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By Ronald-Peter Stoferle, Incrementum AG Liechtenstein

February 19 (King World News) - Trust Is Lost & The Financial Destruction Will Only Get Worse


The (financial) world is at the moment long in questions but short in answers.  We believe that gold is one of the right answers in times of chronic uncertainty.  It is said that “trust is a delicate flower; once destroyed, it will not return easily.”  We believe that the trust lost in the past years will not be regained any time soon, and that the situation will actually still get worse....


Continue reading the Ronald Stoferle piece below...




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The eurozone is still going through a breaking test, and the US dollar is gradually losing its status as the leading global currency.


Why do people place trust in the yellow metal?  Gold looks back on a history of success as the means of retaining value and purchase power that has spanned millennia. In that time span, the market has chosen the optimal currency from a logical and rational perspective.  Among the criteria are high liquidity, indestructibility, a high ratio of value per weight and volume unit, negotiability, easy divisibility, global acceptance, etc.  The slowly but steadily growing supply from the mines (gold reserves grow at about the same pace as the global population) ensures stability and trust.  These unique features make gold one of the best hedges against excessive monetary expansion and black swan events.


Even though critics will not tire of discrediting gold as the barbarous relic and yesterday’s money that has no place in modern society, we would like to ask the question:  What timeline they have looked at?  “Natural laws” such as “property prices don’t fall,” “US Treasuries are risk-free,” or “The Earth is flat” may have applied in the (recent) past, but if we broaden the (time) horizon, we find that the picture changes.  The mere extrapolation of the past leads to disastrous results in the long term.  Gold on the other hand has a track record of 6,000 years as the currency of last resort and has never turned worthless.


Gold is therefore in the center of the system while the currencies oscillate around it.  In his classic work “When Money Dies,” Adam Fergusson writes:  “Nevertheless, it was the natural reaction for most Germans, or Austrians, or Hungarians – indeed, as for any victims of inflation – to assume not so much that their money was falling in value as that the goods which it bought were becoming more expensive in absolute terms; not that their currency was depreciating, but – especially in the beginning – that other currencies were unfairly rising, so pushing up the price of every necessity of life.  It reflected the point of view of those who believe the sun, the planets, and the stars revolve with the moon around the earth...”  Therefore we could see a future where rather than asking for the price of gold, people will much more often ask for the price in gold.


Don’t fight the Fed – buy Gold!


The global expansion of monetary supply should continue to provide gold investments with a positive environment.  The reaction to the current crisis is already feeding into the next crisis.  Trying to resolve a crisis with the very same instruments that caused it (i.e., an expansive monetary policy) would seem to be clutching at straws.  The driving forces of wealth are savings and investments, not consumption and debt.  The weak US dollar is a logical consequence of the quantitative loosening, which from our point of view is just a euphemism for printing money.


Both the fear trade and love trade are the driving factors of this bull market.  The fear component is driven by the negative real interest rates, the excessive government debt, and the rising fear of a collapse of the system.  This component is currently regarded as the only reason for the gold bull market.  However, this perspective disregards China and India, which are the driving forces on the demand side.  The high traditional gold affinity and the rising wealth in those two countries will support demand in the long run.  By 2020 emerging markets will generate 50% of global GDP, up from 19% in 2000.  The majority of the emerging countries are significantly keener on gold than the industrial nations are.


Gold, as antagonist of uncovered paper currencies, remains an excellent hedge against worst-case scenarios.  Low real interest rates and high counterparty risk provide the perfect environment for gold.  Both are clearly the case at the moment, and we expect this scenario to last.  At the current real interest rates, gold is an obvious alternative to short-term government bonds, current accounts, or time deposits.  After many years of a chronic low-interest-rate policy, we do not believe that interest rates, along the lines of Paul Volcker’s, would be possible without the system collapsing.  Therefore this time the gold bull market should end for different reasons than at the beginning of the 1980s.


Therefore the question of price targets is difficult to answer.  But given the fact that the majority of debt has neither been written off nor paid off but simply transferred, the problem of excessive debt is still waiting to be resolved.  As far as the sentiment around gold is concerned, we definitely do not see any signs of euphoria.  Skepticism, fear, and panic never line the final stretch of a bull market.  Therefore we believe that our long-term price target of $2,300/ounce, as formulated a few years ago, could therefore come out on the conservative side.


© 2014 by King World News®. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed.  However, linking directly to the blog page is permitted and encouraged.


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Eric King

KingWorldNews.com

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