GOLD PRICE SIGNALS NEXT GLOBAL CRISIS

By Egon von Greyerz

Founder and Chairman

June 27, 2019

Finally it happened although it took 6 long years to break through The Gold Maginot Line at $1,350!

This resistance was a lot stronger than the original French one in WW II since it took the Germans less than a year to penetrate it in 1940.

But we must remember that the rising gold price is a warning signal for the coming economic crisis.

In my article on February 14th I said.

“No one must believe that the line will hold. It is extremely likely to be penetrated conclusively in 2019 and most probably within maximum the next three months.”

It took four months for the break to happen so I was one month out. Still it had to happen. I also said in the article that:

“once it is broken, the correction of gold is finally over and we are on our way to new highs and much beyond.”

So that’s where we are today. The break has now finally taken place and I doubt that we will see $1,350 decisively broken on the downside in my lifetime. The 6 year resistance line has now become an extremely strong support line.

Yes, gold will go quickly to $1,650+ on its way to new highs and far above that. As I have said many times, we will see levels that no one can imagine today.

GOLD RALLY HAS BARELY STARTED

The precious metals rally hasn’t really started yet. Gold has moved up $125 since May 30th but silver is lagging behind with the gold/silver ratio at over 92, a new high for this century. The paper silver shorts are fighting a desperate battle to hold the white metal down. They will eventually fail of course, although we could see the ratio going a bit higher before it turns. Once the turn comes, the silver price will explode and go up more than twice as fast as gold. If the ratio reaches the 30 level as in 2011, silver will go up 3x as fast as gold. When gold reaches $2,000, silver should reach $66. But that is only the beginning. But we must remember that silver is extremely volatile and not for the faint hearted.

Platinum has not yet joined gold and is creeping along the bottom at levels seen in 2004 and 2008. At some point, platinum will take off and most probably move a lot faster than gold.

DOLLAR HAS STARTED ITS JOURNEY TO PERDITION

Finally, the dollar now seems to be starting the journey to zero. It clearly won’t happen overnight but it is guaranteed that we will see the end of the dollar and its reserve currency status in the next few years.

GOLD IS NOT AN INVESTMENT BUT WEALTH PRESERVATION

Many savvy investors are now talking about gold and the potential for much higher prices, just as I have done above. But we must remember that we are not holding gold as an investment but for wealth preservation purposes in order to protect against a rotten financial system, and a bankrupt global economy.

Gold is not held for short term gains but as insurance against the massive risks we see in the system. We are not in gold to take part in a price move. Instead, gold is the consequence of our analysis of global risk which is at an extreme. At the same time as many impatient holders of gold are now rejoicing over the price move, we must remember that the very strong rise of gold that we are about to see, is a warning signal of very difficult times ahead in the world which I have been discussing many times. I obviously don’t want to be a joy killer so let’s enjoy this first proper rally for six years.

THE ILLUSION IS OVER AND THE DARK YEARS ARE HERE

But let us at the same time realise that we are in the next phase going to experience the Dark Years that I have written about in the past.

The Dark Years are the consequence of a world that for decades has lived above its means, in the belief that credit and printed money can bring prosperity. We will soon experience that this has all been an illusion which will painfully turn into a harsh reality. That means, an implosion of debt markets and also of all the bubble assets that have been financed by the debt.

The biggest risk is the $1.5 quadrillion derivatives market which at some point will evaporate in smoke. These derivatives only function in bull markets when there is liquidity in the system. In the coming bear markets, there will be no liquidity and the derivatives bubble will implode as counterparty not only fails but also disappears. There will be no one on the other side of all these derivative trades which have been the most massive money spinner for the bankers. I will later talk about Deutsche Bank as an example of the coming derivatives disaster.

IS VENEZUELA SHOWING THE WAY?

The consequences of the coming financial and economic global cataclysm will clearly have a major impact on human beings around the world. We can just look at Venezuela to understand what happens when a mismanaged country runs out of money and turns to money printing on a massive scale in a futile attempt to remedy its failures. The majority of the Venezuelans have no money, not enough food, water or fuel and no medicines. By the end of 2019, 5 million desperate Venezuelans will have fled the country. That then has repercussions for the surrounding countries Columbia, Peru, Chile etc that has little capacity to help the refugees. This problem will of course be much greater when it becomes global and most countries are in the same situation which means that no one has the capacity to help their neighbour.

FED STATEMENT WAS THE TRIGGER BUT NOT THE CAUSE

So what happens next. Well, there are always catalysts that trigger the inevitable. The recent gold rally wasn’t caused by the Fed statement. It would have happened anyway. The Fed was just the trigger. Gold was poised to rally and there is always a catalyst or an excuse that the media can hang it on.

Markets in the next few months will be extremely volatile. The US stock market is still in its final hurrah stage when any news is good news. Potentially lower rates due to a slowing economy should be very bearish for stocks but not in this final euphoric phase. US stocks as well as global markets are finishing their final moves up before a long term secular bear market starts. The fall could begin in the next few weeks or possibly take as long as 2-3 months. Before the decline is finished, we should see a fall of at least 90%, in real terms, just like in 1929-31.

When the bear market in stocks starts in earnest, investors will initially buy the dips but very soon the sustained bear market will surprise investors and when the crash stage starts, euphoria and optimism will soon turn to dysphoria and extreme pessimism. I have experienced this personally in the early 1970s in the UK when we thought that the downturn would never end.

CENTRAL BANKS WILL SOON PANIC

With the global economy slowing down and the financial system being under pressure, central banks around the world are now all in a rate cutting mode. The Fed is expected to make 4 cuts within the next 12 months and Draghi has just made clear that the ECB is standing ready with the whole gambit of stimulus. He indicated that further rate cuts “remain part of our tools” and also additional asset purchase which means more QE. And Kuroda of the Bank of Japan decided to join the other two money printers and just said “If the economy loses momentum toward achieving our price target, we will of course consider expanding stimulus without hesitation.”

So there we have it, a probable coordinated action by central banks to add further stimulus to an ailing world economy. And we know why, the world economy is slowing down a lot faster than any central banker dares to admit to. They also know of course that the next slowdown will lead to a lot of bad debt becoming worthless debt. Just take the $1.2 trillion corporate junk debt in the US. Or take the Chinese debt that has exploded from $2 trillion to $40t in this century or Italian debt which is 145% of GDP.

Or take the Japanese debt of Yen 1.1 quadrillion which is 235% of GDP and 70% owned by the Japanese government which is the only buyer of new issues. And even at just above 0% interest rates, Japan can’t afford even the interest on the debt without issuing more debt. As I have stated for a while, the Japanese economy will sink into the Pacific together with the Yen. I could go on since there isn’t one country which is in a sound economic position.

IS DEUTSCHE BANK THE SICKEST OF THEM ALL?

Just to give an example of a bankrupt bank and therefore a potential trigger for the next global financial crisis, let’s look at Deutsche Bank – DB. We only need to look at the share price which tells us everything. DB’s share price has lost 94% since 2007. A stock that loses all but 6% of its value is virtually guaranteed to go to ZERO.

It is only a matter of how long it takes. Since DB is one of the biggest banks in the world, a collapse would have implications for the global banking system. DB is just too big to fail. But it is also too big to survive. Especially as it has a sick balance sheet. DB is a global bank and also part of the German establishment. Thus neither the German government, nor the Fed or other central banks will let it fall without a massive rescue effort.

But how can DB survive with a balance sheet that would be the envy of the shrewdest fraudster.

Share capital and reserves are EUR 54 billion which is 1.8% of total assets. So a credit loss of 2% would make the bank insolvent. They will be lucky if credit losses would only reach 20%.

But wait, now we add derivatives at EUR 44 trillion. DB’s net worth only covers 0.1% of the derivatives. So a loss of only 0.1% on the derivatives portfolio is all it would take to bankrupt DB.

Now, like all banks, the DB management will argue that the net derivatives exposure is only a fraction of the EUR 44 trillion. What they are not taking into account is that when counterparty fails, gross exposure remains gross. Thus no netting. Also, as I explained above, when derivatives fail in a bear market there will be no liquidity and no buyers.

And this bank that the board states is worth EUR 54 billion as a going concern is clearly not considered as a going concern by the stock market since the market value is only EUR 13 billion or 23% of the board’s valuation. Hmmm!

DB is one of the worst banks, but when the financial crisis unravels, we will find that most banks are in dire straits. Unlimited money printing is not far away and with that comes hyperinflation and interest rates no longer negative or 0-2% but in the teens or higher.

WHAT WILL TRIGGER THE NEXT GLOBAL CRISIS?

The next crisis for the world is likely to start in the autumn of 2019. It will be a continuation of the 2006-9 crisis which was never solved but just postponed. This time the world is starting with a debt of $240 trillion, over twice the debt level of 2006. And risk is exponentially higher than last time.

The catalyst for the coming cataclysm in the world economy can come from anywhere, like Deutsche Bank, US junk bonds or Japan. Whatever the catalyst is, it will lead to panic in markets with confidence evaporating and fear setting in.

Now is the time to prepare for this. It will soon be too late. Physical gold should be part of everyone’s wealth preservation strategy.