Egon von Greyerz is the Founder and ManagingPartner of Matterhorn Asset Management AG in Zurich (--->matterhornassetmanagement.com). Matterhorn and its gold investment division GoldSwitzerland are part ofthe Aquila Group, which is the largest independent asset management group in Switzerland. Mr.von Greyerz, bornand educated in Sweden, started his career as a banker in Geneva, lived andworked for 17 years in London and  hasbeen actively involved with financial investment activities including Mergersand Acquisitions and Asset allocation consultancy since the 1990’s. Everymonth, he publishes a Gold Market and World Economy Newsletter at Matterhorn’s website to share hisviews on current developments. GoldSwitzerland’s website is:  --->www.goldswitzerland.com.

Mr. von Greyerz,recently I did an interview with investment manager Marshall Auerback and askedhim about his position on hyperinflation in the United States.[1] You have read hisanswer to that question. What are your thoughts on his arguments related tothis topic – and why do you have a fundamental different opinion than Mr.Auerback?

Virtually withoutexception, hyperinflation arises as a result of a collapse of the currency. Itdoes not stem from demand pull or costs running out of control.

The prerequisitesfor hyperinflation are a deflationary or non-inflationary recession/depressionleading to major government deficits. The government issues debt paper tofinance the deficits. Initially investors continue to buy the government bondsespecially as in the case of the US with the dollarbeing a reserve currency. This is the first stage of the money printing cycle.

Then foreign investors stop buying the bonds and the government has to buytheir own paper. This is the second stage of the money printing cycle which iscalled quantitative easing (a nonsensical fancy word for money printing).

Asthe money printing accelerates due to growing deficits, foreigners will nolonger buy the worthless paper and the currency begins to fall. This leads to avicious circle of a falling currency, more money printing, inflation andfinally hyperinflation. I realise that this is simplified version of the courseof events leading to hyperinflation but I believe in explaining things so thatmost people can understand.

In my view thequantitative easing will now accelerate both in the UK and the US. Unemployment isgoing up in both countries. Real unemployment in the US is over 20% whichis 30 million people. With dependents there are now 100 million people in the US affected byunemployment.

In the UK real unemploymentincluding benefit seekers is 17% or 6.4 million. Including dependents there are20 million people affected by unemployment. That means that both in the US and in the UK there around 1/3of the population is affected by unemployment and the numbers are gettingbigger daily. This is an untenable situation.

The next areawhich will necessitate acceleration in money printing this autumn is thefinancial system. None of the problems in the banks or the financial systemhave been solved in the last 12-18 months. They have just been swept under thecarpet. The toxic debt situation is still critical. A big percentage of the $1quadrillion derivatives is worthless.

The lower figure, circa $500 trillion, ofoutstanding derivatives published by the BIS is just another “adjustment” inorder to massage the figures. Other major problem areas in the US are Option A andAlt A mortgages. This could be a bigger problem than sub-prime. Then we havecommercial real estate, personal credit, car loans, etc. Most of these loanswere raised in good times and there is no chance whatsoever that they will berepaid in bad times. The average Americans is one pay check from bankruptcy.The UK is in a similarposition.

My strong opinionis that the US dollar and the UK pound are goingto very weak this autumn. This is the beginning of the hyperinflationary stagewhich will later spread to many countries.

What effects would anhyperinflation in the United States have for the global economy? And could you put it in the bigger picturerelated to the “US empire”?

There won’t behyperinflation only in the US but also in the UK as I have justmentioned and in many Eastern European countries as well as the Baltic States. If Ireland were not in theEuro zone they would also have the same problem.

The US, UK and some othercountries will have a hyperinflationary depression, but most other countries inthe world will have at least severe recessions but many also depressions. Thereis total interdependence in the world today both in the financial system andtrade.

The cause of the problems in the US and UK is the creditbubble and the leveraged financial system. So far almost 100 banks in the US have collapsedthis year. The FDIC has run out of money and the government will have to printmassive amounts in coming months to fund the FDIC. But until now only smallbanks have gone under, except for Lehman, but I would expect bigger banks tohave major problems again in the next 6-12 months.

I believe that there is ahigh risk that more than one major US bank will come under severe pressureduring this period. The US Government might be able to save one major bank butnot two. And since the problem is across the board in virtually all banks itwill not stop with one. Take JP Morgan Chase which has almost $100 trillion inderivatives. In case of default it is the gross amount of derivatives that isexposed

When the world’sbiggest economy collapses, this will have a major effect on the rest of theworld. US imports and world trade in general will drop dramatically and aworldwide depression would be a virtual certainty. There is also a highprobability that the world financial system does not survive in its presentform.

There is a limit to money printing and we have practically reached thatlimit. Greenspan was totally incompetent as Chairman of the Fed and so isBernanke. There was only one solution to every problem – flood the market withliquidity and make money free. The bankers prospered, politicians loved itsince their voters thought that they were prosperous. Little did the peopleunderstand that their prosperity was false and based on credit. There has beencollusive back scratching between politicians and bankers with both sidesbenefiting enormously from the credit bubble and money printing. Power andgreed runs the US economy and manyothers.

When willpoliticians ever learn that money printing only serves the purpose of keepingthem in power for a short while whilst it totally destroys the economy andmoney? Voltaire said already in 1729 that “Paper money eventually returns toits intrinsic value – ZERO”. No paper money has ever survived in its originalform and the dollar as well as most other currencies will not survive this timeeither.

It would be a lot better for the world in the long term that we have aproper forest fire so that all the weak growth disappeared and that the forestor the world financial system started again from a sound base. No politician wouldbe so brave as to let the banks fail because with the massively inflatedfinancial system we have today, the consequences will be catastrophic. Butsadly it is likely to happen anyway and an uncontrollable collapse of the worldfinancial system is likely to take place within the next few years and changethe world as we know it today.

As regards the US empire, it isalready finished. Very few nations have any respect for the US financially orpolitically. The US is conducting itsaffairs just like the Emperor who had no clothes. They are bankrupt financiallyand intellectually but they still believe that they are ruling the world. Don’tget me wrong, I love America and the Americanpeople but their country is in dire straits once the current crisis has settled,and it could take at least 20 years as I said in my Newsletter “The Dark YearsAre Here”. It could also take longer. Remember that the Dark Ages lasted for500 years.

What advantages doesgold posses that the US-Dollar doesn’t have?

Recall the Voltaire statement:“Paper Money eventually returns to its intrinsic value – ZERO.” In the pastgovernments at least had to print the paper to create money but now in ourelectronic world, all they need to do is to press a button. The temptation forgovernments throughout history to print money to stay in power has always beentoo great.

Gold has been money for 5,000 yearswhilst no paper money has ever survived. Gold can’t be printed and has no debtattached to it. Gold is not one country’s currency and can’t be manipulated,except for in the short term. Also gold is a store of wealth and isindestructible. Virtually all gold ever produced still exists. Gold has a veryhigh value to weight ratio. All the gold ever produced will fit into a 20 metercube.

Also gold has limited supply. Worldannual production is around 2,500 tons and declining. This means that only $80billion of new gold is produced every year which is miniscule in today’sfinancial markets. There is only about $800 billion of investment gold heldprivately currently. This is only 0.5% of world financial assets. Central banksworldwide are now net buyers with China and Russia buying whatever they can lay theirhands on without pushing the price up too fast.

I have been forecasting for sometime that the next phase in the gold price rise would start in the autumn of2009. We are around $1,000 now and I see a rapid rise from here. Virtually noaverage investor or fund holds gold today. This will change very soon. Butinvestors are not going to trust paper gold in the future but will wantphysical gold. With a limited supply rapidly increasing demand for gold canonly be satisfied at much higher prices and they are coming very soon.

In my view, there is only one way tobuy gold. It has to be physical and it must be under your own personal control,stored outside the banking system. This is what Matterhorn Asset Management andour division GoldSwitzerland do for investors.

One of your recent newslettersfor “Matterhorn Asset Management” was titled “The Dark Years Are Here”.[2] Can you let us knowwhat will happen in the near foreseeable future besides inflationarydevelopments that make you think we’re about to enter dark years?

Unemployment will continue toincrease worldwide. Government deficits will escalate with revenues decliningand expenditure soaring. The toxic loans and derivatives in the financialsystem will never be repaid. Because of these massive problems the recessionwill lead to depression and then hyperinflation.

Eventually hyperinflation endsin deflationary collapse. With the financial system likely to collapse lifewill not be the same in the world for a very long time. Law and order will bevirtually impossible to maintain so there will be social disorder and majorincrease in crime. There will be anarchy in many countries. There will be foodshortages and extreme poverty. There will be wars. The world will not be thesame for a very long time.

But there is always a positive sideto every problem. The family will again become the kernel of society. Today’ssociety which is based on material values and instant gratification willdisappear and so will the golden calf. Instead soundly grounded ethical andmoral values will return, built around family and close friends.

One of the reasons whythe gold price is rising is in fact because inflationary tendencies are feared.On the 7^th of September, the price jumped for the first time (sinceFebruary of this year) over the “magical” number of US$1000 per ounce. Will itrise furthermore? If it fails to do it, experts say “we could see a sharp decline in bullion and preciousmetals mining stocks. Put simply, if the price of gold fails to climb pastUS$1,000 per ounce and instead, it falls below US$920 per ounce, it will be anegative omen.”[3]

Gold will not fail to goup from here. If there has ever been a clear investment situation, this is it.A financial system built on quicksand will see to that. Also, hyperinflationand money printing will see to that. Some people ask, what about if we get a deflationarycollapse instead, won’t gold go down then?

I see the probability of adeflationary collapse as very low. Governments will not stop the printingpresses. But even if I were wrong and we get a deflationary collapse, gold isstill the best protection.

Because in a deflationary collapse there isabsolutely no chance whatsoever that the banking system will survive. No loansor derivatives could ever be repaid in a deflationary asset implosion. This iswhy gold is a win-win situation whether we get inflation or deflation.

Since 2002, “Matterhorn” advised its investors to put upto 50 percent of their liquid assets in physical gold. That’s quite unusual.Why 50 percent? And moreover, which elements should a wealth preservationportfolio a ) contain, and b) not contain in these times of crisis?

It wasvery simple. Gold was ridiculously cheap at $300 when we advised investors toput 50% of their assets in the yellow metal. Already back in those days weforecast that the housing and credit bubbles would lead to major problems inthe banking system and inflation/hyperinflation.

For the investors who followedour advice the 50% of their liquid assets in physical gold has become over 80%after gold has appreciated more than three times. We now feel very comfortablewith 80% in physical gold. A smaller percentage of that could be in silver.Silver has more potential then gold to appreciate but it is very volatile. Ibelieve that 10-15% could be in precious metals mining stocks.

There isenormous potential in these stocks but the problem is that it is not wealthpreservation. If something happens to the financial system, investors might notget access to their stocks for years. Also there is the risk of nationalizationof mines or punitive taxation when precious metals prices surge.

Stocksmight go up in a hyperinflationary scenario but not in real terms. The Dow andmost world stock markets are down over 80% against gold in the last 10 years. Iexpect another 90% fall at least of the Dow against gold. I would definitivelynot recommend government bonds or any other bonds. Investors are unlikely to berepaid in normal money and bond prices will collapse as interest rates go up.

There are many ways toinvest in gold. At “Matterhorn” you do not offer everything you could. Why do you exclude certainthings and why do you recommend to store gold outside the banking system?

Physical gold held in your own nameand stored safely outside the banking system is the only true form of wealthpreservation.

Virtually every other form of goldis paper gold. Many ETF’s don’t hold physical gold and even if they do, all youhave is a piece of paper which is of no use if the banking system collapses. Iwould not store the gold in a bank due to the risk of the banking system failing.

And storing gold at home isdefinitively not a good idea. With the increase in crime in the next few years,this is very risky. There are two major and very good companies that sell goldon the internet and store it outside the banking system. But you don’t own yourown gold bars but fractions of a 400 oz bar. If something happens to thefinancial system you cannot go and collect your gold bar to pay your expenses.

There is clearly no absolute methodof wealth preservation that protects investors against all eventualities. Butit is vital to have a plan that gives the best available level of protectionfor peace of mind.

On September 3^rd,Hong-Kong recalled all its physical gold holdings from depositories in London.[4] What are your thoughtson this?

I think they are right. You should have your own gold under your owncontrol. There is so much lending of gold taking place between central banksthat there might not be any gold left at the end.

As you know there arerumors for years that Germany’s gold reserves are not located in Germany but in New York. Let’s assume this isthe case: wouldn’t now be the perfect time to order them back? And if it wasthe case that the total amount of Germany’s gold holdings werestored in the vaults of the Federal Reserve of New York – why should this beof interest to the German population?

Yes, and for the same reason thatHong Kong took its gold back, I think Germany should. Firstly, only then do theyknow if the gold still exists and secondly I wouldn’t want another nation tocontrol my gold, especially not a bankrupt nation.

One last question, Mr.von Greyerz. You are familiar with the claims of the Gold Anti-Trust ActionCommittee (GATA), that the gold market is rigged by “the Gold Cartel” in orderto suppress the price of gold.[5] Do you follow theactivity of Bill Murphy and his camp with particular sympathies?

Yes, I am very familiar with GATAand their activities. I am convinced that the gold market is rigged (as well asthe silver market) and Bill Murphy and GATA have done a great job in tryingbreak the gold cartel. My view is that very soon paper gold manipulation willbe ineffective and only physical gold will count. The world will then find outthat a lot of central bank gold has been lent out and there will be majordiscrepancies in physical gold. This will lead to audits of central bank goldby new governments since the existing ones are part of the cartel. I am surethat we will then find out that there is lots of gold missing or doublecounted. The result of this will have a major impact on the gold price.

Thank you for takingyour time, Mr. von Greyerz!

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