247Bull.com Editor: Since the financial crisis hit, the four largest central banks (the Fed, the ECB, the BoJ and the BoE), have printed $9 trillion. It is true that Western consumers are deleveraging, however governments are releveraging and ramping up spending in order to fill the void. They have proven that they are willing to do whatever it takes to try to prevent a deflationary depression, and as a result we can be confident that the trend of currency debasement will continue.
Some investors are disappointed as gold only went up 7% in USD in 2012. After having compounded at over 19% p.a. over 11 years, gold certainly should be allowed to just gain 7% without some people calling an end to the bull market. Those who believe the bull market is over are mainly the investors who have missed gold going up almost 7 times in since 1999.
Let me be very clear, the real move in gold hasn’t started yet, it is still to come.
I will summarise some of the reasons why:
1. Gold is not an investment, it is money. And gold is the only honest money which reveals governments’ deceitful actions in destroying the value of paper money by printing unlimited amounts of it.
2. In addition to massive increases in government borrowing worldwide, world central banks’ balance sheets have exploded since 2007 and now stand at $15 trillion.
3. Most of the money borrowed or printed has been used to save the banking system and very little has gone into the real economy. In spite of this, the banking system is no sounder than in 2007 and nor is the world economy.
4. The US government is paying $1 billion per day in interest. If interest increased from 2% to 3% on this debt, the US debt in 2022 would be $35 trillion. If rates went up to the historical average level of 5%, the debt, in 10 years’ time, would be $45 trillion. And this is with extrapolating current deficits. But deficits are likely to accelerate and so is Federal debt.
5. Fed is indicating that they might stop QE in 2013. That is absolute nonsense. The Fed cannot and will not stop QE. If they did, who would buy the perpetual issuance of virtually worthless government debt that can never be repaid in today’s money?
6. In many European economies, government makes up 50-60% of the economy. In the US it is now 40%. As Governments worldwide, take an ever greater part of their domestic economies, it makes it practically impossible to grow the economy and repay debt for the shrinking private sector. Governments are non-productive and only consume resources. The only thing they produce extremely well is printed money.
7. Printed money is like heroin, the patient needs bigger and bigger doses until it finally kills him or makes him totally dysfunctional. And this is what is happening to the world economy. Government benefits are increasing and the people are in need of even greater stimulus as unemployment escalates.
8. The banking system has not been repaired in spite of receiving $ trillions from governments. BoA and other US banks just had to pay out $20 billion linked to their MBS (Mortgage Backed Securities) activities. MBS are a part of a $1.2 quadrillion derivative disaster waiting to happen. That will lead to exponential money printing.
9. The Basel III regulations for banks have been weakened and postponed again. Banks around the world cannot cope with any serious tightening of the rules. Even stocks and Mortgage Backed Securities (MBS)! are going to count against their capital requirements. And final implementation is delayed until 2019. Hopefully the banking system will still be there then.
10. When this crisis is over most people will not have a pension that they can live on. 46% of Americans have less than $10,000 in retirement savings and 29% have less than $1,000. Also there will be fewer and fewer workers to pay for each retired person. The Japanese demographics are horrific with their aging population.
11. Real unemployment is now 20-25% in many countries including the US. Youth unemployment is almost 60% in Greece and Spain and up to 50% in many countries. This is a major disaster waiting to happen not just financially but also in respect of social unrest, riots etc.
12. For all of the above problems, unlimited money printing will take place. The problem in the case of the USA is that as markets start to anticipate this, they will dump the dollar which in turn will accelerate the printing presses and lead to hyperinflation. That outcome is virtually guaranteed.
13. Gold (and silver) will continue to reflect this destruction of paper money but at an accelerated pace. As gold dipped at the end of December and early January, Swiss refiners received major orders and now have unexpected delays in production.
14. As I have stressed time and time again, the selling is in the 100 times bigger paper market in gold and silver. The physical market is seeing major and strong demand. As more investors ask for delivery the paper market will panic and gold and silver will surge. This is likely to happen within the next 12 months.
15. For wealth preservation purposes investors must hold physical gold and silver and store their precious metals outside the banking system.
Egon von Greyerz | Matterhorn Asset Management AG
See original article here.