Greyerz:  “Eric, I’ve been thinking about the end game.  The conclusion I have come to is that this will go on for a long period of time because there won’t be a conventional end to the coming chaos.  These are absolutely historic and unprecedented times.  We have never, ever had a situation in history where most major nations are bankrupt. 

Nations are also continuing to run massive deficits, and increasing their debts now exponentially with no solutions in sight.  At the same time, we have a financial system which is also bankrupt....

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“The financial system almost collapsed in 2008, and since then nothing has been done to repair it.  The debt and the problems are still there and the system is still bankrupt.

So you have a situation where the debt/GDP in countries like Japan and Greece is now at 200%, and it is 100% in the U.S. and Europe.  If we add in unfunded liabilities, the debt/GDP ratios in most countries is around 500%, and even as high as a staggering 1000%.

If you take a look at the European banking system they need to get rid of 3 trillion euros of loans, but of course they can’t afford to take the losses.  But that 3 trillion euro figure will become 6 trillion euros and then eventually it will reach 10 trillion euros.  If you add in the derivatives losses the numbers are even more unimaginable.

Total liabilities in the eurozone banking system are 32 trillion euros, which is about 3 times eurozone GDP.  Switzerland’s total bank liabilities are 7 times GDP.  If you add to that number the derivatives exposure, this is a risk that the world cannot afford.  Sadly, these banks will not survive in their present state.

As I said earlier, these are unprecedented times, and you can be sure that there will be unprecedented consequences because of all of this.  This is the end of a cycle that has probably lasted a millennium.  For those very major cycles, there are no quick fixes or solutions.

Governments around the world will be fighting for survival.  They will also be fighting for their own economies to survive.  The pressure will be enormous.  Voters will throw out any government that doesn’t give them what they want, but eventually the problem will be that the governments won’t have any money to give them.

So governments will have very short lives and change constantly.  You can be sure that there will be massive social unrest in many countries.  This will make it almost impossible to govern those nations.  We will also see protectionism and isolationism -- countries will turn inward.  They will not be able to meet on a world stage and solve the world’s problems.

If we add to this the geopolitical problems, there is a major risk of war breaking out in the next few years.  Therefore, I doubt that we will see a new reserve currency in the next few years because governments will be incapable of getting together and agreeing on anything.

Gold may not become part of a reserve currency for a long time.  Instead, I think there is a very good chance that gold will become a reference currency -- that is a reference currency for transactions both domestic and international.  So these currencies will be unofficially linked to the gold price.

It will be the people who do the trading that will actually link their currencies to gold.  Gold has often been an unofficial currency during periods of hyperinflation.  So this would not be unusual, except that the entire world would be using gold in this manner because there will be no other currency that people will view as stable.  The fiat currencies will be in collapse.

Ultimately, I believe this will be better for holders of physical gold because anything introduced by governments is likely to fail.  But gold introduced by the people as a reference currency is a much more durable solution.”

Greyerz also added:  “Looking at the short-term action in gold and silver, Eric, I said last week that anyone who is not fully invested needed to act immediately.  Gold was at $1,300 and silver was at $20.  Today gold is $1,370 and silver is $23.25.

But gold is now on its way to new highs and it will happen very quickly.  First, the metals should move very quickly to the $1,500 area on gold, and $30 for silver.  The gold/silver ratio has already fallen from 67 down to 59.  That ratio is on its way to 50 in the short-term.

I would just add that gold is strong right now vs all fiat currencies, including the U.S. dollar.  So this strength in gold is across the board.  I hope investors are fully invested and they enjoy the ride in gold because this will be a very strong and long-lasting rally.”

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Eric King

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