The Gold Bull Is Back

We know that central banks and governments have lost the plot. When the crisis started in 2006, U.S. short rates were 5%. In 2008 they were down to zero and have virtually stayed there ever since.

A crisis package of $25 trillion was thrown at the financial system. This is what the likes of JP Morgan and Goldman told the Fed they had to do to save the bank(-ers). Ten years later the world financial system is in a mess that is exponentially greater. World debt has exploded, most governments are running deficits and the financial system is balancing dangerously on the edge of a precipice.

$8 trillion of government debt is now negative and $16 trillion is below 1%. Negative yields are supposed to stimulate a deflationary global economy and also save bankrupt nations which can’t afford to pay a market interest rate on their exploding debts. But as usual, the central bankers have got it wrong again.

Negative rates are increasing the risks for the financial system and the world economy. Bank profitability is crashing due to the low rates and forces them to take greater risks. For savers, they kill the incentive to save. And without savings, there will be no investments and no growth in the economy.

But the biggest disaster is hitting the pension sector.

Virtually all pension funds are seriously underfunded, especially if they applied realistic rates of return. Pension funds hold three principal investments: stocks, bonds and property. These are all bubble assets inflated by the credit explosion that central banks have orchestrated.

As these assets implode, there will be no pensions left for anybody. People who are about to retire in coming years have no understanding of the fate that is going to hit them. They will receive no pension or a pension that is worthless.

As the economy deteriorates, the unemployment rate will also rise dramatically. The combination of retirees with no pension and a high percentage of the population without a job will lead to severe human disasters around the world. Governments will of course print unlimited amounts of money, but this will have no effect as manufactured money can never create wealth.

This is all the result of central banks interfering in the natural cycles of the economy by financial repression, and thus interfering with nature’s law. So instead of having minor booms and busts, the manipulation of markets and the economy creates the most massive super booms and busts. It is not the first time it happens in history and it will continue to happen. It will sadly lead to a period of very difficult adjustments and misery for current generations and possibly even future ones.

In addition to all the negative fundamental factors, there are certain indicators that are telling us that we are now getting nearer to the next phase of the downturn that started in 2006, from which has had a temporary reprieve. One is the Dow/Gold ratio. This ratio peaked in 1999 when the Dow was at a high and Gold at the $250 low. The ratio then declined by 87% until September 2011. This means that the average investor in the U.S. stock market was a massive 87% worse off compared to owning gold instead.

Between 2011 and the end of 2015, the ratio recovered 25% of the fall since 1999. Technically it is very clear that the dead cat bounce in this ratio is now finished and that it is on the way to new lows. Since December last year the Dow has fallen about 20% against gold.

Eventually, I see the ratio going well below the 1 to 1 ratio in 1999 (Dow 800 and Gold $800). But even if the ratio only went to 1 that would mean a fall of the Dow versus gold of 92% from here. So gold in the next few years will not only preserve investors wealth but also enhance it. Holding stocks on the other hand will not only lead total despair but also to total wealth destruction.

It looks like 2016 will be a year when volatility increases dramatically in the world. Not only are the risks now greater than ever in the world economy, but the geopolitical risk is now more serious than it has been for many decades.

The U.S. and its allies have created anarchy in Afghanistan, Iraq, Libya and Syria with serious repercussions for world security. There are many other areas that could lead to major war(s) such as Ukraine, Saudi Arabia, North Korea and China (South China Sea).

And as we know from history, bankrupt empires often start wars as a final act of desperation. Let’s hope that this doesn’t happen, although we must be aware that the risk is major.

The bottom line is that economic, financial and geopolitical risk is greater than ever in the world today. Let us hope that the worst case scenario doesn’t materialise, because if it does, life on Earth will be very different for a very long time. We must remember that since we have had the biggest bubble in history over the last 100 years, the end game is likely to lead to the biggest implosion in history of the world economy and financial system.

Whatever the outcome of the crisis that the world will find itself in over coming years, it is absolutely essential to insure wealth against these risks. The best financial insurance available and by far the cheapest is physical gold and silver stored outside the banking system. This is the only insurance available where the premium, invested in metals, doesn’t have to be paid annually at higher rates but instead appreciates as risk increases.

We don’t know of course when these risks will turn to reality. And I admit that it has taken longer than I expected. But when risks are major, it is critical to protect yourself against them. We all know that we can’t buy fire insurance after the fire.

It is not a coincidence that some of the most successful investors in the world are recommending physical gold as insurance against the risks that I have just discussed. Ray Dalio, the founder of an extremely successful hedge fund recently said “If you don’t own gold you know neither history nor economics”.

And Stan Druckenmiller, a hedge fund manager that returned an average of 30% a year over 25 years recently told investors to sell stocks and buy gold.

It seems clear that gold finished the correction at $1,046 in December 2015. We are now around $1,260 and will probably move to the $1,400 level quite soon. But short term movements are totally irrelevant. Gold at $1,300 is an absolute bargain.

It is the most cost effective insurance that anyone can buy against geopolitical instability, a bankrupt world economy and unstable financial system. The beauty of buying gold as insurance is that the “premium” you pay for the insurance, i.e. the price of gold, is very likely to increase substantially in value in coming years.

Could there be a more perfect insurance against global risk than gold. I doubt it!


Egon Von Greyerz
for The Daily Reckoning

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