Egon von Greyerz

Therefore, the indebted governments of the world have two choices: continue to borrow and print money or reduce government spending. This is a lose-lose situation. Countries within the EU like Greece or Spain are introducing austerity programs that forecast their deficits to come down to 3% of GDP, which is the EU maximum deficit limit. These are totally unrealistic targets that are mainly based on an improvement in the economy. Ironically, not one single country within the EU is below the 3% limit, not even Germany. Furthermore, the austerity programs would lead to such a major contraction of the economies that tax revenues would collapse, further exacerbating the plight of these countries.

The alternative is to print or borrow more money. Printing is not a luxury that individual EU members have. And borrowing is becoming increasingly expensive...or impossible. But the European Central Bank can print money and this is likely to be the path they will initially choose to save Greece and possibly Spain. Countries like the US and the UK can still borrow and print money. And this is what they will continue to do. With rising deficits, rising unemployment and the problems in the financial system re-emerging they have no choice. We will see trillions of pounds and dollars printed in the next few years.

We will also see trillions of pounds and dollars worth of new government securities. But the buyers of these government securities might start to become scarce. The rest of the world may dump their holdings of US and UK debt, which would result in both the dollar and the pound dropping precipitously and interest rates rising substantially. The effect of a collapsing currency will be a hyperinflationary depression. This is the inevitable outcome for the UK and US.

All the countries of the major trading currencies – the dollar, euro, pound and yen – have major economic problems that can only be resolved by massive money printing. This is why it is a futile game to try to predict which currency will be the weakest out of the above four. They will all weaken substantially but not at the same time. Therefore, we will have incredible volatility in currency markets in the next few years whilst speculators lose their shirts jumping from one currency to the next. There will be very few winners in that game.

So the last 100 years will be seen in history as an extraordinary period when governments thought that they had invented a new economic miracle based on unlimited credit and money printing. But sadly this miracle will be seen by future historians as another failed delusional economic theory dreamed up by politicians.

Therefore, as many paper currencies become virtually worthless in the next few years, gold will continue to do what it has done for 6,000 years. It will maintain its purchasing power and therefore appreciate substantially against all paper currencies. The recent correction in gold is the weak hands getting out of speculative positions in the paper gold market. There has been virtually no selling in the physical market. So far gold has gone up more than four times in the last ten years in a stealth bull market that very few investors have participated in. There is no other asset during this period that has given such an excellent return whilst at the same time providing the highest form of wealth protection (provided it is physical gold).

The chart shows gold in 2009 dollars adjusted for inflation, as calculated by Shadowstats.com. (Shadowstats.com is a superb service that analyzes government statistics on a true basis, taking out all adjustments, revisions and other manipulations). Applying the true inflation rate on the gold price shows that the gold high in 1980 of $850 in today’s terms is $6,400.

Governments have suppressed the gold price in the last 30 years by both overt operations (official gold sales) and covert operations (manipulations in the paper gold market and unofficial sales). Central banks have now stopped official sales and China, India, Russia and many other countries are major buyers. Production is falling steadily and investment demand is soaring. With the fundamentals so much in gold’s favor, it should have no problem to reach the 1980 inflation-adjusted high of $6,400. With inflation or hyperinflation, gold will go a lot higher than that.

During the next phase up in gold, which we expect to start within the next few weeks, mainstream investors will discover what only a few investors have understood in the last ten years, namely that physical gold is one of the very few ways to protect their assets and preserve capital.

Regards,

Egon von Greyerz
for The Daily Reckoning