Paul Mylchreest’s occasionally-produced Thunder Road Report always makes for fascinating reading and delivers insights into the markets which most mainstream analysts miss – or choose to ignore. He’s now producing his unique view on the markets under the auspices of London broker, Seymour Pierce, which one hopes does not cramp his style too much!
The latest report, which he put out today, suggests that the insights are still incisive – and often worrying, for those looking to their financial futures, but there is the advantage that under the Seymour Pierce banner it is now available to those who may want it in hard copy, as well as online.
Mylchreest is a believer in the Kondratieff, or Long Wave economic theory. Wikipedia describes this as sinusoidal-like cycles in the modern capitalist world economy. Averaging fifty and ranging from approximately forty to sixty years, the cycles consist of alternating periods between high sectoral growth and periods of relatively slow growth. Unlike the short-term business cycle, the long wave of this theory is not accepted by current mainstream economics – which puts Mylchreest somewhat out on a limb, as he accepts himself. However to set against this the theory does support the ‘supercycle’ idea which gained a certain amount of mainstream acceptance during the recent commodities boom.
Mylchreest titles the Executive summary of his latest report – Inflationary Deflation: creating a new bubble in money and looks at the way excessive monetary stimulus, coupled with low interest rates, creates financial bubbles and reckons that Central Banks are now creating the ultimate bubble – in Money – in an attempt to counter what he sees as the downward leg in most recent Long Wave cycle. He notes “first it was NASDAQ, then it was real estate and now it is money” (He describes the “Inflationary Deflation” paradox as referring to the rise in price of almost everything in conventional money and simultaneous fall in terms of gold.)
“This”, Mylchreest notes referring to the QE policies being followed by most major governments and Central Banks “is the biggest debt bubble in history. Each time deflationary forces re-assert themselves, offsetting inflationary forces (monetary stimulus in some form) have to be correspondingly more aggressive to keep systemic failure at bay. The avoidance of a typical deflationary resolution of this long wave is incubating a coming wave of inflation. This will not be the conventional “demand pull” inflation understood by most economists.
“The end game is an inflationary/currency crisis, dislocation across credit and derivative markets, and the transition to a new monetary system, with a new reserve currency replacing the dollar. This makes gold and silver the “go-to”assets for capital preservation.”
As Mylchreest sees it physical gold is the ONLY financial asset with no counterparty risk and a several thousand year track record as a store of wealth par excellence. Furthermore, gold is the only asset which outperforms during both inflation and deflation and he reckons we are seeing a battle to the death in these opposing forces.
While he comments that some commentators doubt gold’s outperformance during deflations, he draws attention to Roy Jastram’s 1977 classic book on the subject – The Golden Constant – with its 500+ years of data (updated and re-issued in 2009 with support from the World Gold Council) which actually shows that gold performs better in major deflations than perhaps it does in inflation – somewhat contrary to generally accepted monetary thinking these days. What Jastram’s research does suggest is that gold retains its purchasing power across a wide range of scenarios and that, in effect, its performance in perhaps countering inflation is probably more due to it retaining purchasing power as currencies themselves depreciate – and that gold will ultimately counter the loss in currency values caused by the kind of excessive money printing which we are seeing now. Thus Mylchreest reckons that this will lead to an eventual victory for inflationary forces – over deflation – as currency crises erupt which makes physical gold (and silver hanging on its coattails) the best assets to hold in this scenario – but also perhaps that if deflation should win out over inflation, then gold is the best asset to hold in this scenario too.
Jastram’s Golden Constant tells us that since the 14th Century, gold’s purchasing power has maintained a broadly constant level. To put this in practical terms, an ounce of gold has repeatedly bought a mid-range outfit of clothing. This was true in the fourteenth century, when an ounce of gold was worth £1.25 to £1.33; it was true in the late 18th century and it remained true at the beginning of this century (2000 to 2008), when an ounce of gold averaged £269 or $472. Even the exchange rate between gold and commodities has been relatively constant over the centuries.
On the other hand, the US dollar that bought 14.5 loaves of bread in 1900 buys only 3/4 of a loaf today. While inflation and other forces have ravaged the value of the world’s currencies, gold has emerged with its capacity for wealth preservation firmly intact. Being no-one’s liability, gold exhibits the same wealth preserving qualities in the face of financial turmoil, earning a reputation as a crisis hedge in addition to its credentials as an inflation hedge.
But back to Mylchreest’s Thunder Road report, and its comments on gold. He notes that some potential gold investors may feel they have missed the boat given the 11-12 year bull market in gold, but he reckons that in the end game the gold price will reflect the reciprocal of the purchasing power of existing currencies and that these are being debased at an ever-increasing rate. He reiterates something that has been noted by other commentators that there is evidence that, contrary again to some economic theory, gold is seeing increased demand as the price rises, rather than the reverse with ETF holdings at an all time high and Central Banks turning to being buyers rather than sellers. He also notes the view, often expressed by Mineweb in these pages, that China is actually at the forefront of gold purchasing despite it not reporting such changes in its official reserve figures.
There are a number of very interesting – indeed worrying –pieces of research in this 75 page report which the writer has to admit he has only had time to skim through so far. Among these are the view that we are now entering the fourth great inflation phase in history – and that the prior ones were brought on by factors which seem awfully familiar today: Excessive population growth putting increasing pressure on available resources; Governments – or rulers – running large deficits; and expansion of the money supply leading to currency debasement.
What is perhaps most worrying is the way these great inflation phases ended. That of 1180-1317 ended with banking collapse and the Black Death with known world population sinking by 20%. The second great inflation of 1496 to 1650 ended with plague (again) and wars with consequent population reduction– coupled with a decline in silver supply, which was then the world’s money. The third of 1733-1814 ended rather less unpleasantly with the Great re-coinage of 1816 and Britain adopting the gold standard – i.e. going on to a hard money backing for what was then the world’s strongest economy.
Mylchreest reckons we are in the fourth great inflation –which started back in 1897 – but with no evidence that the world’s now dominant economy, the U.S, is likely to adopt sound money principles, although one supposes the position could be usurped by China which many believe to have more strong money ideals.
And this leads us, to a final section of the Mylchreest report which is looking at the likelihood (inevitability) of a new global reserve currency emerging to replace the US dollar. He reckons that China is taking the role of France, which effectively brought down the old Bretton Woods agreement through its distrust of the dollar leading it to converting its dollars to gold, which was unsustainable. Key Chinese figures have publicly been commenting on their dissatisfaction with U.S. monetary policy and the country is believed, as we noted above, to be buying large quantities of gold to help give its own currency a better negotiating position in possibly participating in the most likely future reserve currency which is surmised to likely be an expanded version of the IMF’s Special Drawing Rights.
Mylchreest’s latest Thunder Road Report is some 75 pages in length so there is no way we can cover it in detail – however much of it is devoted to explaining his views on the various phases of the Long Wave economic theory. The report may be available directly from London’s Seymour Pierce – www.seymourpierce.com
iPad Version: Picture – Wiener Philharmoniker gold coins are pictured at the Ginza Tanaka store in Tokyo: REUTERS/Yuriko Nakao