GOLDEN TIMES AHEAD
BUT ONLY FOR OWNERS OF PHYSICAL GOLD
by Egon von Greyerz
In this month’s newsletter we will discuss why physical gold is the most important and probably the only asset to protect investors’ wealth from total destruction in the next few years. Gold will not only preserve investors’ wealth, it will also continue to greatly enhance their wealth just as it has done for the last ten years. In 2002 Matterhorn advised investors to put up to 50% of their liquid assets in physical gold. Since then gold has appreciated over 200% against most currencies. But we believe that the big move in gold is still to come as we will explain in this report.
WORLD FINANCIAL SYSTEM BANKRUPT
Last month we discussed the UK economy and why it is virtually bankrupt. The UK Government has had to save and take majority or total control of four banks by printing hundreds of billions of pounds. We used the UK as the example of a rotten financial system worldwide but there are many other regions with insurmountable problems:
Eastern – Western Europe.
Eastern Europe owes $ 1.7 trillion and mainly to Western European banks. Most Eastern European economies, including the Baltic States are now virtually bankrupt with massive debts, current account deficits, budget deficits and collapsing currencies. Many of these countries and their citizens have borrowed heavily in foreign currencies, like the Swiss franc, increasing the size of their debts by up to 100% as their currencies have fallen precipitously. The dilemma for Western European banks is that not only are they the main lenders to Eastern Europe but they also own most of the East European banks. West European banks have not only done most of the lending to Eastern Europe but they also account for 75% of the $ 5 trillion of loans to emerging markets.
But it gets a lot worse than the $ 1.7 trillion lent to Eastern Europe. On February 11, The Telegraph in London published an article with the following headline:
“European Banks may need £ 16.3 trillion bail out, EC document warns…”
The article then goes on to say: “European Commission officials have estimated that impaired assets may amount to 44pc of EU bank balance sheets. The Commission estimates that so-called financial instruments in the trading book total £12.3 trillion (13.7 trillion Euros), equivalent to about 33pc of EU bank balance sheets. In addition, so-called ‘available for sale instruments’ worth £4trillion (4.5 trillion Euros), or 11pc of balance sheets, are also added by the Commission to arrive at the headline figure of £16.3 trillion.
The Telegraph article was changed in later editions with all the figures omitted. If this was due to political pressure, it shows how seriously concerned London and Brussels are to have such a figure published. And so they should be because £ 16.3 trillion or $ 25 trillion is sufficient to sink the whole financial system.
It is not only Eastern Europe, which has severe problems. Many Western European countries are virtually bankrupt including the UK, Spain, Italy, Greece, Portugal, Ireland, Spain, Iceland to mention a few. The US is of course also bankrupt but we will come on to that later.
Remember that none of these countries will be able to repay their debts in today’s money. In addition, due to falling revenues and increased expenditure all governments will run deficits in excess of 10% of GDP for years to come. So the only solution will be to print tens of trillions of Euros, Pounds, and Dollars etc making most currencies worthless and gold a major beneficiary.
USA
US total debt is now $ 54 trillion, which is 450% of GDP. Add to this the unfunded liabilities (Medicare and Social Security/Pensions) of circa $ 60 trillion making a total US debt of $ 114 trillion. This gives a total debt per US household of over $1 million! Remember that these debts were built up during so called good times. There is no chance whatsoever that any of this will be repaid even by future generations.
But it gets worse. In the last 18 months the US Government has created or committed to programmes totalling $11 trillion. The bailouts of AIG, Fannie Mae, Freddie Mac, Citigroup, Bank of America, GM and Chrysler etc are only the beginning.
Let’s look at the next lot of dominos likely to fall:
BANKS – Write-offs are being drip fed into the system in order for the US Government’s printing presses to keep pace. There is much more to come. It has been argued that the European banking system is in much worse shape than the American. But this argument conveniently excludes OTC derivatives. Just three US banks, JP Morgan, Citigroup and Bank of America, have a total derivative exposure of almost $ 200 trillion. This is the gross value of their exposure and when counterparty fails, gross becomes net. A big percentage of these $ 200 trillion are worthless, and there are no reserves to cover these losses.
CITIES AND STATES – A great number of states and cities are virtually bankrupt today. This problem will grow a lot bigger in the next couple of years.
INSURANCE COMPANIES, PENSION FUNDS – These entities keep their assets mainly in stocks, bonds, property and short term government securities. Stockmarkets are down by over 50%, commercial property by 25-35%. So far falling interest rates have kept bond markets strong. This is likely to change in 2009 with long term rates rising, thus putting pressure on bond prices. This strong erosion of assets held by Insurance Companies and Pension Funds is likely to make most of them technically insolvent.
We could go on with this list naming retailers, Property/Real Estate Companies, Industrials, and Airlines etc.
US GOVERNMENT – Luckily we have the US Government that will be America’s as well as the world’s saviour. Both the US treasury and the Fed have made it very clear that they will support any entity that needs financial assistance. The $ 11 trillion in support issued or committed so far will be small fry in relation to what is required to keep US Inc. afloat. The sums involved are mindboggling and will lead to a totally worthless dollar as well as hyperinflation.
THE VIRTUES OF GOLD
For 5000 years gold has been the only real currency that has survived. All paper money has been printed away until it has become worthless. In the last 60 years the purchasing power of most currencies has declined by over 90%. The money that will be printed by governments in the next few years, in their attempt to rescue the financial system will ensure that virtually all paper money will return to its intrinsic value, which is ZERO.
There are times when gold acts as a currency and there are times when it acts as a commodity. Since 1999 gold has acted as a currency and this phase is likely to last for many years. In times like the current ones, when the whole financial system is fighting for survival and when the risk of inflation or hyperinflation is very high, gold is an essential part of an investment portfolio. During such times gold fulfils two vital functions; it protects investors from the destruction of paper money and the decline of other assets such as stocks and property/real estate. In addition, gold gives the potential of substantial wealth enhancement.
With the current turmoil in the world and the risk of wealth destruction, physical gold should form the foundation of investors’ wealth pyramid. Matterhorn advised investors to put up to 50% of their liquid assets into gold already back in 2002 as we then expected the current financial crisis to happen. Although this is a very high percentage of investors’ wealth, it has been proven to be both a superb investment as well as given peace of mind. Even if investors are not prepared to put 50% of their liquid assets into gold, the amount invested should be of a sufficient size to act as meaningful wealth protection. In the current financial environment we would consider 25% as a minimum.
So what makes gold so special?
- Gold cannot be printed.
- Gold has no liability attached to it.
- Gold is not one country’s currency that can be manipulated.
- Gold is a store of wealth.
- Gold is indestructible – Virtually all gold ever produced is still in existence.
- Gold has a high value to weight ratio – All the gold that has ever been refined fits into a 20 metre cube.
‘Gold is in limited supply – Annual gold production is declining and is currently 2500 tons or $ 65 billion’.
Gold bullion above ground held privately amounts to $ 700 billion. This is less than 0.5% of world financial assets of $ 150 trillion. If 1% of these assets were allocated to gold this would mean an investment of $ 1.5 trillion into gold. This would be a trebling of privately held gold.
Not enough gold to satisfy future demand
Annual production is only $ 65 billion at current prices which is grossly insufficient to cover a major increase in demand. Central banks are currently not sellers and countries like China and Russia are likely to increase their gold holdings substantially. Some gold jewellery will be minted but that will not be anywhere near enough.
So how can an investment of $1.5 trillion into gold be satisfied? Only by price! The price of gold has to rise manifold in order to satisfy such an increase in demand. Is this likely? Yes, in our view this is very likely.
Retail gold in the form of coins or smaller bars are virtually impossible to find in quantity and then only at a high premium. Matterhorn can still buy gold bullion for investors without a premium.But for how long?
In 2008 a total of $25 billion was invested into gold bullion (including ETF’s). Although this was a record figure, it is miniscule in relation to total world financial assets. The average private or professional investment portfolio today has no allocation to gold. As a matter of fact most investors don’t even think about buying gold. They don’t follow the gold market as they do stocks, bonds and currencies, even though gold has appreciated 200% in the last nine years. This will change. In the next few years most investors will want to hold gold, especially as paper money becomes worthless and the financial system crumbles.
Gold should not be held in the following forms:
Gold mining shares are not a wealth preservation investment. First there is the custodian risk. If there is a problem in the banking system it can be very hard to get hold of the shares for a long period of time. Also, there is a risk that mining companies will be nationalised when the gold price surges.
Bank and Futures trading accounts have absolutely nothing to do with wealth preservation and must be avoided.
Exchange Traded Funds (ETF’s) There are several gold ETF’s which all say they hold physical gold. Some gold experts are questioning if the ETF’s are holding not only physical gold but also paper gold. There is so far no proof of this. What is clear is that investors do not have access to their ETF gold and therefore it is a form of paper gold.
Fractional ownership There are several web based companies offering fractional gold ownership. This means that investors have a piece of a gold bar which is shared with others and that they don’t have personal access to their gold. This type of ownership does not fulfil our strict wealth preservation criteria.
Gold Certificates are also paper gold since there is no certainty of physical gold delivery in times of crisis or shortage of gold.
We do not favour any of the above methods for investing in gold. With the current precarious state of the world financial system, wealth protection is vital. Therefore, investment in physical gold must adhere to the strictest wealth preservation criteria.
Invest in physical gold for wealth preservation
Matterhorn Asset Management has created a totally unique programme that satisfies the strictest wealth protection criteria. This is the only effective means by which investors can protect their capital in a world financial system, which is virtually bankrupt.
The unique features of Matterhorn’s Gold Investment Programme:
- We only buy the highest grade physical gold for our investors:
- Each gold bar is registered in the investor’s name with serial numbers
- The gold is stored in vaults with the highest security
- The gold is stored outside the banking system in Switzerland, probably the safest country in the world
- The gold is insured
- The investor has access to his gold
For more information about Matterhorn’s gold programme see our Gold Bullion Investments page.
Where is the Gold Price going?
Many investors are asking why gold is not going up more with all the problems in the financial system. But remember that gold is already up over 200% in the last 10 years whilst stockmarkets are down to 1996 levels.
Gold has been a superb wealth protection investment in the last 10 years against almost all other asset classes. Since 1999 the Dow Jones and most other major indices have declined 83% against gold. Our projection is that stockmarkets will decline another 90% against gold in the next few years.
It is never sound to see an investment go straight up without major corrections. These corrections are the necessary and natural forces to shake out all weak hands that buy each time gold makes new highs and sell when gold corrects.
In 2009 gold has made new highs against all major currencies except against the dollar. Demand for dollars in connection with liquidation of non-dollar assets by US investors has been very high. It is our view that the dollar will again weaken substantially during 2009 due to the problems in the US economy. All paper currencies will take turns in the competitive devaluations taking place. Gold will be the only beneficiary in the end.
If we had told investors back in 1919 that gold was going from DM 100 to DM 100 trillion per ounce nobody would have believed us. But this is what gold did between 1919 and 1923 in the Weimar Republic. We are not forecasting that the same will happen now (although possible), but what we are saying is that it’s impossible to forecast the gold price in hyperinflationary terms. In real terms, due all the factors outlined in this letter, we believe that gold will appreciate substantially and reach many multiples of the current price. The 200% that gold has appreciated in the last nine years is only the very beginning. The real move is still to come.
“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 THE 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 – Austrian Economist (1881- 1973)
12th MarchEgon von Greyerz
matterhornassetmanagement.com
goldswitzerland.com
