Gold Investments Market Update – Spectre of Weimar Germany and Hyperinflation Raises Ugly Head

Gold fell slightly yesterday consolidating on the sharp gains of the inauguration day. Gold rose some $10.00 to $865.00 by early trade in London before falling in Europe and early trading in the US, but it then rallied back higher in afternoon trade and ended with a loss of just 0.40%. Silver traded similarly but as has been the case recently, outperformed gold by rising over 1%. Markets await US data today including Building Permits for December, Housing Starts and Initial Jobless Claims which are not expected to cheer the markets and should lead to further safe haven demand for gold. Concerns about the global financial system and economy are increasing and now there is a dawning realization that the cheap money, irresponsible lending practices, trillions of dollars of derivatives, massive leverage and government profligacy of recent times may lead to hyperinflation in some countries internationally. Due to the prodigal money printing and creation of fiat currencies in order to bailout much of the banking system and a continuing meltdown in the asset backed securities market and derivatives market, the threat of Weimar Germany is being mentioned more often, including on the front page of the Financial Times. The fall in sterling due to the huge exposure of the British state and now taxpayer to the liabilities of the banks in the City of London is likely to be replicated by a similar fall in the value of the dollar in the coming weeks as the fundamentals in the US and Wall Street are as bad if not worse than the UK. There is now a real risk of Warren Buffett’s “financial weapons of mass destruction” leading to what some have termed the neutron bomb of a meltdown in the out of control derivates market which now has a value in the hundreds of trillions ($40 trillion credit derivatives alone). The US Treasury is backstopping some $600 trillion in derivatives and the Fed and the Treasury are doing the same for the entire ‘structured finance’ segment. These figures are of a magnitude far greater than the World War I war reparations that the Germans had to pay which led to their hyperinflation. It is worth remembering that Germany was one of the, if not the, strongest powers that the world had ever seen at the end of the 19th century and many saw Germany surpassing the British Empire which was in decline, as a superpower. Germany was one of the strongest nations in the world – culturally, scientifically, militarily and economically and a superpower of the time. Nominal price of gold – record high in 1980 adjusted for inflation is some $2,400/oz, suggesting gold remains very undervalued at one third of its real value in 1980. Gold rose from $35/oz in 1971 to $200/oz in 1974 alone or nearly six fold in 3 years. Gold rose some 25 fold in from 1971 to 1980 or nine years. Today gold has risen just over 3 fold in the same time. The derivatives market is staggeringly large – some $516 trillion, roughly 10 times the value of the entire world’s output and it has rightly been called the "ticking time-bomb". This current financial crisis and the Federal Reserve and Treasury’s response to it has the potential to mortally wound the US dollar and could lead to hyperinflation. Similarly, Gordon Brown and the UK government’s response, risks collapsing the value of sterling further and hyperinflation. As ever best to hope for the best but be at least a little bit prepared for a less benign scenario.

Mark O'Byrne
Executive Director