PAPER GOLD DOESN’T GLITTER

by Egon von Greyerz

Today when gold in US dollars is making a new correction low, the paper shorts are elated. They believe they can win this game of frightening every gold investor to sell their holding. But this elation is likely to soon turn to desperation.

Supply tight in gold and silver

As I have discussed many times, the physical market in gold and silver is very tight. Bullion banks have low stock levels and central banks have leased or sold a major part of their gold. But since they refuse to be properly audited they are desperately trying to hide the real position. China and India are continuing to buy more than the annual production of gold by the miners. And the supply situation from the refiners is tight with delivery delays for bigger orders.

Dollar strength is ephemeral

So gold seems very weak. But that is only in US dollars. In virtually every other currency gold is holding well. That includes the Euro, the Pound, the Canadian dollar, the Aussie dollar, the Yen, even the Swiss Franc and of course weaker currencies like the Ruble as well as most others.

The dollar is on its last swansong. The strength could last a bit longer but the reserve currency of the world is living on borrowed time.The technical picture for gold is indicating misplaced optimism from the dollar bulls. And fundamentally the most indebted country in the world will soon realise that the road to prosperity cannot be built with printed pieces of paper. No economy that runs budget deficits for over 50 years and current account deficits for over 40 years can survive. Retail sales are declining and the major retailers trading is under real pressure. Industrial production is weak and so is housing. Freight and trade is declining fast and these are important advance indicators of economic activity.

No rate increase by the Fed

The Fed cannot afford to increase interest rates. Instead they are likely to start the next money printing cycle which before it ends will dwarf all QE ever done. And the more that is printed the faster the dollar will fall. Japan and the Eurozone are already printing and likely to accelerate their money creation. China is likely to follow suit soon and that will complete the circle of all major economies trying frantically to save their skin.

Intrinsic value of paper gold – ZERO

But just like the paper money printing will fail so will the creation of paper gold. It makes absolutely no sense that unlimited supply of paper gold should have any value. I don’t believe that we are far from the point when the paper gold holders will realise that the intrinsic value of their paper is ZERO.

The geopolitical situation in the world is also looking very grim. Sadly the war industry is likely to prosper greatly in coming years.

And investors in the bubble assets of stocks, bonds and property will see a wealth destruction that they could never have imagined whilst holders of physical gold and silver (held outside the banking system) will maintain their purchasing power and preserve wealth.

Please see also my latest King World News interview.

Egon von Greyerz

Matterhorn Asset Management AG
GoldSwitzerland.com