better to let fiat money be a medium of exchange that finds its own value based on the (mis)-management of the economy and also money used for credit.
Gold should only be a store of value as it has been for 5,000 years. This is what makes physical gold the best instrument for wealth preservation based on the principles that our company has created.
There are a few conditions that need to be fulfilled for gold to be an effective store of value. The principle of Freegold best defines what this means. The website FOFOA (friend of a friend of another) and its predecessors have been pioneers in defining what Freegold is, as follows:
FREEGOLD
These are the basic principles:
ALL PHYSICAL GOLD MUST BE:
- FREE from official money systems
- Owned FREE of all other claims
- FREELY traded
If all the above conditions are met, there would be no gold backed currencies, no ability to exchange currency for gold at central banks for a fixed parity and most importantly THERE WOULD BE NO PAPER GOLD OR OTHER GOLD DERIVATIVES.
Gold would neither be lent nor leveraged.
THE GOLD PRICE IS SET IN A GIANT CASINO
Many of us are familiar with the false gold market today based on paper gold traded in the trillions. According to the World Gold Council, estimated notional gross daily trading of the London LBMA banks is as high as $2 trillion per day. That would mean $43 trillion per month or $500 trillion per year. Total gold ever produced in history is around $7 trillion. This means that the monthly gross trading is up to 6x all the existing gold in the world and annual trading 70x the total gold stock! If we relate the LBMA gold trading to mine production, the daily gross trading of gold is 16x annual production.
No wonder that the paper gold market is a casino that has nothing to do with the real price of gold or FREEGOLD. It certainly does not fulfil any of the criteria of Freegold set above.
So how can we ever get to the point of honest gold or Freegold? Well, what is absolutely certain is that no government, central bank, the LBMA or the BIS (Bank of International Settlement) will make any attempt to create an honest gold market. This can only happen after a partial or total collapse of the current false financial system.
Whether we like it or not, this collapse is likely to take place in the next few years and for the first time, the price of gold will be determined by real supply and demand in the physical market with no link to any paper market.
At that point, the gold price is likely to be multiples of the current price.
Anyone interested in long term wealth preservation should own physical gold today and some silver and not worry about price fluctuations. Precious metals should form the foundation of the wealth pyramid and be left there.
This is what the Chinese are doing
and China bought another 179 tonnes in November taking the total purchases since 2008 to 17,000 tonnes. Thus China is continuously buying a major part of annual mine production.
2019 – A TURBULENT YEAR
Looking at the shorter term, 2019 is going to be the year when most markets will change direction. Stock markets are likely to go down substantially and probably crash. The dollar will continue its long term fall to ZERO and gold and silver will resume their uptrend to new highs.
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