by Egon Von Greyerz, Gold Switzerland:
Understanding four critical but simple puzzle pieces is all investors will need to take the flood that leads to fortune.
Why then will the majority of investors still take the wrong current and lose their ventures?
Well because investors feel more comfortable staying with the trend than anticipating change.
Understanding these four puzzle pieces will not just avoid total wealth destruction but also create an opportunity of a lifetime.
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The next 5-10 years will involve the biggest transfer of wealth in history. Since most investors will hang on to the bubble markets in stocks and bonds, their wealth will be decimated.
As Brutus said in Julius Caesar by Shakespeare:
“There is a tide in the affairs of men,
Which taken at the flood leads on to fortune.
Omitted, all the voyage of their life
Is bound in shallows and in miseries.
On such a full sea we are now afloat.
And we must take the current when it serves.
Or lose our ventures.”
FOUR PUZZLE PIECES TO CLARITY
So what are the four puzzle pieces that will lead to either fortune or misery.
3. Interest rates
Just put these 4 pieces together and the conundrum of the direction of markets and the future of the world economy will be very clear.
But sadly most investors will find it difficult to join up the 4 pieces.
Have governments and central banks conditioned investors to eternal happiness by their profligate policies?
Yes, they most probably have. But happiness in this case is ephemeral and will end in “miseries”.
Central banks are now caught in Sisyphean task of printing money to eternity.
The more they print, the more they need to print. When Sisyphus came to Hades, his punishment was to roll a big rock up a hill. Once he got to the top, it rolled down and he had to roll it up again and again and again.
And this is also the punishment that the Fed has received. As I pointed out in my article about the Swiss 16th century doctor Paracelsus, everything is poison, it is only a question of the dose. The US has for decades received a toxic overdose of “free” money and once hooked the only remedy is to continue to inject the poisoned patient (the US economy) with more of the same.
On the one hand, the Fed can never voluntarily stop the printing as this would lead to instant collapse of stock markets, bond markets and the financial system.
But on the other hand, the incessant printing also has consequences.
It will destroy the dollar and it will destroy the treasury market and eventually lead to inflation and hyperinflation.
Destroying the bond market means substantially higher interest rates which is something that neither the US nor the world can afford with $280 trillion of debt and rising fast.
So there we have it. The US and the world have both their hands tied and whatever they do will have dire consequences for the world.
So let’s come back to the 4 puzzle pieces which investors should have imprinted in their brain.
PUZZLE PIECE 1: COMMODITIES
Since Nixon closed the gold window 50 years ago, the world has experienced unprecedented credit growth and money printing.
Gold backing of the currencies kept the central banks on a short leash, but since 1971 there has been a free for all monetary bonanza in the US and most of the world.
Since 2006 the money creation has gone exponential.
The pure definition of inflation is growth in money supply. But until recently, only asset classes such as stocks, bonds and property have seen major inflation. Normal consumer prices have officially only increased by marginal percentages even though most of us are experiencing much higher inflation than the official figures.
But now commodity prices are warning us that inflation is here with a vengeance.
For example, agricultural product inflation is up 50% since last May. This hasn’t yet reached consumer prices in a major way but it soon will.
If we look at commodity prices in general, they are up 100% since the April 2020 bottom.
And looking at commodity prices to stocks, we can see in the chart below that commodities are at a 50 year low with a massive upward potential which is an advance warning of a major inflationary period lurking.
Most commodities will go up dramatically in price, including food and energy.
GOLD – THE KING OF METALS
Investors who have been reading my articles will know that the best investment for benefiting from inflation and simultaneously preserving wealth are precious metals stocks as well as physical gold, silver and platinum.
Gold is the king of the precious metals and since it broke the Maginot Line at $1,350, it is now on its way to levels few can imagine. Any correction, like the current one should be taken as an opportunity to add more gold.
Gold is today at historical lows in relation to money supply and at the same level as in 1970 when gold was $35 and in 2000 when gold was $290. See graph below.
This means that the price of gold has far from reflected the massive creation of money in the last few decades. So that is still to come.
PUZZLE PIECE 2: DOLLAR – CURRENCIES
The accelerating deficits and debts in the US will continue to put downward pressure on the dollar.
When I started my working life in Switzerland in 1969, $1 bought 4.30 Swiss francs. Today you get only 0.89 Swiss franc for $1. That is an 80% fall of the dollar against the Swiss. The next significant target is 0.5 Swiss franc for $1. That would be another 44% fall from here.
Admittedly, the Swiss franc has been the strongest currency for over 50 years. But even if we look at the troubled EU, it has recently broken out against the dollar and looks very bullish.
But we must remember that all the currencies are in a race to the bottom and there is no prize for being first.
Just look at the gold against the dollar which has lost 85% since 2000.
As I have pointed out many times, all currencies have lost 97-99% in real terms, against gold, and in the next few years, they will lose the remaining 1-3%.
We need to understand that those final few percent fall means a 100% fall from today. And the demise of the current currency system as von Mises predicted.
CURRENCIES DEMISE ARE DETERMINED THE DAY THEY ARE BORN
The very nature of fiat currencies means that their demise is determined the day they are born. Since governments throughout history have destroyed every single currency, it is ludicrous to measure your wealth in a unit that is destined to become worthless.
Remember that gold is the only money which has survived for 5,000 years.
PUZZLE PIECE 3: INTEREST RATES
Interest rates worldwide are at historical lows. In Switzerland for example, you can get a 15 year mortgage at 1.1%.