“You can resist an invading army; BUT you cannot resist an idea whose time has come.”
Outgoing Fed Chairman Ben Bernanke yesterday informed us that the Fed would begin tapering its Bond purchasing programme and would reduce its next round of bond buying by some $10 Billion, to $75 Billion.
This was interpreted by the markets as good news – because the good chairman, had previously told the markets, that they would begin tapering “when the numbers supported it”. Stock markets rose instantly by 1% or over.
This means the markets now believe that the economy is growing sustainibly, and that we are on the road out of the financial turmoil we have experienced over the last 5 years. One further outcome is that the Gold and Silver precious metals markets sold off. Gold dipped below $1200, with Silver dipping below $20 per ounce.
However, I am not so sure. Although the tapering is likely to be spread over a year, as the commentators on Bloomberg suggested, it is not outside the bounds of possibility that weak numbers from the Xmas retail sales, will show up in January and February and suggest that the economy is not growing, but it was merely a splurge as eviscerated consumers fight back at the gloom and doom they see all around them, particularly as house prices are reported as having risen to bubble levels again. Pull backs in precious metals were to be expected, though there were many who have suggested that the current price news means that the boom in precious metals is over, and that the price will likely fall further to perhaps the $870 region.
There are a number of reasons why I think this premise is false.
Reasons to be Cheerful – Part 2
A fall to the $1,000 level for Gold, I once thought possible, as it might follow the pattern set in 1974-76, when it halved from almost $200/oz to $100/oz in a little over an eighteen month period. However, I now feel the Chinese, Middle-Eastern and Indian Gold and silver buying this time around has raised the floor to the level reached back during the summer. Silver too had a major pull-back during the 1970’s.
To understand the reasons for any outcome, we have to understand several things: We have to understand the drivers and the levers applied then and now to make a comparison. Back in the late 1960s and 70s, those retiring were born at the turn of the century (1890 – 1910) Those born during the “Fin de Siècle” (The end of the 19th century) were the off-spring of those who had enjoyed the boom years of the 1880s. They grew up during the late-Victorian, and early Edwardian periods, and were the cannon-fodder of WW1, and the Flappers of the 1920s.
In the UK, that same generation led mostly gruelling working lives in factories, with the lucky ones who lived near the capital finding work in government and commerce – banking, finance, journalism, publishing, local and central politics et-al…
Their hard work and tenacity in the face of adversity led to the creation of the welfare state, we took advantage of after WWII. As they matured, when they saved, that capital built up on Pension companies and Bank balance sheets, and led to lower interest rates. As they began retiring in the late 60s they drew down their pensions and bought gilts (Bonds) which drove down interest rates further, and pushed up house prices, as mortgages got cheaper due to the lower rates, just as the baby-boomers were buying their first flats and homes.
When home prices got too high by the early 70s, as the baby-boomers married and had kids, their parents (our grand-parents) were retiring in an economy that was shrinking for several reasons. We were at the end of the technology cycle – the Railway had begun shrinking in usage as the car became cost-effective due in large part to cheaper oil, and Cheap Air Travel was only just beginning for the masses. But also because of demographics.
Those retirees began dying in droves during the 70s and early eighties, because at the time, they lived on average to late 60s.
The Politicians injected free money (QE) which because of lack of investment opportunities went into Gold and other hard assets at a time of rising oil demand, and the oil price had to rise. Of course, at the time, demand for middle-eastern oil was rising, partly due to greater usage, but also, for political reasons too, because they had rising populations back home… (Just as now) – Mubarak, Ghadaffi, Saddam Hussein and Khomeini, all came to power during that period.
The BIG change between the 1970’s and now is that people are living longer – on average to 81 for a white American woman, and slightly less for a white man. Black women and men live slightly less than both white men and women on the average. So, the 75 million American baby-boomers (and a similar number of Europeans) will be dying off come the 2020-2030 period. THAT will probably mean MORE QE to counteract it, and so I expect to see the blow off phase in precious metals – sometime after 2018.
Reasons to be Cheerful – Part 3
The mainstream media announced the other day, that Bitcoin, which I have written about previously, had suffered a serious decline in price because the Chinese authorities, had attacked it and made its trading illegal. People can still use it to pay for goods and services, but it therefore becomes like any other digital currency. In some Western European states, Eg: Germany, taxation is payable at the VAT rate as for any other currency. Bitcoin therefore is losing a little of its lustre.
As I have written about elsewhere, this was inevitable as it is seen as a threat to the Central Bankers and the politician’s power, and in authoritarian states, it is likely that any threat to the power of the politicians and their power over the economy will be challenged, so we may see further attempts by central authorities elsewhere, to weaken its new found status. Bitcoin prices have fallen from over $900 to $500 as a result.
So, where does this leave us…
Anyone concerned at the deficiencies of crypto-currencies, especially in an inflationary environment will undoubtedly have to follow the sheeple into the stock-markets of the world to maintain or grow their savings. However, there will be many of those very same persons who will be tempted back into precious metals, works of art, and other collectibles, such as stamps, coins, rare vintage cars, fine wines and period furniture.
All these items will help preserve and increase wealth for those with the know how, or access to it.
We shall see when the price inflation will finally arrive, but it won’t be pretty when it does…
And, when it happens… GOD it will be scary – Weimar Republic territory I suspect… (See the book – “When Money Dies” by Adam Fergusson) or “The Coming Battle” by M. W. Walbert and Me – for the time being available for free.
There have been at least 6 countries that have suffered economic collapses – France during the 1760s, Germany and Austria in the post WW1 period. Argentina during the 1980s and 90s, Yugoslavia in the early 1990s, Zimbabwe in the early 2000s and the whole of the Middle-East in the last few years. And we all know where that led.
Until next time…