A Letter to a Central Banker

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Warrington, Cheshire, UK.

25th June, 2017

Dear Central Banker,

I was searching through my e-mail inbox recently, in the hope of finding a reply to a sent email, a few days’ ago and in searching for it using his name as search criteria, I found an e-mail several years old – still unread.

I won’t take it personally, because this reader receives in the region of 150 e-mails per day, and hasn’t time to fully read them all, so I scan the header, and read and digest but a few, so have to be selective.

What struck me most though fom this e-mail, was the price of Gold, which had been predicted to rise inexorably, yet, 8 years’ on, the price is currently, pretty much where it was in 2009, despite it’s subsequent 2 year rise and 5-6 year bear market fall.

Not that I am chastising the sender of this e-mail – for his, or many others wrong predictions (at least so-far?) but what I found interesting is that the powers that be, (TPTB) to use a Mogambo Guru (aka: Richard Daughty) expression, they (and you) have managed to keep the lid on its obvious under-value. We know from their admission, that Deutsche Bank was found guilty of manipulating the market, but others, have a bigger hand in it, and their fingerprints all over the crime.

I suggested, approximately 12 years’ ago, that Gold would ultimately achieve circa $8,500/ozt, and Silver circa $500 in the blow-off phase…The rises in price, I predicted would, go to circa $2,000, then fall back to just above the $1,000/ozt mark, and would not rise to achieve their ultimate price (at least in this bull market) until around the 2018-20 period.

My reasons were (and are) several.

I looked at Gold charts from the 1970’s of the rise, fall and rise again, and of income levels, and prices, and using deductive reasoning, came to the conclusion that it was, in the final analysis, demographics and the financial system of the era, that was affecting the price, and the concerns economic of retirees , of course along with U.S. government spending on its overseas wars.

My father, born in the early flapper era of 1922, and like others reaching retirement age during the 1970s and early 80s decades had, just as many others, who had been born in the post-WWI era, saved for their retirement, and no doubt their saving, spending and investing habits, faced similar analysis, emotions and results as today.

So, what has changed in the intervening time period? Let’s look shall we…

The first thing to change, is that women are leaving it later to procreate. Most educated women (by educated, I mean graduate or equivalence) leave giving birth until they are in their early 30s (some ten years later than early 20th century folk). They also have fewer children. Back then, having three or four was a typical small family, with some, having 6 or 8. These days, many women have at most two, except where they divorce and re-marry, and the new couple have a further child or two.

Secondly, spending patterns and thus saving and investing patterns have changed, and are also being left later, because children are expensive, and more is needed to buy first and subsequent homes. Back in the 1970s, most people could borrow only 3 times, the annual earnings of the husband (main earner) or even 2½ times, and if both parents were working, this was increased to 3½ times earnings. This kept house prices at modest levels.

Thirdly, increased debt levels: today’s young families (and this may be just an Anglo-Saxon trait) are more likely to spend more on holidays, their homes and families to live more comfortably.

And fourthly, people are living a whole lot longer.

My father, was a working man who spent 44 years in the glass industry, just 4 miles away from where we lived. He never needed a car, as the bus service was every 6 minutes at peak times, and 10 or 12 minutes at off-peak. He was forced into retirement aged 58, and given access to his pension, when the company reduced its workforce, as inflation ripped into their profitability, and they strove to reduce costs, but he died just 5 short years later aged 63… Today’s retirees, are likely to live ten to twenty years plus, post-retirement.

Fifthly: Their pension plans were totally different than today, based as they were on Defined Benefits, rather than today’s DC (Defined Contribution) plans, but the drivers are the same; their search for yield, amid rising inflation and a legal requirement to buy Bonds, which would lower interest rates, while government costs would rise, as pensioners began drawing their government pension money.

Interest rates went lower post 1974, until bond prices collapsed, but before the oil spike of 1980 when on the back of the Iranian Revolution, rates were forced up again particularly in the U.S. by Fed Chairman – Paul Volcker, to qwell rising inflation once more. Of course back then, in Britain, we had to go “Cap in hand”in 76, to re-use a well-worn phrase, to the IMF as Britain’s bond holders, sold off Britain’s debt and this raised interest rates driving up government’s costs.

But despite these differences, the parallels are obvious: Ongoing Overseas War(s), a search for yield, a spike in oil prices (2007) and subsequent fall, the collapse of the Banks, (1973) and also, the bailout of them, and a major economy that has stalled and needs a QE intravenous drip – back then it was Britain.

The baby-boom births of post WW2, from 1947-62, rose to a peak in the U.S. in the period 1955-58 and totalled 75 million, plus 8 million migrants. I suspect there were slightly more in Europe and that it occurred slightly later, but those are driving the west’s economy. Changes in penson law in the 1990s with amedments to ERISA in 2014, – and regarding when (or in the UK case – HOW) people could take their pension (and thus postpone tax payable) to 70½ yrs in the U.S., and also recently in the U.K. now allowing people to withdraw their whole pension and use it as they see fit, is likely to cause problems in itself, as people use that money, and in some cases, mal-invest, but that’s a story for another day too. All this means that the falling retirement numbers post 2018, will probably mean rising output, and total demand, at the same time as the millennials, begin their own baby boom, which should begin to affect inflation, and demand for oil at a time of rising extraction costs. BUT, as the price of oil has fallen, and will likely fall further, and remain in the $30-50/bbl range, for the next couple of years, this means those fracked wells that were profitable at perhaps $60+ are closing and new wells that have not been spudded will have been postponed, just as corporate bonds go bad which will lead to lower oil output just as demand begins rising. This will ultimately lead to a price spike again.

The rise in the oil price will cause inflation to spike again too, which will probably again lead to further unrest overseas like the Arab Spring in 2010 (and maybe here in the UK and U.S.too), as food costs, which are so linked to oil prices, rise once more.

The current and previous quantitative easing, will no doubt finally begin to push inflation up around the world, as that money leaks into the economy, and a spike in interest rates to circa 10% are not outside the bounds of possibility – if you react too slowly – as is likely. A hyper-inflationary event is the likely outcome, as all the QE injected over the last 8 years, leaks into the economy and begins bidding for increasingly scarce raw materials, and THAT is when the system collapses..

That will, I believe, mean Gold and Silver prices will explode, but governments and Central Banks will do exactly what they did over 40 years’ ago, and try to cap the PM’s prices – and fail.

But, as Gold approaches the $10,000 per ounce price, you and the rest of the west’s Central Banks will as a block, throw everything at the derivatives and physical markets to stop the price breaching the psychologically important 5 figure sum, of that I am sure. Whether that will work I don’t know for sure.

But, IF, I am wrong, you can send this back to me in 5 year’s time, and tell me so with a wry smile and a jaunty wave.

Yours VERY sincerely,

 

Your humble serf.

 

PS: IF you do like this, please like it, and link to it via social media or re-tweet

 

 

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