Why gold bugs are predicting Armageddon

Steve Sedgwick
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DESPITE a nice run of data in the UK and across Europe over the last week or so, it’s still hard to shake off the prevailing view that a slow, bumpy grind out of economic turmoil is on the cards. However, we may look on this scenario as positively rosy if Egon von Greyerz, the founder and managing partner of Matterhorn Asset Management, is right. This man doesn’t think we are going to get a double dip. Oh no, he says, it’s going to be a lot worse than that.

Von Greyerz believes that the world economy is set to go into “an accelerated and precipitous decline which will make the 2007 to early 2009 downturn seem like a walk in the park”.

The root of the problem for the West is, of course, debt. The man from Matterhorn says: “Without this massive increase in debt, the US would probably have had negative growth for most of the last 39 years. Total US debt to GDP is now 380 per cent and is likely to escalate substantially.”

The logic goes that these excesses must be unwound but the government response appears to be quite the opposite. In fact, Von Greyerz says that with every dollar, pound or euro printed the problems of the economy will be exacerbated. He goes on to accuse governments of “robbing the citizens of their money and their work” by printing money.

So as we head for our bunkers to ride out the storm it appears that Von Greyerz has a port for us. And surprise, surprise, it turns out that all along the safe haven is once again being touted as gold. Yesterday, gold was once again hovering near seven week highs with the spot price at $1,227 (£790) a troy ounce.

As a further justification of the gold bull argument, the bugs point to the price of the 1980 gold high of $850 being equivalent to a current valuation in the region of $6,400, once adjusted for inflation.

So as we bemoan our lot and the current mainstream view that we will just grind along with minimal growth for the next couple of years, perhaps we should count ourselves lucky if the more dire predictions out there fail to come true. Steve Sedgwick is a presenter on Squawk Box Europe each weekday morning on CNBC. http://europe.cnbc.com