Gold – One World Two Markets
by Egon von Greyerz
The world is now at tipping point and this coming autumn we are likely to see the beginning of what I in an 2009 article described as “The Dark Years Are Here”.
We are not just going to experience another correction, giving investors yet a chance to buy the dips in a never ending bullmarket bonanza. No, this time we will see the end of a 100 year Central Bank money printing and debt extravaganza. And maybe it is the end of a bigger cycle since the early 18th century or possibly even a 2000 year cycle.
But it is not important at this point what the magnitude of the cycle is. Suffice it to say that we will see corrections in markets and in the world economy, the proportions of which will be totally devastating for the world. Stock markets will decline by 90% or more bond markets will totally collapse and world trade will more than halve. World population could also decline by 2-3 billion. All of this seems unimaginable today. But if someone had said in 1932 when the Dow was 40 (it is not a misprint) that it would reach 18,000 83 years later, no one would have believed that either. Around 1900, world population was around 1 billion. No one would have believed then that it would be possible to feed another 6 billion people 115 years later. And sadly it isn’t, since many people are suffering around the world.
What we have seen in the last 100 years is totally unprecedented in world history. It has only been possible by central banks creating a money bubble that has expanded far more than anyone would have thought was possible. In my view this bubble cannot expand any further so like all bubbles it will burst. It is only a question of if the bubble will just gradually implode or if it will explode. Hopefully for the world, there will be an implosion so at least we will have a bit of time to adjust.
No one will be able to escape the economic, financial and social calamities that will hit the world. War is also a possibility. Living outside of big cities is clearly an advantage. Having a circle of family and friends for support is invaluable. For the privileged few with assets to protect, the banks will not be a good place to be. An implosion of $ 200 trillion debt and $ 1.5 quadrillion of derivatives will see to that. To hold physical gold and some silver outside the banking system will be the best way to protect wealth.
Gold has now corrected for four years from the $ 1,900 peak in 2011. On most criteria gold is now oversold and undervalued. On a real inflation adjusted basis gold is now as cheap as it was in 2002 when we bought it for $300. Speculators currently have an all time high short position in the futures market. And that doesn’t include the interbank market where the short positions are most likely a lot bigger.
The gold price bears no relationship to the real price of gold nor to the major and continuous very high demand for physical gold. The gold price is set in the paper market by the speculators and manipulators. The buyers of physical gold are very fortunate to be able to buy real gold today for prices which have nothing to do with the real value of gold. Especially India and China understand this. Mine production of gold is around 2,500 tons annually. Only China buys 2,000 tons and India 1,000. In the last few years the demand for physical gold has substantially exceded production. The sellers have been central banks which clearly only have a fraction of their stated figures. When China reveals their real holdings and allows an open audit, no one will believe that the USA has anywhere near 8,000 tons without an independent audit. What we also must remember is that the world has printed and borrowed another $ 60 trillion since 2008. This massive credit expansion is not reflected in the gold price. If there was no paper market in gold, the price today would probably be $ 8,000 since this is the correct price adjusted for real inflation. All of the factors above are likely to start unravelling in coming months.
In the autumn of 2015 we are likely to experience the beginning of the end to the biggest speculative bubble in world history. All bubble assets will implode and the financial system will come under massive pressure. The dollar will fall and so will many other currencies. Money priniting will follow, fuelling the currency collapse and hyperinflation. As a consequnce gold and silver prices will surge.
For more details, please read my latest KWN interview.
Egon von Greyerz