The Phaserl



by Egon Von Greyerz, Gold Switzerland:

Since the 2011 tops, precious metals investors have had their patience severely tested. Six years later, silver is down 66% from the $50 peak and gold 35% off the $1,920 peak. We mustn’t forget off course that these metals started this century at $280 and $5 respectively. But that is no consolation for the investors who got in near the highs. The best time to buy an asset is when it is unloved and undervalued like gold and silver were in the early 2000s. What few investors realise is that the current levels of gold and silver, when real inflation is taken into account, are very similar to where the metals were in 2000-2. Thus gold at $1,265 and silver at $17 is an absolute bargain and unlikely to remain at these levels for long.

Why are asset markets booming and gold static?

As the precious metals have corrected for six years, many markets have boomed. Money printing and credit creation can do wonders to asset markets. Since 2009, stocks in the US for example have trebled and many other asset classes such as property have appreciated substantially. Global debt since 2006 is up by 75% or $100 trillion and short term and long term rates in the Western world re down from 5-6% to anywhere from negative to around 2%. This has fuelled stocks and property but so far had limited effect on gold and silver.

It was the sub-prime mortgage market that started the 2006-9 crisis. Since then, there are property bubbles in many parts of the world. Canada, Australia, UK, Scandinavia, Hong Kong and China all have property markets which are likely to crash in the next few years together with the US one which is still a bubble.

With most asset markets surging since 2009 why haven’t gold and silver. To answer that question, we need to take a slightly longer perspective. Since the beginning of this century, gold has outperformed most asset classes. The Dow for example is down 61% against gold since the beginning of 2000. Thus, gold has been an outstanding investment as well as being the ultimate wealth preservation asset in the 2000s.

Bitcoin can continue up in a speculative frenzy

But since 2009, gold has not reflected the massive money printing and credit creation that has taken place. Many investors are comparing gold to Bitcoin. Bitcoin was $3 in 2011 and now $2,700 – a truly remarkable rise. I have previously noted that Bitcoin could be an excellent investment and that is proving to be the case. But Bitcoin has nothing to do with wealth preservation. Just like with paper money, there is no tangible asset backing it. Also, cryptocurrencies are totally dependent on an electronic world and the internet. So whilst Bitcoin could continue to go up in a speculative frenzy, it will never replace the only money which has survived for 5,000 years. Bitcoin is only one of many cryptocurrencies. New ones are being launched continuously and thus created in a similar fashion to how paper money is printed, thus without an underlying service or exchange of goods. The one major advantage that Bitcoin has and which makes it so popular is that is not controlled by governments and can therefore not be manipulated by them. If cryptocurrencies become too successful that could of course change.

Governments are controlling the rise of gold

So currently Bitcoin is an investment which is not influenced by governments or manipulation. Investors love that they can buy something that is not interfered with by the powers that be. Sadly, the same cannot be said about gold and silver. Governments and central bankers have quietly admitted that they don’t like gold going up too fast and will therefore manage the rise. The reason governments dislike gold, is that it reflects their mismanagement of the economy. But as investors in physical gold know, the gold price is not going up but the value of fiat money declines continuously as governments issue more and more of it. Since 1913 when the Fed was created, all major currencies have declined 97-99% versus gold. The same has happened many times in history like when the Roman Empire collapsed. The silver content of the Denarius coin declined from 100% to 0% between 180-280 AD.

Gold paper trading volumes are astounding

Governments and central banks currently have a very effective way of manipulating the gold price and this is the main reason why gold so far has not risen like Bitcoin. But in due course this will all change. If we look at the gold paper market, the amount of paper trading is astounding. In 2016, $10 trillion of paper gold was traded in four exchanges with Comex in New York accounting for 76% or of that. $10 trillion is more than all the gold ever produced in history which is $7 trillion. But the paper gold traded on the futures exchanges is totally dwarfed by the amount traded by the LBMA banks in London. In 2016, the total estimated gold traded in London is estimated at $64T. Of that less than 1% is physical. Adding the LBMA and Futures Exchanges gold trading we get to an astounding $74T annually. Thus, the world trades more paper gold than goods and services since global GDP is $70T. And the gold traded in 2016 is over 600x the gold mined every year. Even more incredible is that the paper gold traded was 10x all the gold ever produced in history.

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