Why Is Gold Still Cheap?

The precious metals markets are quiet, yet everyone should be buying gold and silver before it is too late!

Although gold and silver prices have risen significantly in recent years, in our view we are still only in the early phase of the bull market. As we noted previously, the upward trend was expected to continue following the Covid panic. It now appears that the time has come, and both gold and silver are set for a longer, sustained rally. It is only a matter of time before the September 2011 high of $1,910 is broken.

For anyone who has not already done so, it may therefore be worth allocating 20–25% physical gold and 5–8% physical silver to their long-term portfolio. Let us not wait for the next panic, because buying in a panic is very expensive. Log in to Goldtresor

Log in to Goldtresor

What is our view based on?

It has by now become clear that the former unipolar world order dominated by the United States is coming to an end, and this will bring enormous turbulence. Regardless of the outcome of the US presidential election, the dominance of the dollar will continue to diminish and the greenback will gradually lose its reserve currency role.

The debt crisis that erupted in 2008 has been converted into a snowballing national debt that presents central bankers with an ever more intractable problem. Governments repeatedly choose the path of least short-term resistance: firing up the money printing press, which destroys the real value of savings while simultaneously inflating away the national debt — in other words, countries indebted in their own currency will be able to repay their old debts with newly diluted money.

For investors and savers, however, this process will not be painless. When will the thread finally snap? When will the world take fright at the fact that the money created out of thin air by the US Federal Reserve has no backing? At what precise moment will declining confidence tip over into a headlong flight?

It appears that the financial system established on 15 August 1971 is, in its current form, approaching its end. Something new will replace it. We believe that in the emerging new system, precious metals will once again be assigned a significant role.

How could US national debt become 10% gold-backed?

Although the United States' 8,133-tonne gold reserve is the largest in the world, if its current $26,500 billion national debt had to be made 10% gold-backed again (at the time the Bretton Woods agreement broke down on 15 August 1971, the backing was more than 20%), then at current prices the American gold reserve would need to be increased by 36,420 tonnes.

At current US gold mining rates, this would take more than 110 years, and purchasing that quantity of gold would also be deeply problematic, since it far exceeds the total stock held by all the world's central banks combined.

So version 1 can be ruled out. Version 2 would involve an extraordinary revaluation of the gold price. To achieve 10% gold backing, the current price of $1,850 per ounce would need to be multiplied by 5.48. The new price would be around $10,100, generating a $2,600 billion profit on the gold reserve that could immediately be paid into the budget.

A $10,000 gold price may sound startling at first glance, but the accounting solution could be attractive — especially if regular cash transfers to the population and other factors trigger an inflationary spiral. In such a scenario, the gold price could multiply within a short time, because the extreme level of indebtedness means that raising interest rates to curb inflation simply cannot be afforded.

Fine, but how would China (and the rest) react to such a move?

The central banks of eurozone countries collectively hold more gold reserves (nearly 11,000 tonnes) than the United States currently does.

The Russians have been the biggest gold buyers over the past decade; they currently hold 2,290 tonnes, while the Chinese — the world's largest gold producers — are believed by some to already be sitting on the world's largest gold reserve, though officially they report only 1,600 tonnes to the IMF.

It therefore appears that the major powers would not necessarily object to an agreement on a new gold price. Among emerging economies, Turkey is also very well positioned in terms of gold reserves (412 tonnes), so it too would have a strong interest in "resetting" the gold price.

What would be somewhat disruptive is the disproportionate increase in the purchasing power of India's and China's populations, since Indian households in particular hold an extraordinary proportion of their savings in gold — which would mean the relative impoverishment of Westerners who save less in gold.

And how would Hungarians fare from a gold price revaluation?

Unlike the Far East, where virtually the entire population holds physical gold, physical gold as a savings vehicle has still barely become widespread in Hungary. Many people do not hold any such savings at all, and will therefore not be able to benefit from a gold price revaluation.

In our view, it is not too late to act!

The price of gold — and along with it, silver — will benefit from the processes described above, as money seeking shelter will migrate into precious metals. However, we should not wait until a gold-buying panic erupts, because the lesson of March 2020 must be firmly taken to heart: "there is less gold than money".