Paper gold market will crash at Comex

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Do you want to see gold in the big picture? Read an interesting interview with Marc Gugerli by Oliver Disler. Marc Gugerli is
Fund Manager & Advisor of Gold 2000 Ltd and the Julius Baer Gold Equity Fund.

Gold has primarily a function of conserving the value of purchasing power. Gold is money and goes hand in hand with the development of money supply long-term. In recent months a lot of money has been destroyed, although on opposite central banks are printing money.

The various problems and issues we have in financial markets, have been recognized much too late and most central banks (especially the ECB) are “behind the curve” reacting with adequate counter-measures. This is one of the reasons, why the gold price did not go up explosively.

Gold was, is and remains money. Gold supply and demand and the variation of paper money supply are two important parameters which have an impact on the price of gold. Before the financial crisis started in 2007, money supply was growing at a rate of roughly 10 % in most industrialized western countries. Nowadays it is a multiple of ten percent.

A lot of central banks try to get ahead of the curve by reducing interest rates and flooding the markets with new money. The gold price should reflect this already now and trade around its inflation adjusted top of approximately USD 2’000. Man wants to go against the curve.

This is my minimum target for the gold price! The inflation of gold (dilution) is about 1.6% (gold output) or 2’000 tons per year. The entire amount of gold ever mined in mankind history is estimated to be about 140’000 tons. Money supply growth is approximately 30% and exceeds even 100% in some specific cases. It is just a matter of time that Gold will rebalance this inequality.

Treasury bills are the next big bubble (to burst). Investors and most asset managers have in average 20% cash and 30% invested in short-term treasuries. For a certain period this might be the right asset allocation.

Since the yields on cash and short-term treasuries are almost 0% in major currencies, Gold is getting more attractive as an investment. Now you have to ask yourself, if you rather want to be fully invested in classical assets only where the supply is exploding by the new money printed or at least add some Gold which can’t be copied, printed and is nobody’s liability?

There are three possibilities, which are relatively safe:
1. You buy physical Gold and put it into a vault

2. You could buy the Gold ETF from Zurich Kantonalbank (ZKB) which is traded at the Swiss Stock Exchange, which is the only ETF available which is fully covered by physical Gold and if needed you can exercise and get the Gold delivered within 10 days. There are similar products available but as with bank metal depository accounts you run the risk that you have to wait a long time until you get your gold. Very important: Reduce to a maximum the failure of exercise, counterparty and depository risk.

3. It makes absolutely sense to purchase gold coins in respect of the designated use. Investors have to consider that gold coins trade at elevated premiums and are almost not available anymore in some regions, such as United States of America, Canada or Australian.

I suggest to have invested minimum 10% of total wealth in physical Gold. Consider this investment as an insurance which in worst case scenario protects the rest of your holdings and assets.

The majority of investors purchase Paper-(Gold)-Futures at the COMEX. The sellers or counterparties of those Gold-Futures are just a few very dominant players. Some of them have an in-official close link to the US government. So far most of the investors didn’t exercise the gold futures and have accepted cash instead of physical settlement.

This is about to change. I believe that the comex will default and the entire paper gold market will „crash“ and gold could rise very quickly to 2000 until 3000 US Dollars. When this happens it will be too late to exercise or to try purchasing physical gold. It’s the same with a house insurance, which you need before the beds are burning!

The situation in the paper silver market is even worse. At the actual levels, Silver is extremely cheap and investors are divided if Silver is rather an industrial or still a precious metal or both. But having a look at the price development it is rather treated like other industrial metals as well. Silver is the Gold of the poor Man.

I believe that the price of Gold becomes extremely expensive and will be considered rather as “store of wealth” than money. What concerns Silver I can imagine that for example China or Mexico could accept Silver to be money and mean of payment (Silver Standard). I expect that Silver could outperform the price of Gold. Silver takes much more space to store and in most countries you have to pay VAT on Silver purchases. I suggest the Silver ETF of ZKB, which can be traded at the Swiss Stock Exchange.

This year several 1‘000 billion US Dollars rescue packages will be rolled-out. The biggest part of this fresh money will pour into infrastructure projects. Of course there will be companies which will benefit from this. During German “Weimarer” hyperinflation period some stocks of industrial companies perceived 70% of the purchasing power.

Cash and government bonds became worthless. Remember, in which asset classes are investors mainly invested those days? My top choices are companies in the commodity, food and energy sector.

Have a look at industrial metals like nickel, zinc or crude oil. Some of them dropped more than 70% from last years peaks. The industrial metals mining companies share prices tumbled 50 to 70%. The price of Gold is trading only 10% below its highest level and as mentioned already reaching new highs calculated in many other currencies. But gold mining shares are still trading XX% below its peaks.

I consider this to be a miss-pricing and a big buying opportunity. Due to lower price for energy, production costs are falling substantially and Gold price close to its highest level means that profitability of gold mining companies will increase substantially. The Philadelphia Gold Index (XAU) is trading at an attractive level and could double easily. From a historical valuation point of view and compared with the price of Gold the XAU is very cheap and my favorite investment 2009.