The second day of this year’s much more upbeat European Gold Forum, given the relatively strong performance of gold and silver this year to date, was kicked off with a hugely positive (for gold investors) presentation from Egon von Greyerz of Matterhorn Asset Management. Von Greyerz’s views on gold are well known – he has virtually always been hugely bullish on the precious metal, or perhaps that should be bearish on national currencies, including the mighty US dollar. While gold bugs may like his predictions – gold to $10,000 within the next few years, they may not, on deeper analysis, be particularly happy on what will happen to the global economy on the way to getting there if it does.
Von Greyerz commented that investors in gold and gold stocks are likely to be about to have their best five years ever with the precious metal – and selected gold stocks will do even better. They will prove to be by far the best asset class out there he averred. We have already seen many of these stocks double in the past three months – even the normally sluggish to move majors like Barrick Gold (ABX) and Yamana (AUY) , although these were perhaps so oversold that this should not prove too surprising.
So on what does he base his predictions? The factors are hardly unknown to the gold investment fraternity, but von Greyerz does present his case most vehemently, aided by charts showing the enormous spikes in global debt and global population. Something’s got to give. Anything that looks like a spike won’t last von Greyerz says – it has to come down again sooner or later – history tells us that. But what has to be worrying for us all is how and why this may happen. The likelihood of global population coming back sharply at some time in the near future has to be exceedingly worrying for example. But the unwinding of global debt suggests also a pretty dire economic future too. The world has never been in such a worrying state as it is today he said.
All sovereign nations are, in effect, bankrupt notes von Greyerz. Take Japan for example – the most indebted of all with a ratio of net debt to GDP of 260% Japan will implode – particularly given its demographics of a declining overall population but huge growth in the over 60s element in its economy. There’s no way Japanese youth will be able to support the aspirations and entitlements of the aging population. And other countries are heading in the same direction.
China’s debt ratio has increased enormously this century. The EU he sees as a ‘basket case’ and is hugely thankful that his native Switzerland avoided becoming a part of it – but even Switzerland has huge debt problems going forwards describing its banks and policies as casino hedge fund banking – led by the US. This obviously applies to the whole global economic community. There’s much more when one starts analysing the positions of nearly all economies. He even sees the U.S. dollar collapsing under the weight of its debt in the next two years!
So the case for gold is not necessarily that it will rise in real terms, but that the currencies against which it is measured will collapse. He sees central banks as having exhausted their ammunition and losing control, leading to a massive rise in interest rates – perhaps back to the kinds of levels seen in the 1970s and, ultimately some degree of hyperinflation. As he puts it – gold is eternal with constant purchasing power, but all fiat currencies against which it is measured will eventually collapse.
He recommends holding physical gold – and holding it outside the banking system. Swiss vaults he sees as as safe as anywhere against possible government confiscations.
As for general equities – he sees them falling dramatically against gold. He sees the Dow:Gold ratio falling back below 1 – perhaps as low as 0.5. Say the Dow at 5,000 and gold at $10,000.
As for the current situation he feels that gold has at last turned after a near 5 year downturn, and looking to silver he sees the junior precious metal performing even better than gold, but warns though that its volatility still means it is not suitable for investment by widows and orphans. Even so he sees the Gold:Silver ratio coming down dramatically – perhaps back to 30 or lower.
As to the slightly safer gold though he points out that his price prediction of $10,000 is not unprecedented. If one takes gold’s 1980 peak around the $800 mark and takes inflation into account then that was equivalent to around $9,000 in today’s dollar terms!
But as I’ve alluded in the article title, if gold does get to $10,000 it suggests the path to achieve this is so fraught with economic and geopolitical uncertainties that even the most ardent gold bugs should be worried about what kind of world we may be left with under such a scenario.