by Egon Von Greyerz, Gold Switzerland:

At the beginning of last week, I was challenged with a wager on the gold price. The individual, who called me a “gold pumper”, wanted to bet $1 million on the gold price going below $1,000 before it reached the Maginot Line at $1,350.

Since the gold price was $1,325 when I received the challenge, the odds looked pretty good to me. Gold only needed to go up $25 for me to win $1 million but down $325 for the challenger to cash in. Thus, a no-brainer really, especially since I was totally convinced that gold would break the Maginot Line soon.

I suggested that we both place $1 million in a vault in Zurich, held in escrow by a Swiss notary and I also set out the detailed rules for the wager. The challenger came back and wanted to deposit $1million with his lawyer in the US instead. Obviously not acceptable to me since being Swiss, I would neither trust the US legal system, nor the other party’s lawyer or the US dollar.

To make a long story short, the challenger started to procrastinate and then as the price was rising, the challenger became nervous and pulled out because, as he said, Paul Tudor Jones was bullish on gold. So not much conviction there in his big bet! And then last Friday, gold broke above the $1,350 Maginot Line.

So I didn’t actually win $1 million in fiat money or gold, but morally I did of course and that felt just as good.

GOLD HATERS AND THEIR FALLACIOUS ARGUMENTS

People who hate gold obviously don’t understand its purpose nor the history of gold as the only money that has survived throughout the ages. Also, I have found that many gold haters have lost money speculating on gold mining stocks and therefor are anti gold.

The gold haters always use the same fallacious arguments, like you can’t eat gold. True, it is slightly harder to digest than paper money which you can’t eat either. Gold haters, including lazy and tendentious journalists, also choose a price level that suits their argument. They take the gold price in 1980 at $850 and then argue what a poor investment is was as gold went to $250 in 1999.

The fact that gold went up 24x from $35 in 1971 to $850 in 1980 is totally ignored by the gold ignoramus. And then they pick the top in 2011 at $1,920 as an example of what a bad investment gold is today.

BUY HIGH AND SELL LOW – A RECIPE FOR BECOMING POOR

It is of course true that if you buy at the top and get out at the bottom, you will lose money. And these investors who buy high and sell low will quickly run out of money. I hear of people around me who didn’t buy gold in 2002 when I recommended it at $300. But when gold reached the front pages, many bought not far from the $1,920 top and then sold as it crashed to $1,300. Many investors feel more comfortable buying with the crowd as well as selling with the same crowd and getting out at no profit or a loss.

Few realise that you must buy when the asset is undervalued and unloved and not on anybody’s radar. Then all you need is patience and the market will look after you.

GOVERNMENTS UNDERWRITE THE GOLD PRICE

What most investors fail to understand is that governments are their best friend when it comes to gold. Because governments always underwrite the gold price by constantly printing money and expanding credit. That is why all currencies have fallen 97-99% against gold in the last 100 years. Thus, there is only 1-3% left for paper money to lose all their value.

And we must remember that the next move down involves a 100% loss in value of currencies from today. This is what the world can expect in the next 5-7 years as the financial system fails and governments, in a desperate attempt to save the system, print unlimited amounts of money. Remember that 2006-9 was a rehearsal. Nothing was solved at that time. The can was just temporarily kicked down the road with $10s of trillions of printed money, loans and guarantees. Since 2006, global debt has doubled from $125 trillion to $250 trillion.

GOVERNMENTS CAN’T SERVCE THEIR DEBTS AT CURRENT RIDICULOUSLY LOW RATES

Most governments can hardly service their debt even with interest rates around the world from negative to just over 2%.

Deficits and debts are continuing to grow globally. Only in the US, eight months into the current fiscal year, debt has grown by $1 trillion to $22.4t. On average US debt has doubled every 8 years since Reagan became President. There is every reason to believe that this trend will continue. This means that by the end of 2024, the US will have a debt of $40 trillion. That might seem unrealistic today but with rising deficits and a new financial crisis in the next 5 years, $40t debt seems quite feasible.

INTEREST RATES TO REACH 1970S / EARLY 80S LEVELS AT 15%+

With a crash in the bond market and high inflation, or hyperinflation, interest rates are likely to reach the teens by then just like in the late 1970s and early 1980s. By that time the Fed will have lost control of rates as market pressure will prevail with panic in bond markets globally.

With US debt at $40t in 2025 and interest rates at say 15%, total interest cost would be $6t. Tax revenues are unlikely to rise from current levels and will be maximum $3.5t. Thus, just interest costs will be $2.5t above tax revenues. And so the vicious circle begins with falling tax revenues and rising costs, more deficits, corporate and bank defaults, debt levels exploding and interest rates surging. With risk levels at extremes, any lender would demand extremely high returns.

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