The CPMs (Chief Printing Officer) Fully Employed
Rolf Nef
15 December 2008
If the Fed would print the newly created 800 bio $US since the passed summer, the printing capacities would not be big enough. 800 bio $ is the amount of dollars which the Fed created from 1913 to summer 2008. What did it buy with all this money? It bought mainly debt paper of the private sector, which this sector does not want to hold any more - and therefore is illiquid. No end is visible.
The US Fed, the ECB and the Bank of Japan make together about 80 - 90% of the western monetary base. How do the ECB and BoJ behave? Let's look first at the ECB (see second graph). Also they know how to use the printing press, but with 36% growth annualized, the ECB remains behind the US Fed. Because these ECB figures are so seldom seen (the ECB takes good measures to hide these figures) you see in graph 3 the absolute figures. They grew from a good 400 bio Euros in 1999 to almost 1200 bio Euros. They really do a good job, these central bankers. Don't they?
What about the BoJ? Currently (November figures) they are slow and grow at zero %.
The three monetary basis added in $US show how the world liquidity is developing. Graph 5 shows the speed since last August, but as a whole the growth rate is not yet much larger than in summer 2003 (32%). The BoJ is not yet accommodating, but it will do as well, no doubt, otherwise it's currency will go through the roof and its exports to the cellar.
Graph 6 shows you the total development of these basis. In 1999 the total was 1500 bio $, in August this year 3000, but now 4000 bii $. The Fed and the ECB filled the banks hard disks with 1000 bio $US.
What are the consequences of such a fast and large growth of the monetary base? As standard you always get the answer inflation or hyperinflation, but it is not that simple. For hyperinflation a much bigger growth rate is necessary. The Russians in 1993 went up to 1200%. Most important is, in what phase of the
Kondratieff Cycle the economy is in. China as example is at the end of the first phase, the phase when capacity enlargement is built. Even China used the printing press, the money went into the build-up of the industrial sector and infrastructure. The western economies are entering the last phase, the deflation of the huge amounts of credit. Despite the enormous intervention of the government, private credit starts to fall and contract. Mortgages in the US, the largest sector for private credit (ca. 11'000 bio US$) showed negative growth in the third quarter of 2008. Either borrowed money is paid back and/or it is defaulting and destroyed. In deflation, cash is king. In older deflations, there were only two possibilities: first class debtors or gold, sometimes also silver. Currently the money powers into government paper even at negative yield. Some of them achieve new lows in yields, some don't. That points to a divergence, a classical sign at turning points. Once the government bonds start to fall, there are only the precious metal left. Graph 6 shows you the yield of US papers, how investors panicked into these bonds.
How does gold and silver behave? Graph 7 shows you gold. The correction that started in March seems to have ended in October, but a breakout has not yet happened. The price would have to go above the upper trend line at 925$. Afterwards the price action should start to become ballistic. First of all because gold is in a fifth wave since October 2006, time wise very advanced and fifth waves are the explosive phases. Secondly 2009 is the 8th year from 2001, the bottom of the bear since 1980. Effectively the bottom was in 1999, but 2001 is 21 years from 1980, the end of the bull market of the inflationary phase. Graph 8 shows you the bull market in gold since 1800. What is interesting in that graph? All indicated figures measure the length of bull and bear markets and are Fibonacci figures. There is only one exception in the phase from 1869 to 1933. The mistake is only one year. So since 200 years gold moves on the time scale in Fibonacci figures. The next possible year is 2009. Here the single phases:
1835 - 1869: 34 years
1869 - 1877: (78) 8 years, one failed year
1878 - 1933: 55 years
1933 - 1967: 34 years
1967 - 1980: 13 years
2001 - 2009 ? 8 years or 2001 - 2014 ?
If 2009 is a major top, it will be only the end of the bull from 1933 and not from 1800 or 1879, when ever you started to count. After a severe correction an even more excessive final phase will start.
To complete the newsletter lets have a look at silver. Silver had a massive correction since last March. According to my counting, in October ended wave 4 just to start the fifth, the most dynamic phase. The long term development of silver is quiet different than the one of gold. The low point of the price was 1932. The reason behind is, that silver got kicked out of the monetary system. As a consequence, not only dropped the price of silver, but also the large stocks, which were usually 12 times as large as those of gold, dropped to only 10% of that of gold. That accounts to about 500 Mio ounces or 10 bio $US. As a comparison: last week the Fed printed 150 bio $, 800 bio since August, the Fed plus ECB 1000 bio $ since August or 100 times the silver stock. Where does the price go, when monetary demand starts? From 1976 to 1980 silver rose from 5$ to 50$, the stock was 2 bio ounces and the Fed and other central banks started to be restrictive. Today the price is at 10$, the stock 0,5 bio ounces and central banks are expansionary like never before. Do you think that "Tell Gold & Silver Fund" is aggressive to hold 40% of its NAV in long life silver call-options, distributed with 6 banks, or even interesting and attractive?
Rolf Nef
Tell Gold & Silver Fund
info@tellgold.li
www.tellgold.li
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