by Egon Von Greyerz, Gold Switzerland:
To own gold is not climbing a wall of worry. For anyone who understands the problems that the world is now facing, physical gold ownership gives peace of mind and the best insurance that money can buy. So why is less than 0.5% of world financial assets invested in gold and gold stocks? There are several reasons for this. Firstly, 100 years of massive credit expansion and money printing have mainly inflated the asset classes that investors understand, be it stocks, bonds or property. Also, financial repression, which in layman’s terms means manipulation, has totally distorted most financial markets. With the help of derivatives, governments, central banks, investment banks and hedge funds can create false markets in most investment areas. If a market is massive and global, like currencies, they are very hard to manipulate, except if several major sovereign states collude. But in a small market like gold and silver, it is extremely easy to manipulate prices. Even more so when a lot of it is done with the assistance and blessing of governments.
All manipulation ends in tears
The longer it takes before a market gets back to its unmanipulated equilibrium, the bigger will be the adjustment. In the meantime, investors believe that their portfolios will continue to grow to the sky. Nobody fears the fact that p/e’s are 80% above the average or that bond yields are around zero or negative. But in bubble markets not much is needed to change sentiment.
There is a lot of talk about the Trump effect. Is the new US president going to continue to fuel market sentiment or will he cause a collapse. It is of course not Trump that will change the direction of markets. More likely, he could be one of the catalysts that will cause the credit and stock market bubble to burst.
When markets are overbought, overvalued and overloved, there is not much needed to change the direction. And this is where we are now. A change in sentiment and fear will make markets turn on a sixpence.
In the short term the gold price is a reflection of fear. But in the longer term, all gold does is to reflect the debasement of paper currencies. Since 1971 when Nixon abandoned the gold backing of the dollar, the US currency has lost 97% of its purchasing power. But since currency debasement is not noticed on a daily basis, its effect is never understood by the public. Few people appreciate that the increase in house or food prices is due to credit expansion and money printing. We will never see a headline like: “The dollar is losing purchasing power due to economic mismanagement”, or that gold is going up because the dollar is being debased. Since 2011 when gold reached a temporary peak of $1,920 we have seldom seen gold making positive headlines. In 2016 we saw the first signs of gold making the news again. But that died quickly as gold declined $250 from the July 2016 peak.
But on Friday the 24th of February we saw headlines of gold and fear like:
“Gold nears four-month high as European political worries persist”
“Gold nears four month high amid heightened political uncertainty”
“Gold loves Trump”
This commentator expresses the dichotomy in markets:
“The rise in stocks this year tells you investors are feeling confident about Trump’s America, but the rise in gold tells you they are well aware it could all go horribly wrong.”
The last commentary says it all, it will all go horribly wrong. That is the inevitable consequence of 100 years of credit expansion from virtually nothing to $250 trillion, plus global unfunded liabilities of probably $500 trillion, plus derivatives of $1.5 quadrillion. This is a staggering total of $2 ¼ quadrillion. Therefore, the question is not what could go wrong since it is guaranteed that all these liabilities will implode at some point. And when they do, it will bring misery to the world of a magnitude that no one could ever imagine. It is of course very difficult to forecast the end of a major cycle. As this is unlikely to be a mere 100-year cycle but possibly a 2000-year cycle. It is also impossible to forecast how long the decline will take. Will it be gradual like the Dark Ages which took 500 years after the fall of the Roman Empire? Or will the fall be much faster this time due to the implosion of the biggest credit bubbles in history? The latter is more likely especially since the bubble will become a lot bigger before it implodes. Also this time we are not talking about real assets crashing in value but the biggest part will be paper assets with no intrinsic value.
Money printing of over $2 quadrillion
The reason the bubble will expand first is that central banks worldwide will print unlimited amounts of money to try to save the financial system. The amount of money printing could easily reach the magnitude of total outstanding credit, liabilities and derivatives of $2 ¼ quadrillion. But that is unlikely to be enough since deficits will grow exponentially due to social security, pensions etc. Most people will find it very difficult to take these figures seriously today, but then nobody has the experience of the end of the biggest global debt bubble in history. We have seen many examples in history what can happen in a hyperinflationary economy. Take the Weimar Republic for example where gold reached 100 trillion marks. Hyperinflation often becomes a vicious circle that feeds on itself until the financial system collapses under the sheer weight of the worthless hyperinflationary money printed by central banks.
We are not far from the moment when central banks will fail to expand the Ponzi scheme in an orderly manner. Hyperinflationary printing will certainly not be orderly. Governments have neither the skills, nor the imagination to continuously delude the people that they are creating real money out of thin air. For some reason, there is today total trust in debt instruments issued by governments through the central banks. As money printing escalates, this trust will wane. How can any sane investor buy a sovereign debt instrument that yields anything from a negative return to a marginal positive return? Especially since it is guaranteed that these debts will never be repaid, at least not in real money.