AS POLITICAL PARTIES FALL, GOLD AND SILVER WILL RISE

By Egon von Greyerz

Founder and Chairman

July 8, 2024

With the collapse of the Western financial and political systems now happening before our eyes, wealth preservation takes on a totally different meaning. 

As political parties, currencies, stocks, bonds and other bubble assets fall, the indisputable winners will be gold and silver.  

The world and in particular the West is now entering a period of political and social unrest that signifies the end of a major era. 

It is the consequence of deficit spending, major debt expansion, currency debasement, inflation leading to political and economic turmoil and misery.  

Politics in the West are already a total mess. Whatever party gets into power, the deficit spending will accelerate, probably exponentially. That is certain in the UK with the new Labour led government, in France with a motley coalition government and in the US where one candidate might end up in jail (or become president) and the other one is too senile to stand for election. In either case, the US will have an insoluble debt crisis. 

What a mess!

Financial markets will, in coming months and years, reflect this mess. 

Geopolitical risk is of course also significant. A major war is a big risk, even nuclear war. But leaders of China, Russia and the US are of course aware of the finality of nuclear war and only an “accident” is likely to start one. But there are so many new ways of modern warfare as drones become so much more sophisticated. 

Even more effective are Cyberwars. China, Russia and the US all have the ability to immobilise computer, electronic and electrical systems to the extent that major parts of countries and even the world would be totally paralysed. In today’s sophisticated world, virtually nothing would function without computer systems – financial markets including banks, travel by any means, shipping, supply of goods including food, telecommunications, internet etc, etc. 

It is quite frightening how in the last 50-60 years the world has become totally dependent on electrical and electronic systems without which we could quickly go back to the Stone Age.

 WARS WITH STICKS AND STONES

As Einstein said:

Sadly, certain humans in power have an innate instinct to self-destruct so Einstein’s prediction is not so unrealistic. 

Also, the world is now for the first time in history in possession of weapons such as cyber, drones and nuclear that can all virtually end life on earth.

POLITICAL TURMOIL

Anyone elected to President, Prime Minister or Chancellor in the West in the next few years is likely to at best stay in the position for a full term but more likely to be thrown out before that. 

For example, the newly elected UK Prime Minister Keir Starmer won an overwhelming majority in parliament with only 33% of the vote. Even more remarkable is that 80% of all people eligible to vote did not support him. 

Well, a day is a very long time in politics. Five years ago, Labour lost so big to the conservatives that no one thought that Labour would come back in the next decade or two.

The US will have a similar problem after the November election. As it looks now Trump will win although a lot can happen before then. But even if Trump wins, he will probably have a thin majority. So around half of the people will be against him. And if a Democrat would win (definitely Biden will not stand) the Trump supporters would never accept the result. 

And in France Macron suffered a devastating defeat in the first round. Macron (on the tricycle below) is now a lame duck president. But he is still arrogantly behaving like the French Marshall Foch in the Battle of the Marne in WW I who famously said: “My centre is giving way, my right is retreating; situation excellent, I am attacking!”  But Macron is certainly no Marshall Foch. 

Still through skilful political manoeuvring, Macron might succeed in being part of a new coalition government with feeble support both from the right and the left. 

So, the order in the caricature below from the first week has now reversed although Le Pen’s National Rally is the biggest party.  

A WEEK IS A LONG TIME IN POLITICS

Yes, a week is a long time in politics as desperate leaders cling on to power. By the time France holds the presidential election, Le Pen now has a bigger chance of winning. But it is not unlikely that the coalition collapses long before then. 

What is important to understand is that new governments are seldom voted in. Instead, it is the sitting government which is voted out. The Brits had had enough of the Conservatives, the French hate Macron, the Germans don’t respect Scholz and the US people are in the unenviable position to choose between two octogenarians (or a new democratic candidate), neither of which is respected by the rest of the world. 

Historically these political upheavals always happen at the end of an era whether it was Rome, France, Ottoman or the British to mention a few. 

Currently we are seeing the fall of the US empire which is financial rather than territorial. Most European governments are slaves or more appropriately lapdogs under the US might and follow virtually all US dictates whether they are financial like FATCA (Foreign Account Tax Compliance Act) or political like freezing and confiscating Russian assets.

But as the US lead debt bubble bursts, their financial and military superiority will rapidly evaporate. 

WITHOUT WEALTH PRESERVATION THERE WILL BE WEALTH DESTRUCTION 

For 25 years I have stood on a soap box, advising investors about the importance of wealth preservation in the form of physical gold. During that time, gold as a share of world financial assets has stayed at 0.5% in spite of the fact that gold has outperformed most asset classes including the S&P 500 with dividends reinvested.

Between 2000 and today, the S&P, including reinvested dividends, has returned 7.7% per annum whilst gold has returned 9.2% per year or 8X.

As the world approaches the end of an era, it is fascinating to watch the (un-)awareness among fellow investors. 

Having recently spent a couple of days at a family office conference and given a speech on wealth preservation and gold, it is discouraging to observe the total lack of fear and or awareness of risk. 

More wealth has been accumulated by the average investor than ever in history. Most investors believe that they are masters of the universe and that their investment trees grow to heaven.

For these investors wealth preservation means spreading risk between a number of investment classes such as stocks, bonds, private equity, property etc. 

A typical spread for a Family office is: Stocks 32%, bonds 18%, private equity 18%, property 10%, cash 10%, hedge funds 6% plus a total of 3% in gold, precious metals, art, commodities and antiques. 

It could be argued that up to 80% of the above asset classes are correlated since they are affected by credit expansion or money printing.  Cash is also correlated as it declines in real terms (measured in gold), the more money supply expands. 

US DEBT UP 59X SINCE THE GOLD WINDOW WAS CLOSED

The graph below shows US total debt going from $1.7 billion in 1971 to $100 trillion today. 

As the graph shows, the stock market needs a continuous injection of the debt drug to function and grow. 

This is how US successive governments buy votes. Just expand credit to artificially inflate stocks. It is amazing how far you can get in a successful Ponzi scheme before investors discover that the whole market rests on quicksand.  But it won’t be long now. 

GOLD’S INEVITABLE RISE

A simple method for measuring the massive wealth destruction and transformation that especially the West will experience in coming years is the DOW – GOLD ratio.

Back in early 1980 this ratio reached 1 for 1.  Thus, Gold was $850 and the Dow index 850. The long term trend line now targets a ratio of 0.5 for 1. 

As the graph shows, that could be gold $10,000 Dow 5,000 or it could be gold $ 20,000 and Dow 10,000. 

As we enter the golden era with BRICS countries increasing their purchases continuously and central banks selling US treasuries to buy gold. 

No country and no central bank will in future hold dollars as a reserve asset. 

Physical gold is the only proper reserve asset, just as it has been throughout history. 

Also, the total of US held gold has on average been 40% of US treasuries outstanding. 

Today it is only 7%. 

If gold were to reach the average level it needs to be revalued 6x at least – a gold price of $16,000

And if gold were to reach the 1979 – 80 level of 140% gold need to be revalued 19x to over $40,000.

Silver could move twice as fast. 

These are obviously not forecasts but the consequence of gold returning as a reserve asset and also to historical norms. 

But investors should not focus on potential targets for gold or silver.

Instead, just think of gold as financial life insurance which just as throughout history will at least preserve investors’ assets but most probably also enhance them. 

The only question is what percentage of financial assets to hold in gold.

In my view 20% is a minimum but bearing in mind the magnitude of the coming crisis, 50% or more might be the cheapest insurance that investors can buy.  

Remember to only hold physical gold and silver stored in the most secure vaults and the safest jurisdictions.