Egon von Greyerz, founder and Managing Partner of Matterhorn Asset Management AG & GoldSwitzerland, believes that the perfect storm might be brewing and that we may be facing a world that we have not seen for many years, even decades or even a century.
“When the next crisis comes, it will be a shock to most people in the western world, emerging countries and the developing world,” said Greyerz.
The recent volatility in equities underscores the fact that investors are not seeing reality, believes Greyerz.
Indeed, the dowjones went down 900 points in just seven trading days during the second week of December and in just two days it went up 700 points.
So what is causing these wild gyrations in the equity market?
The Fed just changed a few words in their outlook for 2015. Those magic words were “Be patient.”
Perhaps that was interpreted by investors that they should buy unlimited amounts of stock irrespective of the fundamental outlook.
Sweet words, but some market participants continue to point out that the real world is still finding it difficult to make ends meet in today’s economy. Put simply, consumption spending remains feeble which partly explains why oil and commodity prices have collapsed in value. The bears view is that the world is in a recession and regretfully, soon on its way into depression. They flag-up the recent depressed commodity prices to justify this view.
Greyerz believes that no country's economy will escape the coming turmoil. “This will happen to west and east and it is likely to happen very quickly in 2015,” he said.
So is there still demand for physical gold?
“Gold refineries in Switzerland are in constant demand, they are working in three shifts just to keep up,” said Greyerz.
But there is very little demand from the west for physical gold so where is all this interest coming from?
Demand in the east is very robust, according to Greyerz.
That makes sense, bearing in mind the recent launch of China's bullion exchange.
Greyerz is predicting a massive squeeze in gold in 2015 and he recommends holding onto gold in its physical form.
Why is it better to hold gold in its physical form?
When you buy gold from banks you really don't know who the gold belongs to. For example, the gold might be owned by a central bank. So the real owner could ask for it back from the bullion bank that it lent it to. In other words, the risk is that the investor in gold might be left holding worthless paper if the bullion bank doesn't hold enough physical reserves of gold.
Greyerz recommends people take the physical gold out of system and keep it in private vaults, “it is absolutely critical to do this because there isn't enough physical gold around,” he said.
Central Banks around the world are likely to be printing massive amounts of money in 2015. We are probably going to see the resurgence of quantitative easing around the world.
So pumping the system with liquidity might be promising for gold prices going forward. Moreover, if we combine that with a shortage of the physical yellow metal then that should keep prices up.
What about the incredible volatility of that other forgotten precious metal, silver? Where will we see silver heading in 2015?
At the time of writing this piece silver spot is 15.8 USD. “I think we will make 50 USD next year 2015,” said Greyerz.
Can the central banks get out of this one?
They have lowered interest rates to zero and even negative zero in some monetary regions around the world. In Switzerland today and other countries they have no more ammunition left. So the central banks cannot do anything else but print money. But as the EU realised in 2014 and Japan before then, printing more money is a quick fix, but it is not a real solution in the medium long run.
If we take a look at world debt today it is currently approximately 300 trillion US dollars and growing. At an interest rate of around one and two percent this debt is serviceable. With the massive amount of money that is going to be printed in the next few years, it unlikely that interest rates will continue to stay at one or two percent, even zero percent, because the market won’t accept that. What shrewd investor will buy government bonds that are worthless and that are unlikely to be paid? They will want some risk premium and central banks will be the only buyers.
So what would happen if interest rates ballooned to, say, 10 percent?
At today's 300 trillion US dollar world debt, the cost of servicing the debt would be 30 trillion But the world GDP is 60 trillion, so 50 percent of world economic activity would go towards just servicing the debt, that implies drastic public cuts, it is not sustainable...
What happens when interest payments are above GDP? Game over.
Hyperinflation and depression on the cards.
Also a sharp rise in interest rates may result in the few investors holding bonds to exit which could be the catalyst for a bond market crash in 2015.
Greyerz sees no way out of this one... the real problem is going to start in 2015.
People will be shocked at the speed of change of the world economy, money printing will happen at an unbelievable speed in 2015 reckons Greyerz.
What does Greyerz recommend to do?
“Look at Russia, it is a good example. Any Russian who had gold rather than roubles in last year would have preserved his wealth. Gold in roubles is above the 2000 peak and that is what is going to happen to every single currency in the next few years. So for those few people who have surplus funds investments they should put it into gold.”
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