Money printing and debt are just the most beautiful schemes invented by governments to make ends meet and give the people whatever they want. In this perfect system, it makes not the slightest difference if the budget doesn’t balance. Conventional methods of increasing taxes or reducing government expenses is old hat and totally unnecessary. With modern methods, such trivial problems are solved by the printing press. More social security, more guns or major infrastructure projects; whatever is required, there is money for. Because printing presses have no limit. And with computers, a few zeros can easily be added. The problems in the HC Andersen saga “The Emperor’s New Clothes” don’t exist today.
At that time, they had run out of gold in their coffers, and therefore, the emperor had to go naked. Today, no president must be naked since the printing press can dress both him and all the people. And after he has finished his term, his banker friends will use him so he can earn $100s of millions by just giving speeches and networking. Everybody benefits, the poor get more welfare, the middle classes can borrow money for houses and cars, and the rich accumulate incredible wealth. This system is so good that work can be made voluntary. All that is needed is to print a bit more money to feed everyone, whether they are working or not.
Gold has no place in a modern monetary system
The system described above has worked incredibly well for the last 45 years since Nixon abandoned the gold backing of the dollar. Gold doesn’t fit into a modern monetary system. It restricts the unlimited expansion of money and credit which is the new paradigm for prosperity and growth.
In 1971 the US Federal debt was $398 billion. Forty years later the US will have a debt of $20 trillion by the time the new president comes into office. That makes a compound annual growth rate of the debt of 9%. This rate remains fairly constant whether it is calculated from 1971, 1981 or later. If we extrapolate it four years to the end of the new president’s period, it would give a debt by the end of 2021 of $28 trillion. And if we go ten years forward to the end of 2026, the debt will be a staggering $47 trillion. So, President Trunton and whoever follows after him/her will just have to speed up the printing presses a bit more.
But wait, what about a slowdown in GDP, a decrease in tax revenues, major bank defaults, much higher interest rates and more weapons for the military and possibly some major wars? These are all likely events in the next few years. As bond and credit markets collapse, we will see interest rates at least in the high teens, like in the 1970s. This will also kill the $1.5 quadrillion derivative market. Well, all of this is not a problem either. Just needs more money for printing. Instead of printing trillions, we just add a few zeros and make it into quadrillions or quintillions. We might even get to googols (1 with a hundred zeros). The founders of Google never thought that would happen in their lifetime. Or did they?
Taxes are redundant
The great advantage in this new economic system is that taxes become totally redundant. Firstly, very few people will have a job and for the ones who do, they won’t be able to afford to pay any tax. Secondly, the little tax they can pay is totally irrelevant in an economy where the government needs to print unlimited amounts of money to prevent the inevitable collapse. In this context, tax revenue becomes incidental. The rich will be heavily taxed, probably nearer 100% income tax to placate the masses. But most of the rich will never pay these taxes. In many countries, like the US, there will be schemes that minimise taxes for the rich to virtually nothing. Wealth taxes will be extremely high in most countries, and this could be a problem for the wealthy since hyperinflation initially will drive asset prices up to very high nominal levels. Most governments will be in total disarray when hyperinflation starts. That includes civil servants and tax inspectors. Their system never assumed hyperinflation, and they will be totally incapable of calculating and collecting taxes. But this won’t be a problem that a bit more money printing can’t solve.
Hyperinflation is a chronic disease
What every government in hyperinflationary economies fail to understand is that adding debt to a debt problem just exacerbates the problem. Zimbabwe still haven’t learned despite their recent experience of hyperinflation. They now need to print money again since they still have no idea how to govern the country. This coming hyperinflationary era will benefit no one. Governments will lose control, people will lose their jobs, and there will be social unrest and probably wars, including cyberwars. World trade and economic activity will collapse. Asset markets might boom for a while, reflecting hyperinflationary price levels. But this will be short-lived and follow the pattern of all hyperinflationary economies because hyperinflation always goes hand in hand with depressions.
Credit markets will also fall fast due to severe economic conditions, high interest rates and the inability of borrowers to service their loans. Indexation of loans in line with inflation is also a possibility. It has happened before.
In every case of hyperinflation in history, it has always affected just one country or region. Between 1700 and today, there have been around 150 instances of hyperinflation in various countries around the world. When a country has defaulted on its debt, any foreign creditors obviously have to write off their claim. So far, these write-offs have been manageable. However, the coming period of major defaults will involve such astronomical amounts on a global scale which cannot be absorbed by any country.
The coming global hyperinflationary period is unlikely to last more than a few years. During this period, there will be debts of a magnitude that computers are unlikely to cope with. Before the world can get on a sound footing again, all this debt must disappear. There is clearly no chance of ever paying it off. And there is no possibility for the world to grow again as long as this debt is overhanging the world economy. Therefore, the only solution is an implosion of the debt. But when this happens, all assets financed by this debt will also implode in value. This will create a global super depression that will be devastating for every individual on Earth. It will also involve a major reduction in world population due to poverty, famine, lack of medicine and hospital care, disease, social unrest and wars. The world has been through these periods before. In the mid-14th century Black Death halved Europe’s population and possibly also the whole world’s.
After a period of excesses that we have seen in the last 100 years, a correction is due. This correction is the only way for the world to get back to a sound base on which future growth and prosperity can be built. But sadly, the transition will be horrific and could last a very long time.
No physical Gold at any price
During the economic, financial and geopolitical calamities that we will see in the coming years, there will be times when the financial system will not function and when paper money will be worthless. The demand for physical gold and silver will then increase exponentially. At that time, no one will accept paper gold or silver. So the paper market, which is many hundreds of times the physical market, will collapse. Comex, together with other futures markets, will then default since they will neither have the gold nor the silver nor the money to settle the claims. The same will happen to all the bullion banks, investment banks and the BIS. They will all have lost control of the paper market in precious metals. Instead, prices will only be determined in the physical market. As people scramble to get hold of physical gold and silver at any price, there will be periods when there is “no offer”. This means that physical gold or silver cannot be found at any price. These will be the times when gold will go up, not just hundreds of dollars but also thousands.
For any buyer who is waiting to buy physical gold or silver, I would advise them to buy now at current prices which are unlikely to ever be seen in history. There could soon be times when physical shortages will be it impossible to get hold of gold and silver.
$500 Silver – $10,000 Gold very likely
My longstanding target of $10,000 gold is in today’s money. Taking into account credit creation, money printing and inflation in the last 26 years, this is a very realistic target that could well be exceeded. Silver on the same basis could reach $500-1,000. But remember that these targets don’t take the coming hyperinflation into account. With that we need to add quite a few zeros to the gold and silver price.
The wonderful thing is that investors can still today take advantage of the current low prices to buy physical gold and silver based on the paper prices for the metals. This situation is unlikely to last for much longer.
Gold Has No Place In A Modern Monetary System!
As the gold market takes a break in its journey to much higher levels, it is good to step back a bit and understand why gold has appreciated so dramatically in the last 100 years and why this will continue for many years to come.
Most people have no idea what money is. They believe that if they have 100 dollars or euros, this represents real value as well as durability. Few people realise that their currency, which they call money, has nothing to do with real money at all. All paper currencies are ephemeral and return to their intrinsic value of zero. This is because reckless governments cling to power by printing or borrowing endless amounts of fiat money in the hope that they will placate the people and buy votes. Fiat money, as the name indicates, can never be real money. It is issued by edict and is not backed by anything but debt and liabilities.
Power corrupts and money corrupts.
It is a lethal combination which not only destroys people but also nations. And sadly, we have now reached a point in history when the unlimited amounts of fiat money that have been created will also destroy continents.
Zimbabwe type hyperinflation to hit most currencies
To understand what money is and isn’t, we can just look at the example below.
Most people in Zimbabwe believed that their currency was money and that it represented reward for labour and or production. But as the irresponsible regime started to run out of tricks to cover up their total mismanagement of the economy, they had to print endless amounts of money until the point when even the 100 trillion-dollar note was totally worthless. Inflation in Zimbabwe rose exponentially. In 2008, annual inflation was estimated at 90 to 21 per cent (or roughly a 10 with 40 zeros).
What happened in Zimbabwe is an excellent example of how a prosperous country can be destroyed by total mismanagement. The country had a very successful agricultural sector, mainly owned by Brits from the South Rhodesia era. It also has considerable mineral resources. But the value of this was gradually destroyed when the country became independent. And during that tragic decline of Zimbabwe, private land was expropriated and enterprise was nationalised.
So, Zimbabwe is an excellent example of how to destroy a currency by killing private enterprise and replacing it with government interference and control. There are many examples of this in history. The partition of Germany after WWII is the best proof how a country’s economy can be destroyed with disastrous policies – a West Germany, a prospering free market economy and East Germany, a centrally steered and poor communist economy.
The decline of the US dollar has been a lot faster than most people realise. In 1971 the $100 bill note above would have bought the 100 gram (ca. 3oz) bar pictured. Today it buys just a small corner or 3% of the gold bar.
But the US$ is not the only currency in the race to the bottom. All major currencies compete successfully in this race and that includes the Euro, Yen, Pound and all other currencies.
Gold is nature’s currency and the only money to survive
The graph below shows gold as real money and stable purchasing power (straight line at 100). Gold does not appreciate. It performs the function that money should do. It represents stable value just as it has for thousands of years. One ounce of gold bought a good suit for a man 2,000 years ago, also 100 years ago and still does today. This is exactly how money should perform. It should maintain its value over time. But if we then look at the graph below, we see how all currencies have lost 97-99% against gold in the last 100 years.
As the graph shows, the dollar, euro, yen and pound have only 1-3% to go to reach zero. It is virtually guaranteed that this final fall will take place, and it is only a question of how long it will take. With the exponential growth in debt accelerating strongly since 2006, we could very well see this final destruction of the currencies in the next 5-7 years. And if the debt doesn’t cause the collapse, so will the $1.5 quadrillion derivatives do as counterparty fails.
Zimbabwe is an excellent example how what was meant to be money and a store of value just turns into a worthless promise that could not be used for any transaction or exchange. In the final stages of the hyperinflationary period the people either demanded dollars or gold.
Destruction of money is the historical norm
It is so fascinating that the destruction of currencies has been the norm throughout history as no paper or fiat currency has ever survived. Therefore, there seems to be little hope to permanently introduce a sound money system. Yes, there have been periods of sound money but they are seldom long lasting. Power seems to have such a corrupting effect on everyone who enters politics that the urge to print and spend worthless paper money seems completely irresistible.
The simple solution would be to first get rid of all central banks because central banks are the main reason why money never remains money but always returns to just the value of the paper it is printed on. Central banks perform two principal functions. They artificially manipulate interest rates, and they print money. By manipulating interest rates, they destroy the natural laws of supply and demand. If there is high demand for money, interest rates in a free market will go up to dampen the demand for money. Also, higher rates properly compensate depositors for the increased risks they take.
Unprecedented financial manipulation
What is happening today is the total opposite of a free market. Global debt has grown over ten times in 25 years, and interest rates are zero or negative. This is financial repression or manipulation of a degree never seen in history. It totally destroys free market forces and is therefore the seed of a financial Armageddon never seen before. Whenever natural laws of supply and demand are interfered with, there are always severe consequences.
One thing is certain. The current financial system will not survive because it is based on principles which are not sustainable. In such a defective system, there is no sound money.
What is also certain is that gold, as the only real money, will continue to reflect the mismanagement of the world economy as the currencies in the next few years finish the move to zero.
Gold Has No Place In A Modern Monetary System!
Gold Has No Place In A Modern Monetary System!
There are a lot of people who are concerned about the performance of gold and the fact that the price after four years of correction is still so far from the high. The mistake that most people make is to measure gold in US dollars. We are seeing currently very temporary dollar strength. But the US$ is a weak currency in a mismanaged economy. Just look at the dollar in Swiss Francs. Since 1970 the dollar has lost 77% against the Swissy. That can hardly be called dollar strength.
The dollar is a very weak currency
If we measure the dollar in real money which is gold of course, the not so mighty dollar has lost 80% in this century.
So to talk about a strong dollar is totally ridiculous. The dollar is in a long-term downtrend which will continue for many years until it reaches zero. The temporary dollar strength gives the appearance that gold is currently weak. But we must remember that gold should be measured in your home currency and not only in dollars. It is pure laziness that makes non-Americans quote gold in dollars. International media don’t make it easier since they always show the dollar price.
The US population is less than 5% of world population and most of the remaining 6.7 billion people are not linked to the dollar. If we instead use GDP as a measure, the US represents around 25% of global GDP but that still leaves 3/4 of global GDP which is not dollar based. My point is that gold in dollars is only relevant to a minority of the world and the rest of us should measure gold in our home currency.
Gold in pounds up 47% in 2016
Let us look at gold in UK pounds for example. Any Brit who has kept his money in gold since December 2015 had gained a staggering 47% in the last ten months. Had he instead kept his money in the UK stock market, he would have made just 13% which is 1/4 of the gain he could have made in gold.
The chart of gold in pounds below is an excellent example of the wealth preservation properties of gold. When a currency weakens, most investors don’t realise how much real value this is costing them. As opposed to most governments, gold tells the truth and the truth is that for UK citizens, their currency has lost a huge 1/3 of its purchasing power in the last 10 months measured in gold.
But it is not just gold’s performance in pounds this year which is significant. Since 1999, gold in pounds is up 6.6x. That means that the pound has lost 85% of its purchasing power when measured in gold. During the same period, the FTSE100 index has gone nowhere since it is today at the same level as it was in 1999.
UK stock market investors are deluding themselves when they believe they have preserved capital with a market that has gone sideways for 17 years, when in real money, gold, they could have made almost seven times their investment. Also, since most investors around the world only look at the gold price in dollars, they believe that gold is far from the 2011 highs. But looking at the chart above, gold in pounds, for example, is only 8% of the September 2011 peak.
Few UK investors, and that includes institutional investors, realise that if they had just kept their funds in real money – gold – for the last 17 years, they would have outperformed all other asset classes. That trend will continue for many years as all the bubble assets such as stocks, bonds and property will lose another 50-90% against gold.
Gold is near the 2011 highs in many currencies
But it is not just in pounds gold is doing well. In many other currencies gold is near the 2011 peak. The table below shows that gold in Australian and Canadian dollars for example is only 3% and 5% respectively from the peak.
The temporary rise of the dollar gives a skewed picture of gold’s performance since the 2011 peak. The dollar’s current strength leaves gold at 31% below the peak. But this is a very temporary situation and will be rectified when the dollar starts to fall. It is possible that we will see dollar strength for a while still but thereafter the world’s reserve currency will join the race to the bottom in earnest.
I am also showing in the table what is likely to happen to gold against all currencies in the coming years. Gold in Argentine pesos is up 6,500% in the last 14 years. This is what happens when governments mismanage the economy and print money to make ends meet. I expect that we will see similar percentages for the dollar, pound, euro and most currencies in the next five years.
Inflation – Deflation
The battle between deflation and inflation is continuing. Despite massive money printing and credit creation in many countries like Japan, China, the EU and the US, there is little sign of conventional inflation. The official figures show non-existent inflation in most countries. The fact that we have had the most incredible asset inflation in stocks, bonds and properties is not counted in these figures. Most of the printed money has pushed asset prices to levels which have made a small minority incredibly wealthy at the expense of the masses, who have been landed with massive debts, both private and public.
QE to save European banks
As the European financial system is on the verge of collapse, central banks are standing ready to crank up the printing presses. These central banks are totally aware that an extended deflationary period would be the end of many major European banks and, therefore, also the global financial system. We are at the point now when a deflationary implosion could happen any time, caused by the collapse of Deutsche Bank or a major Italian or Spanish bank. European governments are not going to let this happen, and therefore, a major European and global money printing package is not far away.
My view has not changed for a very long time. I believe we will have unlimited money printing in the next few years which will lead to hyperinflation. Thereafter we are likely to see a deflationary implosion. But if I will be wrong and severe deflation comes first, the world financial system will not survive. In that case, gold will become the only money available and therefore extremely valuable. Thus, physical gold will be the best protection both against inflation and deflation.
Gold Has No Place In A Modern Monetary System!
The selling of gold we saw last week was another desperate attack by the BIS and some central banks, together with the bullion banks, to manipulate the gold market lower. We saw over 40% of annual production of gold being sold last week which is 1,000 tons. The physical market continues to be strong which I will discuss further on.
Western Central Banks hold less than 50% of official quantities
Obviously, the sellers had no physical gold to sell, so they conveniently dumped all this gold in the paper market. It would have been totally impossible for them to do this trade in the real gold market, which is only physical, of course. Western Central banks have no physical gold of any quantity to sell. This is why they must fabricate paper gold out of thin air in order to dump it in the market. In total, these banks officially have around 23,000 tons of gold. I doubt they even hold half that figure. The rest is likely to have been sold covertly.
No major central bank has had an official audit of its physical gold in modern times. The last time the US gold was audited was in the 1950s. A proper audit would not just reveal that these banks have a lot less gold than they officially declare, but it would also expose the true position of their gold lending or leasing. Most of the gold they have left has been leased to the market in order to depress the price. But this gold no longer stays within the LBMA bullion banks like in the past. No, instead, the intelligent buyers of gold today, like China, India, and Russia, take delivery. This means that the leased gold now becomes a paper claim with no chance of getting physical gold back. So what has happened in the physical market in recent years is that central banks have continuously depleted their physical stock by selling and leasing their gol,d with most of the buying having taken place in the East.
This transfer from West to East is the reason why Western governments and central banks are desperate to keep the gold price down. Official gold is no longer held in “safe” Western hands that are easy to control. Instead the gold has been acquired by nations and people who understand the value of gold. These new gold buyers also know that it is the best protection against the total destruction of paper money that is taking place in our debt-infested world. And the countries that are now buying gold are not sellers.
Russia accumulates gold in spite of economic difficulties
The Russian government, for example, has been expected by the West to sell their gold every time they are under economic pressure. But if we look at the chart below, the picture looks very different. Since 2006, Russia’s gold reserves have gone up almost 4X.
And it is the same in China. Official Chinese holding have increased more than fourfold since 2006 to 1,800 tons.
China has accumulated more gold than any nation in this century
But since China has produced and imported over 11,000 tons of gold since 2009, it is assumed that the official gold holdings are substantially higher than the 1,800 tons reported, maybe as high as 8-12,000 tons, which would be higher than the official 8,000 tons that the US holds.
As paper gold is dumped, physical gold buying continues
So whilst the West is dumping paper gold, the East is buying physical. And this is exactly what happened last week. Gold fell almost $100 on the sale of massive amounts of paper gold. But something very different happened in the physical market. Mutual Funds and ETFs bought over 30 tons of physical gold last week. In total, these funds have increased their holdings this year by over 46% or 900 tons to 2,840 tons. As we can see in the chart below, the buying by these funds has been strong all year. When gold corrected by $100 in May, their gold holdings continued to increase.
As some speculative gold buyers are becoming nervous due to another manipulative attack in the paper gold market, the wealth preservationists see this as a real opportunity to add to positions in physical gold.
We are seeing the same thing in our company with continued strong buying from investors who understand that what we have just seen is another desperate attack by the BIS and some central banks, together with the bullion banks. When this group dump half a year’s physical gold production in a very short time, they know they can temporarily drive the price down. Banks can, of course, manufacture unlimited amounts of worthless paper gold and sell it to buyers who don’t understand the massive risk they are taking. But at some point, holders of paper gold will realise that they can’t get rid of it at any price. At that time, the price of physical gold will go up by hundreds of dollars or more in a day.
Thus, last week’s takedown is absolutely nothing to worry about even if we see a bit more pressure. We have seen these manipulations time and time again in this bull market which so far has lasted 16 years and is likely to last at least another 5 years and maybe a lot longer.
Gold Has No Place In A Modern Monetary System!
Gold Has No Place In A Modern Monetary System!
Two millennia ago, according to the bible, three wise men came to offer Jesus the gifts of gold, frankincense and myrrh. The peak of the Roman Empire is considered to be at the time Jesus was born although it took until 476 AD until the Western Empire finally fell.
Today, just over 2000 years later, we might be standing at another historical peak in the global economy. There are certainly many similarities like deficits, debts and decadence. Just like the Roman Emperors, current leaders have illusions of grandeur of a magnitude that the world has never seen before.
So let’s look at the modern version of the three wise men. What gifts are they bringing the world?As in the illustration below I have picked three central individuals in the world today; Draghi – head of the ECB, Li Keqiang – Premier of China and Abe – Prime minister of Japan. In themselves, they are not that important but the country or region they represent is.
Italy – the next nail in the EU coffin
Let’s first look at Draghi, the President of the ECB, obviously with the required Goldman Sachs connections. What gifts is he bringing to the world, and especially to Europe? Very little, as a matter of fact, and certainly not gold or solid finances. Although Draghi can’t be blamed for all the problems of Europe, he certainly personifies them. The European Union is in the process of braking up. Brexit was just the first step, but will be followed by many countries that will want to exit until the EU is no more. The Italian election on December 4th could be the next nail in the EU’s coffin. Initially, the EU and its predecessor EFTA were created for free trade between the member countries. But soon the power-hungry elite decided that the EU should be a power centre that would control Europe, politically, economically and militarily. But most 500 million Europeans have no desire to be controlled by an unelected and unaccountable elite in Brussels. The history, culture and roots of individual European countries are much too strong to lose your identity in some anonymous superstructure. Britain, free from the shackles of the EU bureaucracy, is likely to now prosper relative to its EU brothers.
There are now so many problems in the EU, but the biggest and most urgent one is clearly the financial system. Most European banks would be bankrupt if they valued their toxic assets at market rather than maturity value. Currently, many European banks are on the verge of failure, whether it is German, Greek, Italian, Spanish, Portuguese or French banks. Share prices of many major European banks are down 80-95%, which clearly indicates that the markets consider their chances of survival to be very small. Deutsche Bank is one example that some of us identified a few years ago as a bank that is unlikely to survive. Its market value is now less than 1% of its balance sheet. With $60 trillion in virtually worthless derivatives, the German government will need to print a lot of money to postpone the inevitable demise of Deutsche. I don’t think that the German government will let DB fail before Germany does. Thus, they are likely to fall together at some future point. The situation is the same for many other European banks, so Draghi will have to use all his wisdom to save the European financial system. This means he will print unlimited amounts of money in the coming years. But that will not have any effect. You can solve a debt problem by adding more debt. Thus, “wise man” Draghi will sadly fail in his attempt to save Europe.
China’s credit expansion – a time bomb?
What about China’s Li? Does he stand a chance? He has an impossible task. China’s spectacular growth has been accompanied by an even more spectacular increase in debt. China’s debt has exploded from $2 trillion to $35T this century. A lot of that is in the shadow banking system, and total bad debts are 10X higher than officially admitted. The slowdown in world trade this year is also going to affect China badly. The collapse of one Hanjin Shipping, one of the largest shipping companies in the world, is clear evidence of the downturn in global trade. Shipping rates for a container from Asia to Europe are now down to $760. Breakeven is $1,400 per container. The largest shipping companies are projected to lose up to $20 billion this year. The main reason for this is what is happening in China. Sadly, China fell into the Western pattern of expanding credit irresponsibly and spending a major part of the money on speculative investments that will fail. The bad debt in China will lead to major defaults, money printing and a fall of the yuan. Yes, the Chinese are wise and they do realise the importance of gold. That is why they will probably emerge from the coming economic debacle better than many countries, barring major political upheaval. Li and his successors will need all their Chinese wisdom to survive the coming ears.
Japan – a basket case?
Turning to Japan, there is absolutely no wisdom in Abenomics. As a matter of fact, it is a Kamikaze strategy that is guaranteed to lead to the Japanese economy falling into the Pacific. A country that, since the 1990s, has used up all its savings, had zero or negative interest rates and then printed more money than any major nation and still can’t grow, is doomed to fail. The Bank of Japan is holding 50% of all Japanese debt and is buying all the debt it issues, which is Yen 80 trillion ($0.8T) a year. This is, of course, the ultimate Ponzi scheme to issue debt at negative rates and then to buy it all yourself. Abe clearly gets no prize for his wisdom.
Finally, we have Janet Yellen. With three not so wise men around the world, does she add some wisdom to save the world financial system?
Let’s just look back and see how the US got to where they are now. The US was a superpower until the 1960s, but then wars, deficits and debts started to take their toll. But by having the world’s reserve currency, the US could ignore the decline in the economy and just issue more of its currency. To be linked to gold at $35 per ounce was, of course, a major inconvenience. This made it difficult to print unlimited amounts, especially since astute leaders like de Gaulle asked the US to pay their debts to France in gold. But Nixon was desperate to borrow and print money, so he decided to get rid of the inconvenient tie to gold. That was the beginning of the final phase of the destruction of all paper money, and with it the world economy.
Gold up 38x since 1971
One of the reasons why Western governments don’t like gold is that the price of gold reveals their deceitful actions in destroying the value of the currency. And this is exactly what happened to the dollar after 15 August 1971, when it was no longer backed by gold. It took 9 years for gold to go up 24X to $850 in January 1980. After a long correction that lasted until 1999, gold has resumed its uptrend and is now up 38X in dollars. This means that the dollar has lost 97% of its value in real terms, which is gold, in the last 45 years. With gold no longer backing any currency, it is a free-for-all for irresponsible governments and central banks to borrow and print any amount of money. Since Reagan became president in 1981, US debt has gone from $0.9 trillion to $ 19.6 trillion. Before Obama hands over to Trump/Clinton in January, he will have set the all-time record of increasing US debt a staggering $10 trillion from $10T to $20T. But that is chicken feed compared to what Trump/Clinton will need to do to try to save the US economy and the financial system.
The US is still hanging on to the super power position by its nails although it requires ever increasing amounts of debt. With the help of its reserve currency status, the US empire has dominated the world financial system not just with the dollar but also by creating powerful banking empires. This is a plan that was established in connection with the foundation of the Fed in 1913. Through international regulations like FATCA and Automatic Exchange of Bank Information, US authorities are tightening the grip on the financial system.
So Yellen has inherited a hopeless situation, and her Fedspeak makes it totally clear that she hasn’t got a clue what to do. Since the December Fed meeting, she has indicated consistently that rates will be raised, and nine months later, this has not happened. The Fed speaks with a forked tongue. They want to be all things to all men, and therefore they say one thing to please some people, and then they do something different because they know that the US economy cannot take an interest rate rise currently. With $14 trillion of Sovereign debt carrying negative rates, the US is not in a situation to raise rates. Not only would it cause the stock market to fall before the election, but it would also cause major stress for the global financial system.
So Yellen’s situation is hopeless. She is central bank head of the most indebted country in the world with absolutely no chance of ever repaying these debts. With derivatives and unfunded liabilities approaching $2 quadrillion she would require a wisdom that she does not possess. Not that anyone else could solve it either. The only solution would be Deus ex Machina but even this is not likely.
Thus, the four “wise” individuals with the power and position to save the world from the biggest collapse in history neither have the understanding of the problem, nor the tools to prevent the inevitable fall of the financial system. But that won’t stop them from trying. They will do the only thing they know, which is to print money of a magnitude that the world has never seen before, leading to“the final and total catastrophe of the currency system involved.” I doubt it will take 476 years this time!
Physical gold and silver will continue to reflect the destruction of paper money and also act as the best wealth protection available. At today’s price, gold is a gift. We are likely to see levels that are unimaginable in future years.
Gold Has No Place In A Modern Monetary System!
Gold Has No Place In A Modern Monetary System!
The world economy is now at its most dangerous point in history. In virtually every major country or region, there are problems of a magnitude which individually could trigger a collapse of the financial system. Because of the interconnectivity of the system, when the first domino starts falling, there is zero possibility of stopping all the other unstable dominoes from crashing one after the other in quick succession.
The world is now staring down a deflationary black hole that is on the verge of sucking into it all global debt of $250 trillion plus unfunded liabilities and derivatives of another $2 quadrillion or so. That would be the end of the financial system as we know it. Governments and central bankers around the world are, of course, totally aware of this and are standing with their fingers ready to push the button for the biggest money printing bonanza that the world has ever experienced.
Deutsche Bank is worse than Lehman
Look at Europe – Deutsche Bank, which is one of the biggest in the world, is valued at less than 1% of its asset value, and it has derivatives which are standing at 20x German GDP. The share price is telling us that DB is bust. And so are Greek banks, Italian, as well as Spanish, Portuguese and French banks and many more. Deutsche has now become front-page news, and its survival is not in jeopardy. It has total assets of EUR 1.9 trillion but a deposit base of only EUR 450 billion. This means that DB is totally dependent on short-term loans to finance its massive balance sheet. That is extremely dangerous and the reason for Lehman’s demise. The pressure on DB is likely to increase in the coming weeks.
ECB money printing of €80 billion a month or €1 trillion per year is having no effect. Central banks are now pushing on a string. The bailout of Italy’s fourth-largest bank, Monte dei Paschi, is failing. Germany is totally against the ECB stepping in, and the Italian government doesn’t want to bail out the depositors. That would be a political disaster. Non-performing loans in Italy are 20% of assets and growing. It confirms my view that no debts, bank or sovereign,n will ever be repaid.
Bank of Japan’s policies have failed for over 20 years
The news from around the world is just getting worse by the day. Japan’s Yen 80 trillion ($0.8T) printing programme is having no effect. Kuroda (Governor of BoJ) is totally lost. He is currently buying all the bonds that the Bank of Japan is issuing. The BoJ is a top 10 shareholder in 90% of Japanese stocks. So not only is the BoJ holding Japanese bonds that they can never repay, but they are desperately trying to support the Japanese stock market. Just as the bonds will become worthless, they will likely lose at least 90% of their stock holdings. The balance sheet of the BoJ is now approaching Yen 0.5 quadrillion ($5T), which makes them the biggest money printer in the world. But it won’t stop there. Kuroda’s latest folly is to hold the 10-year bond interest rate at 0% for an undetermined period. As investors start dumping Japanese bonds, the BoJ will need to print unlimited amounts of Yen and increase debt exponentially to keep rates at zero. This is a policy which is guaranteed to fail.
Emerging market debt is unsustainable
The debt explosion in emerging markets has created a disastrous situation for many countries. Corporate debt in these markets has grown massively in the last ten years and is now standing at $25 trillion. Without continued growth of exports and higher commodity prices, these countries will go into a deflationary spiral. According to the Bank for International Settlements, the debt-to-GDP ratio in China is 3x greater than what the BIS calls a dangerous level. The growth of Chinese debt from $2T to $32T in this century has probably created the credit bubble of all bubbles. A lot of this money has gone to big infrastructure projects that have zero value and yield no return. Bad debts in China are estimated at $2T but are probably considerably higher.
US federal and corporate debt continue to surge
In the US, corporate debt has grown from $2 trillion to $6 trillion in the last 10 years. A lot of this debt has been used for share buybacks and has thus not created any economic value except for a few shareholders and executives. And the US Federal debt will have doubled from $10T to $20T during Obama’s presidency. This is an absolutely remarkable and unacceptable increase and a clear sign of a country on the road to bankruptcy. No country that runs substantial budget deficits every year for 55 years has any chance of survival. The only reason the US economy hasn’t collapsed yet is that the dollar is still the reserve currency of the world. But the dollar doesn’t deserve to be a reserve currency. Against the Swiss Franc for example, the dollar is down 77% since 1971. And against gold, history’s only surviving currency, the dollar is down 97% since 1971. It is only a matter of time before the dollar starts its final journey to its intrinsic value of zero, and so will many other currencies.
Coming money printing will greatly exceed Weimar and Zimbabwe
Thus, we are standing on the edge of a black hole that very easily could cause a deflationary implosion of all financial assets and all debt. No government is talking about this, and no central banker dares to mention the seriousness of the present situation. The smallest final snowflake that can push the world over the edge and start the deflationary avalanche. It is really surprising that central banks dare to hold back on the biggest printing programme ever for so long. Because they only need to be a few seconds late, and they will not be able to stop the collapse.
Let’s assume that central bank will intervene in time and print first tens of trillions and eventually hundreds or even quadrillions of dollars, euros, yen etc. We will then see a hyperinflationary period which will be bigger than both the Weimar Republic or Zimbabwe for the simple reason that the figures involved now are so much greater.
But we know of course that we cannot create wealth by printing worthless pieces of paper or creating zeros in a computer. So sadly, the world will not be saved by this money printing which will only create more debt. It is of course impossible to solve a problem by the same means that caused it in the first place.
Hyperinflation will be followed by deflationary implosion
After the hyperinflation, which will have solved nothing but just created a bigger problem, we will still see a deflationary collapse. This will be absolutely necessary to get rid of all the debt and the bubble assets. It will be like a forest fire that will get rid of all the dead wood and create the foundation for new strong growth, not lumbered by debt. This is the only way that the world can progress and grow, totally free from debt, decadence and all the false values that the current era has created.
It will not be easy to protect yourself against the coming upheaval. It is likely to involve social unrest, wars, famine, disease and massive suffering for most people.
Gold acts as protection against inflation and deflation
During this period of transition, money will be needed as a method of payment or for barter. Throughout periods of crisis, whether inflationary or deflationary, gold has always functioned as money. During the hyperinflationary period, gold will reflect the destruction of paper money and appreciate substantially both in inflationary terms as well as in real terms.
What most people don’t realise is that gold also normally does very well during deflationary periods. If we get the deflationary implosion that I have discussed above, there will be no financial system for a while and gold will be one of the few methods of payments. This is why gold will also be excellent protection in a deflationary period although the nominal value will be much lower than in a hyperinflationary period.
Thus, with the current unprecedented risk in the financial system and the world economy, physical gold and some silver will be the best insurance and protection that anyone can hold.
Gold Has No Place In A Modern Monetary System!
Gold Has No Place In A Modern Monetary System!
In my King World News audio interview early this week, I discussed with Eric King how investors will flee from the major currencies into gold as the currencies start reflecting the imminent major money printing spree.
We also talk about the European banking system and Deutsche Bank, whose market cap is 1% of its balance sheet. I explain why there won’t be bail-ins in any of the major banks and much more:
“As we get ready to enter the final quarter of 2016, today the man who has become legendary for his predictions on QE, historic moves in currencies, and major global events, just spoke with King World News about the roadmap to $10,000 gold and $1,000 silver.
Egon von Greyerz: “If you look at the euro, it’s not going to survive. At some point European investors will realize that and they will flee the euro into gold. It’s the same with the yen…”
Gold Has No Place In A Modern Monetary System!
The autumn of 2016 has for some time looked like a period when dark clouds will move in over the world economy. Therefore, it was not surprising to see the first sign of things to come in the next few months. In one day, the Dow erased all the gains since early July with an almost 400-point fall. Since the beginning of the year, the Dow is now up a pitiful 4%. Almost 8 years of ZERO interest rates have not managed to revive the US economy, nor the world economy. On a longer timeframe, the Dow, together with many other markets, looks extremely vulnerable.
Central banks are leading ordinary people to the slaughter
In this century, the Dow is up 57%, which on the surface appears to be an excellent return over 16 years. But it must be remembered that we have seen an unprecedented period of money printing and credit creation in the last 16 years. In my article last week, I talked about the massive credit creation in the USA. We have seen the same pattern worldwide. China’s debt, for example, has gone from $1 trillion to $32 trillion in the last 16 years. And Japanese government debt is exploding and has reached 250% of GDP. Japan is now printing half of the government expenditure every month and buying all the bonds that they are issuing. Japan is clearly bankrupt, and a default is inevitable. In Europe, the ECB is printing €80 billion every month. But that will, of course, not suffice to save a bankrupt European financial system. Whether we talk about Greek, Spanish, French, Italian or German banks, their balance sheets are all lumbered with billions of toxic assets, with the only buyer being the ECB. This is why the current ECB printing programme will not end in March 2017 but instead accelerate. But as we all know, printed money can never save the financial system. All it will achieve is to increase the debt burden and create hyperinflation.
Clueless investment managers are buying worthless bonds
Negative interest rates in many countries have no beneficial effect on the world economy. For over $13 trillion of sovereign debt, investors now have to pay governments for the privilege of holding their worthless paper. These clueless investors are not only guaranteed to get less back than they invested due to the negative interest, but they are also very unlikely to get the principal back since no government will repay their debt with real money.
As I have stated many times, government bonds are an investment that no one should own. But sadly, most institutions and pension funds hold tens of trillions as custodians for the poor investors and pensioners who will see their savings totally evaporate. There has never been a time in history when savings and investments just disappear into a black hole never to return again. But the risk that this will happen in the next five years or so is now greater than any time. The consequences will be devastating.
Real returns in stocks are abysmal
Investors around the world are now facing massive risk in all asset markets ,be it stocks, bonds or property. The Dow’s rise of 57% since 2000 looks very different if it is compared to constant purchasing power rather than inflated dollars. In real terms, measured against gold, the Dow is down 70% in the last 16 years.
Stock markets worldwide have since the beginning of 2016 underperformed gold and silver substantially. The Dow is down 19% against gold in 2016 and 25% against silver. Silver has been one of the best performing asset classes this year.
But this is likely to be just the beginning of gold and silver’s rise against all other asset markets. Over the next five years, I would expect most global stock markets to decline at least 90% against the precious metals.
Gold and silver will be the star performers in the next 5+ years
Gold has gone up by 25% this year in dollar terms. The correction in the precious metals that has lasted since 2011 finished in December 2015. Gold and silver have now resumed their uptrend, and it is not unlikely that we will see new highs in the next few months above the $1,920 for gold and $50 for silver. In the next few years, gold and silver could easily reach $10,000 and $500, respectively. The gold-silver ratio could even go to 10 as John Embry and I discussed recently. That would give us a silver price of $1,000. But before the coming money printing bonanza by central banks has finished, we could see multiples of those targets in a hyperinflationary collapse of paper money values.
So today is still an excellent time to buy gold and silver, but I doubt that we will see these prices for much longer.
Don’t buy gold or silver that will never be yours
When precious metals are bought for wealth preservation purposes, certain cardinal rules must be followed.
The following methods to acquire/hold gold and silver are NOT wealth preservation and must therefore be avoided at all costs:
Gold and silver ETFs – Most ETFs are not backed by physical metals, even if they indicate they are. If you read the prospectuses properly, you will find that even the gold/silver-backed ETFs can hold paper metals instead. Also, ETFs are in effect a paper investment within the financial system that investors are unlikely to get possession of in case of a default.
Futures and bank paper gold/silver – These must also be avoided since they are just paper claims that will never be settled in case of a crisis.
Gold/silver stored in a bank – We have seen numerous examples of clients being told they have allocated gold/silver bars when, in fact, the bank doesn’t have the metals. And even if the bank does hold physical metals for the clients, in times of crisis we have often seen examples of banks using client assets. Storing in a private bank safe deposit box is not advisable either, since in case of bank failure, investors might not get access for a very long time.
Part ownership of gold/silver bars – Many companies offer shared part ownership of metals stored outside the banking system. With this method, the investor does not own his own allocated bar and does not have personal access to his metals.
Storing gold/silver at home – You should only store the amount of metals at home that you can afford to lose. Increasing crime and social unrest will make home storage very dangerous, and often, family members could be threatened at gunpoint to reveal a hiding place.
This is real wealth preservation:
Hold your gold/silver in allocated physical form in private vaults outside the banking system.
You must have direct ownership and control of your individual bars/coins.
You must have total control and access to your metals and eliminate counterparty risk.
Your metals must be insured.
Store your metals in a politically safe country, preferably outside your country of residence.
Buy metals directly from recognised refiners. Forgeries are now prevalent.
Many investors ask what percentage of their financial assets should be in precious metals. Some investors who are really concerned about the financial system have 60-100% in gold, together with some silver. Investors must themselves decide what percentage they feel comfortable with. In our view, the investment in metals should be sufficient to fall back on if there is a crisis in the financial system, which prevents access to other investments or makes it impossible to raise cash from other assets.
What is important to remember is that gold and silver is money and instant liquidity. Throughout history, in every country where there has been a serious financial crisis, gold and silver have always functioned as money or barter.
The world economy is now at its most dangerous point in history. In virtually every major country or region, there are problems of a magnitude which individually could trigger a collapse of the financial system. Because of the interconnectivity of the system, when the first domino starts falling, there is zero possibility of stopping all the other unstable dominoes from crashing one after the other in quick succession.
