Monday, April 25, 2011

Gold and commodities update

As this chart shows, gold has a tendency to lead the price action in commodities. This in turn suggests that there is a monetary common denominator that is at work behind the scenes. Many—including the Fed—argue that commodity prices are rising solely because of strong demand in emerging market economies that has outstripped supply, but that doesn't explain why demand for gold should have arisen first, and so strongly. Nor does it explain why the prices of hundreds of commodities should be moving together, nor why thousands of commodity producers should have been outfoxed by demand all at the same time. Then there is the coincidence that gold and commodities started to rally in 2001, which just happened to be when the Fed started easing in earnest, after having pursued a very tight policy for the previous 5-6 years. And let's not forget that the dollar peaked in early 2002, and has been trending down ever since.


TradingStrategyLetter - Weekly Summary said...

Gold has rallied almost 10 years in a row. Definately lomg of the tooth. However, as long as Gov'ts expand (sic) balance sheets (read: destroy) the canary in the coal mine will continue to chirp.

brodero said...

Since the start of SLV..silver etf...Silver is up 229%...dollar is down 13%..M2 is up 31%...Median
new home prices are down 17%...eggs are up 36% and bread is up
27%....selling some silver i bought in 1990's to payoff part
of second house mortgage...

TradingStrategyLetter - Weekly Summary said...

Does manufacturing stand a chance at $5/gal diesel?

Benjamin Cole said...


You recently have run charts showing M2 growing at fairly steady rates through years and years--how does this square with a Fed being "easy" or "tight."?

And do you have a comment on the recent NY Fed report that suggests that because the Fed pays interest on reserves, that effects of QE are somewhat neutralized?

Benjamin Cole said...

From another blog, but worth reading:

“Service sector inflation is now running at historical lows of little more than one percent, and here we are about to enter the third year of a statistical economic recovery,” said Rosenberg, formerly the economist at Merrill Lynch where he made his name by going against the perma-bullish Wall Street crowd (see bottom chart above). “Service sector inflation used to be sticky, because this area of the economy years ago was dominated by unions, was protected by entry barriers, and did not face much in the way of competitive pressures. The times have changed,” wrote Rosenberg in a note to clients Tuesday."

How does one percent inflation in services square with an "easy" Fed policy?

Benjamin Cole said...

The above table of m2 growth, if anything, seems to suggest the Fed was "tight" from 2001 to 2008 (and spiked in 2001 probably due to 9/11).

If m2 growth is steady, if inflation is in check, if we have deflation 2009-2010, then how do we get an "easy" Fed?

Public Library said...


Its called stagflation my friend. Its what happens when you goose the globe with cheap cash. Instead employing the money towards productive wealth building activities, it is redirected at speculation and profiteering.

Food and gas are heading north. Who cares if computer RAM is decreasing, eventually we all need to eat and drive to work.

acrossthecurve said...


The whole goal for QE 1 and 2, and most likely 3 or 4, was to inflate housing and wages. Neither has happened and now the only thing occurring is disposable incomes for middle class and other lower wages earned is being destroyed. Inflation is not yet raging in this country but it most definitely is for emerging economies. TradingStrategyLetter is right, how does manufacturing or communiting workers stand a chance at 5$? Well, lets just assume QE3(or a Saudi Crisis) and that would mean 125+ oil, then its 6-7$. Food prices are rising quickly too, but its the hidden kind reference by the New York Times, smaller packaging poorer quality. It will soon be felt in all capacities in the economy and by that point any increase in housing prices or real wages will mean very little.

Benjamin Cole said...


Inflation, or price appreciation, in commodities is surging. There is very little general price inflation.

Office rents, natural gas, telephone bills, factory rents, retail space rents, and wages are all soft to down.

I suspect, regardless of what the central bank of one nation does (including the US), commodities are going to cool off, as new supplies come online, and demand slackens.

China and India, both with accommodative central banks, are growing rapidly, and consuming heavily. The global centers of gravity are moving right underneath our feet. This is actually a good thing; the world is becoming more prosperous.

The worst thing to do would be to draw the monetary noose around our own neck, to try (futilely) to control global commodities price appreciation.

That has not worked for Japan.

Public Library said...

"There is no means of avoiding the final collapse of a boom brought about by credit [or monetary] expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of the further credit expansion, or later as a final and total catastrophe of the currency system involved."

Benjamin Cole said...


I wish there were a lot more cheap cash out thtre. So far the banks have not lent it out much. They earn interest on reserves.

It would do out economy good to get more money changing hands.

acrossthecurve said...


the point is, if QE 3 becomes apparent to the market, today's commodities prices will be considered very cheap and the market will add another 30% to many prices. The dollar index would break through historic lows.

Public Library said...


The banks are probably sitting on massive losses and the ideas coming across their desks for more real estate speculation do not seem appetizing considering the assets on their balance sheets.

William said...

I like to follow the Economic Cycle Research Institute (ECRI) U.S. Weekly Leading Index (WLI), Future Inflation Gauge (FIG) and Leading Home Price Index (LHPI). For March 2011 the FIG was 104.9; one year ago it was 101.2 .

You may view these indicators here:

TradingStrategyLetter - Weekly Summary said...

The notion of 'stimulative' inflation has been embraced by the expert on the depression -Helicopter Ben B. If the current inflation trend leads to yet another 'credit crisis' - as it did a few year ago - then a further liquefying round of QE III and perhaps QE IV will surely follow. Either way a huge surge in crippling inflation will work it's way through the system. It is the chosen 'painless' strategy of the administration.

Benjamin Cole said...

Actually, I don't think Bernanke is going to QE3. I think he will stop paying interest on reserves. or some other stimulative mechanism a little bit under the radar.

Inflation is about as serious as Billy Barty trying out for the Lakers. But then, maybe Donald Trump will be our next President, so maybe anything can happan.

Benjamin Cole said...


I went to the ECRI website, and it looks like a nice website.

But man, inflation is checking in a very very low levels on their charts--a non-issue actually.

I don't see how inflation in the 0 to 2 percent range has become an issue.

TradingStrategyLetter - Weekly Summary said...

Uncle Ben is not afraid of inflation. It is his painless silver bullet. The dollar can't drop fast enough or far enough for him. He has been rubbing his magic lamp anxiously awaiting the arrival of the inflation genie. He has got his 3 wishes ready. Getting the genie back in the lamp will be another story.

William said...

Benjamin, my friend, you are totally misinterpreting the data. 0 - 2% is NOT what it indicates at all. Similarly, you appear determined to NOT understand what Mr. Scott Grannis has clearly demonstrated as well. Repeating your beliefs - dogma - is no way to convince others.

Personally, I think that you are in WAY over your head in posting on Mr. Grannis' Blog.

Lori said...

Pub Lib,

If a certain percentage of money did make itself in to being "redirected at speculation and profiteering", speculators harvest their profits at some point.

And redirected into other investments and or speculations.

And as always, the game is to be ahead of the curve.

Not behind it.

acrossthecurve said...


exactly, its more painless to inflate our way out of a major debt crisis, rather than bite the budget bullet and hunker down financially.

Jeff said...

How is this for a scary chart? It shows the the value of the US Dollar in mg of gold for 100 years.

The first big drop, about 40% in value, was due to govt action...FDR confiscating gold. The second big drop, about 80% in value, was due to goft action...closing the gold window. The final slow drop since 2001, another 40%, was due to govt action...print and spend.

Overall, from 1900 to 2010, the dollar fell from 1500 mg to 25 mg, losing over 98% of it's purchasing power.

But we need to "spend more or we'll go broke".