GOLD – THE ONLY MONEY THAT CAN’T BE DEBASED

By Egon von Greyerz

Founder and Chairman

June 1, 2018

In 1980, global assets, including property, were less than $20 trillion. Today almost 40 years later they have grown to $524 trillion. That is a compound annual growth rate of 9% which is quite remarkable for a 38 year period. Global assets have gone up 26 fold during this period.

In the same period, gold went from an average price of around $650 in 1980 to $1,300 today. So whilst global assets have gone up 26x since 1980, gold has just managed to go up 2x. Admittedly gold started at $35 in 1971 so it had already benefitted from a substantial rise by 1980. Nevertheless, since 1980, gold has been totally ignored both as an investment and as insurance or wealth protection. The massive increase in money supply through credit expansion and money printing has gone into conventional assets such as stocks, bonds and property but not into gold.

Gold has been a forgotten asset and investment for 38 years and has not even kept pace with inflation with gold’s 1.8% annual growth rate since 1980. So there has been very little interest in gold whilst other investment assets have surged. We identified gold as a strategic investment for wealth preservation in 2002 at $300 and recommended to our investors to put a substantial percentage of their assets into gold with a minimum of 25%. Since then gold has been performing better than most investment classes. But the rise so far is totally insignificant compared to what is going to come.

BIGGEST WEALTH TRANSFER IN HISTORY

Because, between now and 2025, we are going to see the biggest transfer of wealth in history. The coming transfer will affect global investment markets in a way which will be totally shocking to most investors. All conventional markets, bonds, stocks and property will lose at least 50-75% and possibly more. At the same time, gold and silver will not just catch up with the underperformance since 1980. The precious metals will experience a totally unexpected investment mania of spectacular proportions.

As stocks and bonds fall precipitously, the markets will be overcome by a fear that the world hasn’t experienced since the 1929 crash. But this time it is likely to be much worse.

WORLD FINANCIAL ASSETS (INCLUDING PROPERTY)

Table 1 below shows global assets at $524 trillion currently. A major part of that is property which is a massive bubble in many countries like the US, UK, Australia, New Zealand, China, Hong Kong, Sweden, Switzerland etc. Low interest rates and unlimited credit have driven property prices to dizzy heights. So dizzy that they are now ready to fall down to earth very fast.

Looking at gold, the figure of $3 trillion represents all the gold in the world ever produced which is in gold bars or coins, including ETFs, some of which may not have the physical gold. It also includes central banks many of which don’t have the gold they officially declare. But that gold will then be somewhere else like in China, India or Russia so it clearly exists albeit elsewhere.

1. GLOBAL ASSETS 2018

As the above table shows, only 0.6% of world financial assets are in physical gold today. Back in 1960, gold represented 5% of global assets but the explosion in other investment assets has reduced the percentage to just 0.6%.

The coming implosion of asset bubbles will lead to a reduction of asset prices of at least 50% between today and 2025. That will obviously cause a major financial crisis and massive problems in the financial system, since assets do not just include stocks and property but also bonds and loans. Thus, the banking system will be under tremendous pressure and so will insurance companies and pension funds.

Table 2 below shows global assets declining by 50% in real terms which in my view is a minimum in the coming crisis. The one exception is gold which will reflect the crisis by gaining substantially in price to reflect its real importance as the only money that can’t be debased as well as the ultimate wealth preservation asset. A gold price of $5,000 in today’s prices is a minimum in my view.

2. GLOBAL ASSETS DOWN 50% – GOLD $5,000

$5,000 an ounce for gold, would still be only 4% of global assets in the above scenario. At that point gold is starting to assume its role as money which has always been the case throughout history. As stocks, bonds and property collapse, gold is again assuming its monetary mantle.

Table 3 below is the minimum scenario, in my view. With asset prices having gone up 26x in the last 38 years, a 75% correction would be totally normal. It would still leave global asset prices 8x higher than in 1980. As the financial crisis intensifies, gold will start to reflect its real inflation adjusted value. The table below assumes $10,000 gold but the real inflation adjusted price (with 1980 as the base year) is nearer $17,000.

3. GLOBAL ASSETS DOWN 75% – GOLD $10,000

For anyone who believes that a 75% fall in stocks is impossible, just remember what happened to the Dow in 1929. At that time, the Dow collapsed by 90% in an economic scenario which was much more benign than today. The US was then a creditor nation and the global debt situation was miniscule compared to today. And not only did the Dow decline by 90% but it took over 25 years before it attained the 1929 peak. The coming fall is not only likely to be greater than the 75% assumption but it will take even longer than 25 years to recover due to the global nature of the crisis and the major worldwide financial debacle that will ensue.

GOLD – THE ONLY TRUSTED MONEY

$10,000 gold combined with a 75% fall in global assets means that gold would represent 17% of total assets. That might sound extremely high. But we must remember that gold at that point will be real money and possibly the only trusted money as fiat currencies are reaching their intrinsic value of zero. Also, many investors will panic out of stocks and bonds and buy gold as the only safe haven investment.

Global assets are today 174x greater than gold. When assets are down 75% and gold $10,000, that makes global asset (excluding gold) just 5x greater than all the gold in the world. This means that global assets would decline 97% against gold between today and 2025. I am sure that many people would be sceptical about these proportions. It seems almost unreal that gold could become so valuable relative to other assets. But in a panic scenario, valuations will be totally different to today’s massive overvaluations. We will see price earning ratios at 1-5, even for good companies. This means that a company can be bought at 1 to 5 years’ earnings. And dividends will be 10-20% from the very few companies that can still afford a dividend. Yields on rental properties will be 20% or more.

For the sceptics who believe that the current excesses are the norm, it is important to understand that in the scenario I am painting, there is no trusted fiat money to be had and the only money is gold which very few will own.

You can of course ask the question if authorities around the world would allow holders of gold to become so powerful. Wouldn’t they tax gold heavily or even confiscate it. I think taxation is much more likely than confiscation. But it is more likely that the big holders of gold like China and Russia at that point will be in an extremely strong position with their gold holdings. We would then also find out if the US has any of its alleged 8,000 tonnes left.

Another reason why confiscation or high taxation of gold wouldn’t work, is that many governments will have lost control at that point. They will have no money left to pay civil servants, including tax collectors.

Thus, holders of gold who today can buy a meagre 0.6% of global assets could within the next 7 years buy 16%. More importantly, a 97% decline in the value of stocks, bonds and property against gold signifies the most massive wealth transfer in history.

GOLD’S DUAL PURPOSE

The exact level of the collapse in investment assets and surge of gold is of course impossible to forecast. What is virtually certain is that gold, relative to other assets, will increase substantially in value. Thus gold serves a very important dual purpose:

• Firstly as insurance and wealth preservation against a rotten financial system as well as massively overvalued investment assets.
• Secondly for its capital appreciation potential which today is greater than at any time in history.