Those investors panicking now and selling their gold and silver will feel as sick as dogs when they see what happens next to prices. For after a bleak patch lasting at most a couple of months the eurozone authorities will start their money printing presses rolling and hey what is the one money that they can never print?
We saw the start of the European Central Bank’s money printing with the announcement of the $1.3 trillion LTRO program last Christmas. It worked and rallied markets for a few months, rather less than QE2 from the Fed. And that is the dynamic of money printing.
Money printing consequences
It works just fine in the initial stages and surprises everybody to the upside. But over time the upside will become shorter and the amounts that have to be pumped into the system will become bigger and bigger, and so will the impact on precious metal prices.
The eurozone politicians and bureaucrats are weak-minded committee men and women. They see money printing as the only easy option to avoid a major recession. Fine in theory but ultimately this will be disastrous in practice. Money will be devalued and it is happening right now in front of our eyes.
As John Mauldin, co-author of ‘Endgame’ comments this weekend: ‘I think the vast majority of Germans (and to be fair, the entire world) have no idea how many trillions of euros are going to be needed to keep patching the leaky ship that is the eurozone. It is even possible that most German politicians actually think it might only be three per cent inflation.
‘Spain is too big to save and too big to fail. The only way for Spanish debt to remain at six per cent is for the ECB to basically buy it (or lend to Spanish banks so they can buy it, or whatever creative new program Draghi and team can think up).
‘When Spain goes, it is just a matter of time before we lose Italy and then, yes, even France. The line must be drawn with Spain. And the only outfit with a balance sheet big enough that can also do it in a politically acceptable manner is the ECB, and the only way they can do it is with a printing press.
‘Will it buy time? Yes, but time for what? To fix government deficits? To deal with bank debts? Sovereign debt? To somehow solve the massive trade imbalances between Germany and the European periphery? To force voters to accept a fiscal union? In the midst of a crisis?
‘If there is some conspiratorial cabal that has a secret plan, they have kept it well hidden. Because from here it looks like they are making up the ‘plan’ as they go along.’
Keep your money saved in German bunds or US treasuries and you will see what happens to it. The purchasing power of these currencies will be inflated away. Gold and silver are selling at near bargain basement prices today in the circumstances.
You won’t be able to buy them very much cheaper than this even in a major sell-off because there is strong demand for physical precious metals from everybody from small investors to central banks in the worried emerging markets. They all want protection against inflation from money printing by central banks.
All you need to do is step back and look at the bigger picture. The focus is always on what gold and silver did last week or last month, never last year or five years ago. How did other asset classes perform over the longer time scale? You won’t find anything better than precious metals for the past decade.
Now consider what has to happen for gold and silver not to rise in price. The eurozone has to make a stand against its debts and let countries fail and whole populations fall into ruin. In the world of muddle-through committee politics that is never going to be allowed to occur, except perhaps in the special case of Greece who should never have been allowed to join the European Union let alone the eurozone.
So just stay on the rightside of history and precious metal investors will yet again come out on top. Don’t panic now. It is the equity investment case that is crashing not precious metals.
See the next edition of the ArabianMoney investment newsletter for our advice on how best to profit from this phenomenon (subscribe here).