Egon von Greyerz, of Matterhorn Asset Management, and James Turk, Director of the GoldMoney Foundation, talk about the state of the global economy and gold’s status as a safe haven. They discuss S&P’s recent downgrade of US debt and also talk about the situation in the UK and in Switzerland.
They discuss the Swiss franc and how its appreciation hurts the Swiss economy in the short term, however they make the point that strong currencies are always better for long-term growth and economic stability. James and Egon emphasise the importance of owning allocated physical gold outside the banking system. We agree with Egon’s statement “as few obstacles as possible between you and your assets, i.e. your gold or your silver, your physical asset. Therefore, you should hold it so you take possession yourself and it’s outside the banking system.”
This interview was recorded on August 6 2011 in London.
Full transcript below the video if you prefer to read than watch.
James Turk: I’m James Turk. I’m a director of the GoldMoney Foundation. I’m here in London at the GATA conference with Egon Von Greyerz. Egon is the founder of Matterhorn Asset Management. We had the opportunity to speak in Munich at the DEG conference a few months ago. It’s great to have the opportunity to follow up. The big news this morning is that S&P has downgraded the U.S.A. to AA+. What are your thoughts on that?
Egon Von Greyerz: I’m not surprised. It should have happened a long time ago. The U.S., in my mind, has been bankrupt for years. Their debt has gone up since 1961, U.S. government debt. They’ve had 79 increases in the debt ceiling. They have no ability, ever, to repay that debt. It’s just that they’ve had the ability to print money for a long, long time. But that is also now going to disappear because no one will buy their bonds. This is what I’ve been expecting. I think AA+ could be junk rate, as far as I’m concerned, because they are bankrupt.
Now, interest rates are going to go up for the U.S., for the rest of the world, and we’re going to have a real problem worldwide because you know the problems in… You also. I’m sure you want to talk about that.
James: If the interest rates go up, though, the U.S. has $14 trillion plus of debt. It goes up 1%, that is $140 billion to the deficit for each 1% increase. They can’t afford higher interest rates.
Egon: No. In my view, it’s that they will drop to the teens at least. The interest rates. They’re forecasting officially an increase of about $10 trillion in the next 10 years of the debt. The politicians haven’t even managed to agree to reduce that by… Well, they’re trying with $2 trillion, but they haven’t even agreed on that. It’s scandalous, the way that they have behaved. They’re rearranging the deck chairs on the Titanic when the country’s sinking. They’re bickering about a million here, a billion there, a trillion there when they actually need to reduce the debt dramatically. They will never agree, of course, and that’s why the country’s being taken into the abyss now.
James: Even though we’re headed down the road toward the edge of the cliff, and probably a lot of the people in Washington see it, nobody’s making the u turn to turn the country around in the right direction. Even that $2 trillion you were talking about, that’s just cutting potential future spending. It’s not cutting real spending.
Egon: Yes, and the official forecast that they have of a circa $10 trillion increase in the next 10 years, that will not suffice, in my view. First of all, unemployment will grow dramatically. You have the banking problem. It’s massive. The toxic debt in the banks. It’s going to reemerge now. The U.S. will need to print unlimited amounts of money to save the banking system in their own country. They’re probably going to try to help the rest of the world, also. We are going to see, now, the start of what you and I always thought would happen, the hyperinflationary depression. There will just be unlimited money printing.
James: Yeah, in an attempt to save the banking system, they’re going to destroy the currency, and therefore destroy the economy as well, which means the banks are going to be destroyed in the long run anyway.
Egon: They are, and interesting thing is they will destroy their currency but sadly there isn’t any strong currency in the world right now. You and I agree, also, on the fact that all currencies will decline.
James: All national currencies, the strong currency being gold, of course.
Egon: Exactly. That is the only real money. That is the only measure that we should use. There’s no use measuring against the euro. Is the euro going to be strong or weak? Or the dollar? It doesn’t matter because they’re all going to weaken against gold. Even the Swiss franc will. It’s gone sideways now for a while against gold for a year, but also the Swiss franc will weaken against gold.
James: The point I’ve made about the Swiss franc is one little country cannot stop this tidal wave of bad currency being created around the world. If you have a tidal wave of hot money coming toward you, even if the Swiss National Bank pursued prudent policies, it can’t stop the tidal wave.
Egon: No, no.
James: Not to pick on the U.S., if we look at this side of the pond, there are a lot of problems here, too. We already know about, of course, Greece and Ireland. Italy is on the ropes. Spain is on the ropes. Somehow the U.K., which I think is probably in as bad a position, if not worse, than the U.S. has managed to avoid the limelight, for the time being. Here in London, here in the U.K., the situation is just as bad, isn’t it?
Egon: Absolutely. I think it is as bad, if not worse than the rest of Europe. It’s just that, as you say, it’s a matter of focus. The U.S. has, for a few years, managed to direct the focus onto Europe and therefore avoid problems with their own debt situation. But now it’s coming to the U.S. I’ve been expecting that for a long time. It will also come to the U.K. There’s no question about it. You take the European banking system now. A lot of their funding is short term. They have about five trillion euros to refinance in the next two years. Five trillion. That’s about half of the GDP of the EU countries. In this market, there’s no chance of refinancing that. Again, it will lead to the Europe ECB printing unlimited amounts of money. They will do it. Whatever they say, they will do.
James: Right now, we’re in a situation where the stock markets have been hit. There’s a lot of question about the security of any kind of debt paper that people are holding, particularly sovereign debt paper. What about corporates? Would you recommend holding any corporate funds or corporate paper at this time?
Egon: No, I wouldn’t. I wouldn’t.
James: Because of the currency risk?
Egon: Exactly. You have the currency risk, and, of course, if you get a downturn in the economy a lot of corporates will have problems, also. The choices today for investors are so limited. As we’ve been talking about at this conference, very few people understand gold and very few people are invested. I was speaking at a family office conference in Geneva a month ago. There were about 250 family office managers there, managing a lot of money. They had no clue what was happening in the world. Not a single one owned gold and they had no intention of buying gold, either. That shows you they’re still looking at the old conventional methods of investing: bonds, stocks, et cetera. But they don’t know what’s going to hit them.
James: I actually find this quite amazing. Your being based in Switzerland, let me ask you this question: 25, 30 years ago I could travel to Switzerland and everybody understood gold. When I go to Switzerland now and I talk to portfolio mangers or family office managers, very, very few of them understand gold. How could that happen in Switzerland? That so few people truly understand the importance of gold in the portfolio?
Egon: The Swiss banks changed from being the old conservative Swiss banks to being part of the world financial system. They became Americanized totally. They started taking the same risks and having the same short term performance and the same short term investment activity that all other banks in the world have had because it was all about short term performance. So they forgot about wealth preservation that Switzerland was all about. That was left behind. They leveraged their banking system dramatically. It’s very sad because gold investment has always been a tradition in Switzerland. The Swiss always used to buy their little friendly every month to save X percent of their wages. That disappeared, but I’m sure it’s coming back now.
James: In terms of where the Swiss banks are, basically avoid most of the Swiss banks other than some of the traditional, old line private banks which still understand gold, and maybe some of the Cantonal banks, as well.
Egon: Yes. They’re definitely better, but my concern is if something happens to the banking system, if something happens to the big banks, you know that the whole system is totally interconnected. Even if a private Swiss bank… If they receive a dollar deposit, what do they do with it? They put it in a U.S. bank. If they have a foreign exchange transaction with a dollar counterpart, they will have a U.S. bank or a major bank as a counterparty. If we have a problem in the banking system, I think all banks will have problems. This is why you have to have gold outside the banking system as the bottom of your wealth pyramid.
James: More generally speaking, this is why, when you’re in a financial bust like we’ve been in for several years now, you want to avoid promises. You want to avoid those types of things that you’re tying up wealth on the basis of someone else’s promise and own tangible assets instead. For a liquid tangible asset, gold and silver are obviously among the top choices.
Egon: Absolutely. I try to instill in investors that there should be no one, or as few obstacles as possible between you and your assets, i.e. your gold or your silver, your physical asset. Therefore, you should hold it so you take possession yourself and it’s outside the banking system.
James: You’re also the proprietor of SwissGold.com?
James: Is that the thinking, also, behind…?
Egon: Yeah, what we do is very similar to what you do, although actually our investors own their own bars. They have their own serial numbers, and so they can actually go and visit their gold and take it out if they want, which is also in vaults in Switzerland.
James: We can do that in GoldMoney, as well, but it has to be a London good delivery as a bar registered in your name at any one of the four vaults.
Egon: I think that’s the only way to do it. That’s the way you should own gold or silver.
James: I agree. Has the Swiss name been tarnished because of some of these issues in the banking system?
Egon: Absolutely. Totally, because now, with the issues in the banking system and with the attack of the U.S. after the UBS affair, now, it is not the same. Of course, banking secrets are now disappearing in Switzerland and will totally disappear by 2014 if now the FATCA and the rules about it. They require each bank to report every American citizen. Of course, every European country is also demanding for Switzerland to get information. I think it’s not gone yet, but it is going, the banking secrecy. The political stability of the country is still the same, in my view. It’s still one of the most stable and safest countries in Europe.
James: But with the Swiss franc so strong, it’s obviously going to have a negative impact on the export industries. Tourism is still an important part of the Swiss economy. It’s obviously going to have a negative impact. The Swiss economy has got some difficult issues to deal with here.
Egon: Very difficult, but you look long term, though… I was starting my working life in Switzerland in ’69. Then I came to the U.K. in ’72. It was 10 Swiss francs to the pound, and now it’s 1.25. It’s gone from 10 to 1.25. The dollar was 430, 430 Swiss francs to one dollar and now it’s .76 today, I think it is. 0.76. The Swiss franc has continuously revalued against all currencies and the country has prospered. It’s a fallacy to believe that it’s good to have weak currencies because the countries with the strongest currencies, they are actually the strongest countries financially, also.
But now, I think, yes. This is short term. This is terrible for Switzerland. In spite of that, their long term, they have prospered. But short term, for industry, for tourism, et cetera.
James: The thing about weak currencies, that’s just another, like you say, you used the word “fallacy,” of mainstream economic thinking today. What you really need is a currency that has stable purchasing power so that people can interact with a level playing field. And having a sound money. But talking about the Swiss franc’s strength against the U.S. dollar and also the British pound, but the price of gold just is going up, even in terms of Swiss francs.
Egon: Yes, it does. Since the last eleven years, of course, it has gone up less than all the others, but it has. But in the last year, as I said before, it has been going sideways, gold against the Swiss franc. But I see it in a triangle now. I think that will break up pretty soon, also. That gold will start or resume its strong uptrend against the Swiss franc also.
James: That’s the way it looks to me. With all of this uncertainty about sovereign debt continuing to grow, it seems inevitable that gold is going to continue its rise against all national currencies. This is going to be viewed, like your last video, among thousands of people around the world. Any last thoughts you’d like to share?
Egon: One has to be concerned about the world. I wrote a report two years ago called “The Dark Years Are Here.” I think it’s now starting. I think it could be terrible for the world. I would be much worse than any of us can ever imagine. For some of us who are lucky, first of all, you’re going to put our financial house in order, if you haven’t done it. If you take gold and silver that we’re talking about, less than 1% of world financial assets are still in gold or around 1%. It means that no one is invested. The number one, put your financial house in order. Number two, see that you and your family’s safe. Because everybody can’t do that, and socially it will be terrible for a lot of people.
James: Yeah, I think there’s some tough times coming. Egon, it’s always a pleasure to speak with you. Thank you for sharing your thoughts. Maybe we can do this again in the not too distant future.
Egon: I hope so. It’s a pleasure. Thank you very much.
James: Egon Van Greyerz of Matterhorn Asset Management. Thank you again.
Egon: Thank you.