By: Egon von Greyerz
My long standing target for gold of $10,000 in today’s money and much, much higher in inflationary terms, is now more probable than ever. But I hope it will never be achieved. When gold goes to $10,000, it won’t be under the same circumstances that we saw in the 1970s. Gold then went from $35 in 1971 to $850 in January 1980 – a 24x explosion in very different conditions.
In the 1970s we had high inflation, weakening currencies and recessions in most countries. I remember the time well. I lived in the UK and experienced in those days a global oil crisis, a coal miners’ strike and shortages of various products. In 1974, businesses could only operate with electricity for three days per week. I was involved in retailing with Dixons which later became the UK’s biggest consumer electronics retailer and a FTSE 100 company. We sold televisions and other electric products with candle light. The Dixons’ share price went down 94% (and so did my first options) although the company was always profitable and well financed. My first mortgage went to 21% for a period.
UK 1970S – A SERIES OF CRISIS
I was fortunate to learn early what could happen to a country’s economy. Times were hard but there was no depression and most people had a job. What we must remember is that in August 1971 Nixon took away the gold backing of the dollar and that opened the floodgates for the credit creation and money printing that we are now in the final stages of. Gold’s massive surge in the 70s was primarily caused by double digit inflation and currency debasement.
US DEBT UP 55X
US debt in 1971 was $400 billion which was 34% of GDP. Today US debt is 55x greater at $22 trillion and 105% of GDP.
Since 1971 the dollar has lost 97% in purchasing power and even at today’s level, the dollar is massively overvalued.
Although I sincerely hope that gold will not reach $10,000 or above, I am absolutely convinced that this is very likely to happen. This next time a much higher gold price will not just reflect inflation and falling currencies like in the 1970s but a much more serious or even catastrophic situation both in the US and globally.
So let’s look at a potential scenario for the next few years. This is obviously not a forecast but more of a rough sketch of what we could happen:
$300 IN 2002 TO $1,920 IN 2011 WAS JUST THE FIRST LEG
I will start by sticking my neck out. I know forecasting is very dangerous and a mug’s game. Since 2001, I have been right about the risks in the world and gold’s role to protect against these risks. Early in 2002 we entered the physical gold market in a substantial way for ourselves and the people we advised. The ride from $300 in 2002 to $1,920 in 2011 was spectacular. But the gold price rise was just a confirmation of the risks that we had identified which led to the 2007-9 financial crisis. The world financial system was minutes away from going under in 2008 but was saved with tens of trillions of printed money issued by the Fed and other central banks around the world.
This did not save the world but postponed the eventual collapse. What you learn after a long life of experiences at all levels is that things take longer than you think. There is always a danger to believe that when you see a major problem in the economy that it will materialise very quickly. We have now learnt that things can take a lot longer than you expect. Thus patience is a very important virtue that is learnt from a long life of experiences.
Today over 10 years have passed since the culmination of the Great Financial Crisis. The optimism is as great as ever. Stock, bond and property markets are at, or near, their highs. But the world has learnt nothing. The cause of the problem in 2007-9 was debt in various forms, including derivatives and today, with global debt having doubled since 2006, the risk position is exponentially more explosive. Also, the gold price has not yet reflected all the recent money printing.