Posted By: Matthias Paul Kuhlmey
Who doesn’t remember the slick guys from the British pop-band, Spandau Ballet, with their 1980s smash hit, Gold?! Even if it is a distant (or unwanted) memory, we have no choice but to recall the “smash hit” that Gold has taken over recent days. Last Friday, the precious metal traded down more than USD 100/ounce (nearly -6%). Silver, in comparison, was truly “demolished,” and fell nearly 18%, its largest single-day decline since 1987. Now the “know-it-alls” are making the round, as Gold never was an investment to begin with, right? What they do not tell you is that (like in 2008) there is considerable action behind the scenes, and someone is liquidating – liquidating big. Most likely:
1. Hedge Funds – to save performance for the year and to meet margin calls
2. Retail Investors – to take profits and rest with the feeling that at least something has worked this year
Spandau is one of the twelve boroughs of Berlin, Germany, bringing us back to where it all happened before. After the November Revolution of 1918, Germany’s imperial government was replaced with the Weimarer Republic, named after the city of Weimar, where the constitutional assembly took place. Only a few years into the new republic, Germany went through its worst period of inflation. In 1922, the highest denomination was 50,000 Mark. By 1923, it was 100,000,000,000,000 Mark. On November 20, 1923, the system was “reset,” and 1,000,000,000,000 old Marks could be exchanged for 1 new Rentenmark. It took 4.2 Rentenmarks to buy 1 U.S.-Dollar, exactly as much as it had been in 1914. Germany then entered a period of economic success and social stability, also known as the Golden Twenties.
As we have previously explained, the global FIAT currency system will have to be reset, and it is most likely the current Sovereign Debt Crisis that will lead the way to this reform; this in mind, Gold may not even be expensive enough at USD 10,000/ounce, given the highly inflationary aspect of such reset. In this event, investors will scramble to find stores of value, and real asset prices will be “bid up.” Take, for example, 1922: The German stock market traded at 743 in January and rose to 8981 in December (i.e., a more than 1200% increase). From 1914-1922, the German stock market rose 89x from about 100. Concurrently, the U.S. Dollar versus the Mark rose 1525x, and coal increased by 1250x.
As difficult as the current downturn in markets may feel, it is also the time for investors with a long-term view to buy what can serve as value in the years to come. Do not be fooled by the re-emergence of the U.S.-Dollar. The recent, significant rise can be explained by a Dollar-shortage in the global system, and the old adage, “Among the blind, the one-eyed man is King.”
It all will soon end and, once again, we will be embracing the promise of the Golden Twenties … a hundred years later!