by Egon von Greyerz Economic Policy Journal
Warning: We present to you the analysis of Matterhorn Asset Management. We fully agree that the long-term prospects for gold appear extremely bullish. However, given that global central bankers, including the Fed, are not yet printing significant amounts of new money, the potential for significant downtrends exists. There are two short-term trends going on here. First we have new buyers entering the market to buy gold. Second we have the deflationary pressure that not much new money is being printed at present. These two factors may make gold extremely volatile in the short-term. Buy gold as a long-term hedge but realize new gold investors are likely to be "weak" holders of gold and could be shaken out in any correction, making for an extremely rocky ride.
Fundamental and technical factors for gold are now in total harmony and gold is entering a virtuous circle that will drive the price up at its fastest pace since this bull market started in 1999.
- It is a fact that gold in US dollars (and many other currencies) has gone up 400% in eleven years or 16% per annum annualised.
- It is a fact that the US dollar has declined 80% in value against gold since 1999.
- It is a fact that the dollar and most other currencies have gone down 98–99% against gold since 1913 when the Federal Reserve Bank of New York was created.
- It is also a fact that the Dow Jones (and many world stock markets) has declined over 80% against gold since 1999.
- It is a fact that gold has made a new all time monthly closing high in dollars in August 2010.
We expect gold to start a substantial rise now which will continue for 5–10 months before any major correction. Gold’s technical picture is extremely strong with a continuous rising pattern of higher highs and higher lows with the steepness of the curve increasing. From much higher levels we are likely to see a correction that could last up to a year before the next rise which will last several years before we see a significant peak. Once gold has topped we do not expect the same kind of decline as after the 1980 peak since gold is likely to become part of a future reserve currency. At that point gold will be a solid but unexciting investment with very little upside potential. But that is likely to be a few years away.
In spite of a 5 times increase in the value of gold or an 80% decline against many currencies and stockmarkets in the last 11 years, most investors own no gold and still do not understand the importance and value of gold. In a world of constant money printing and credit creation leading to devaluing currencies and devaluing assets, gold reflects stability and is virtually the only store of value that cannot be destroyed by governments.
The average asset manager, fund manager, pension fund or private individual owns no physical gold and at best has a very small exposure to some precious metals stocks. And in spite of this gold has gone up over 400% in 11 years. How is that possible? For the simple reason with the relatively modest demand that we have seen in the last few years, there is not enough physical gold even at these levels. The increase in demand that we have seen has most probably been satisfied by central banks leasing or lending their gold to the bullion banks. Central banks supposedly own 30,000 tons of gold but unofficial estimates of their real holdings are at 15,000 tons or less.