Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
8 Stock Market Indicators in 1: Here's the Message of the Panic/Euphoria Model - 19th Apr 21
Gold - You Can Win a Battle, but Still Lose the War - 19th Apr 21
Will Interest Rates Rally Further Push Gold Price Down? - 19th Apr 21
Gold Fireworks Doubt the Official Inflation Story - 19th Apr 21
YuanPay Team Discuss The Process Of Crypto Diversification - 19th Apr 21
Central Banks May Ramp Up Gold Buying - 18th Apr 21
How to Get Rid of Driveway Weeds With Just WATER! 6 Months later NO Weeds, Ultimate Killer! - 18th Apr 21
State of the European Markets - DAX, FTSE, CAC, AEX, SMI, IBEX 35, S&P/MIB, Euro Stoxx 50, RTS - 18th Apr 21
Einvestment Fund: What You Need To Know About Investments - 18th Apr 21
Google Alphabet (GOOG) AI Deep Mind Stock Trend Analysis - 17th Apr 21
Stocks and Bonds Inflationary Slingshot - 17th Apr 21
Best Smartphone Selfie Stick Tripod Review by ATUMTEK Works with Samsung Galaxy and Iphone - 17th Apr 21
How to Give Budgie's First Bath | Easy Budgie Bathing and Water Training with Lettuce - 17th Apr 21
Record-breaking Decrease in New Passenger Vehicle Sale in Europe - 17th Apr 21
US Stocks Climb A “Wall Of Worry” To New Highs - 16th Apr 21
Gold’s Singular Role - 16th Apr 21
See what Anatomy of a Bursting Market Bubble looks like - 16th Apr 21
Many Stock Market Sectors Are Primed For Another Breakout Rally – Are You? - 16th Apr 21
What Skyrocketing US Home Prices Say About Inflation - 16th Apr 21
Still a Bullish Fever in Stocks? - 16th Apr 21
Trying to Buy Coinbase Stock on IPO Day - Institutional Investors Freeze out Retail Investors - 15th Apr 21
Stocks or Gold – Which Is in the Catbird Seat? - 15th Apr 21
Time For A Stock Market Melt-Up - 15th Apr 21
Stocks Bull Market Progression Now Shows Base Metal Strength - 15th Apr 21
AI Tech Stocks Buy Ratings, Levels and Valuations - 14th Apr 21
Easy 10% to 15% Overclock for 5600x, 5900x, 5950x Using AMD Ryzen Master Precision Boost Overdrive - 14th Apr 21
The Current Cannabis Sector Rally Is Pointing To Another Breakout - 14th Apr 21
U.S. Dollar Junk Bond Market The Easiest Money in History - 14th Apr 21
The SPY Is Nearing Resistance @ $410… What Is Next? - 14th Apr 21
The Curious Stock Market Staircase Rally - 14th Apr 21
Stocks are Heating Up - 14th Apr 21
Two Methods in Calculating For R&D Tax Credits - 14th Apr 21
Stock Market Minor Correction Due - 13th Apr 21
How to Feed Budgies Cucumbers - Best Vegetables Feeding for the First Time, Parakeet Care UK - 13th Apr 21
Biggest Inflation Threat in 40 Years Looms over Markets - 13th Apr 21
How to Get Rich with the Pareto Distribution - Tesco Example - 13th Apr 21
Litecoin and Bitcoin-Which Is Better? - 13th Apr 21
The Major Advantages Of Getting Your PhD Online - 12th Apr 21
Covid-19 Pandemic Current State for UK, US, Europe, Brazil Vaccinations vs Lockdown's Third Wave - 12th Apr 21
Why These Stock Market Indicators Should Grab Your Full Attention - 12th Apr 21
Rising Debt Means a Weaker US Dollar - 12th Apr 21
Another Gold Stocks Upleg - 12th Apr 21
AMD The ZEN Tech Stock - 12th Apr 21
Overclockers UK Build Quality - Why Glue Fan to CPU Heat sink Instead of Using Supplied Clips? - 12th Apr 21 -
What are the Key Capabilities You Should Look for in Fleet Management Software? - 12th Apr 21
What Is Bitcoin Gold? - 12th Apr 21
UK Covd-19 FREE Lateral Flow Self Testing Kits How Use for the First Time at Home - 10th Apr 21
NVIDIA Stock ARMED and Dangeorus! - 10th Apr 21
The History of Bitcoin Hard Forks - 10th Apr 21
Gold Mining Stocks: A House Built on Shaky Ground - 9th Apr 21
Stock Market On the Verge of a Pullback - 9th Apr 21
What Is Bitcoin Unlimited? - 9th Apr 21
Most Money Managers Gamble With Your Money - 9th Apr 21
Top 5 Evolving Trends For Mobile Casinos - 9th Apr 21
Top 5 AI Tech Stocks Investing 2021 Analysis - 8th Apr 21
Dow Stock Market Trend Forecast 2021 - Crash or Continuing Bull Run? - 8th Apr 21
Don’t Be Fooled by the Stock Market Rally - 8th Apr 21
Gold and Latin: Twin Pillars of Western Rejuvenation - 8th Apr 21
Stronger US Dollar Reacts To Global Market Concerns – Which ETFs Will Benefit? Part II - 8th Apr 21
You're invited: Spot the Next BIG Move in Oil, Gas, Energy ETFs - 8th Apr 21
Ladies and Gentlemen, Mr US Dollar is Back - 8th Apr 21
Stock Market New S&P 500 Highs or Metals Rising? - 8th Apr 21
Microsoft AI Azure Cloud Computing Driving Tech Giant Profits - 7th Apr 21
Amazon Tech Stock PRIMEDAY SALE- 7th Apr 21
The US has Metals Problem - Lithium, Graphite, Copper, Nickel Supplies - 7th Apr 21
Yes, the Fed Will Cover Biden’s $4 Trillion Deficit - 7th Apr 21
S&P 500 Fireworks and Gold Going Stronger - 7th Apr 21
Stock Market Perceived Vs. Actual Risks: The Key To Success - 7th Apr 21

Market Oracle FREE Newsletter

FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

Real Price Of Gold Soars

Commodities / Gold & Silver Oct 07, 2008 - 01:44 PM GMT

By: Mike_Shedlock

Commodities Diamond Rated - Best Financial Markets Analysis ArticleGold in "Real" terms is soaring. "Real" in this case means how much an ounce of gold will buy. Let's compare gold to a commodities, to silver and to the stock market, starting with a basket of commodities as measured by $CRB commodities index. Charts are as of 2008-10-06.


$CRB Monthly


The world economy is rapidly slowing. There is a recession in the US, UK, Australia, Japan, Spain, Ireland, New Zealand, France, and there is manufacturing contraction in China. With that backdrop, one should expect the price of commodities to drop. And drop they have as shown by the above chart.

For the time being, forget about China. There is simply no way growth in China can make up for falling demand virtually everywhere else in the world. U.S. and the Western World is the dog, China remains the tail. That may change in the future, but it is important to concentrate on the present.

I expect the global slowdown to be far bigger than most expect, potentially wiping out all commodity price gains back to the beginning of 2004 if not further. A drop in the $CRB to the 200 day moving average would do just that.

Now let's see how gold is holding up vs. commodities.

Gold vs. $CRB Monthly


Gold buys a bigger basket of commodities now than any other point on the chart.

Silver Monthly Chart



Fundamentally, silver is more of an industrial commodity than it is a currency. It is not holding up as well as gold in recent selloffs. There is a very real possibility that silver falls back to the 2004 high around $8. Those who pay attention to moving averages will note that $8 happens to be the 200 day moving average as well.

In contrast, gold has almost no industrial use worth mentioning. The demand for gold is the same as it has been throughout history, as money. With that in mind, let's compare gold to silver.

Gold vs. Silver Monthly



One of the ongoing debates was how well silver would hold up in deflation relative to gold. I think we now have our answer, and it does not look pretty.

S&P 500 Index Monthly


In the wake of the dot-com bubble, banks were in bad shape because they made poor lending decisions to busted companies and also to countries like Argentina. To reflate banks, Greenspan slashed rates to 1% fueling a global liquidity boom that lasted 5 years.

The housing boom ended in 2005, but the party in commercial real estate, commodities, and various carry trades continued on for two full years when the pool of greater fools finally ran out. Since August of 2007 the world has been in a massive deleveraging mode.

The S&P 500 made a marginal new top in 2007, but the reality is the secular bear market that started in 2000 is still ongoing. In real terms, (either compared to gold or the CPI) the S&P 500 came nowhere close to making a new high.

Gold vs. S&P 500 Index


Congress passed a $700 billion bailout package but it was a total and complete waste of $700 billion. Actually, it is worse than that as it further depletes the pool of real funding, slowing a possible recovery some point in the future. Yes, the Fed has started a monetary printing campaign. And yes, the SEC will suspend mark to market accounting allowing banks to pretend their book are in order.

But pretending is not reality. I can pretend all I want that Madame Merriweather's Mud Hut is worth $1 billion and I can pretend my pet rock is worth the same. The reality (sorry Madame), is that neither is worth the book value I place on them.

Suspension of the mark to market rules will accomplish nothing but further mistrust of banks and bank stocks. Everyone will know they are lying. No one will know by how much. What we do know is that Citigroup alone holds $1 trillion in off balance sheet SIVs.

Pretending those SIVs are worth $1 trillion will not make it so. Yes, $700 billion is a lot of money. But let's see just how fast it comes and let's see if all of it comes.

But unless it can offset the countless $trillions in total bank assets that are not marked to market, we are realistically still going to see credit contraction (on a marked to market basis, and that is what counts).

Attempts To Spur Lending Are Failing

Bernanke and Paulson think that the Fed buying toxic garbage will spur institutions to start lending. It won't. Banks will know they are holding garbage, and the market can smell that garbage even if the rules allow banks to pretend that garbage is a rose.

For more on the Fed's efforts to spur lending please see Pushing on a String In Academic Wonderland and Thoughts On The Commercial Paper Funding Facility .

Greenspan did not defeat deflation in 2003 as is widely believed. Instead, he fueled the biggest credit boom in history, sowing seeds of the biggest deflationary bust since the great depression.

Deflation Back In The News

It took a while but the "D-Word" is back in the news after a long hiatus. Bloomberg is reporting Deflation Threat Returns as Asset Markets Decline

As Federal Reserve Chairman Ben S. Bernanke and his global colleagues fight the worst financial crisis since the 1930s, one danger is looming larger by the day: deflation.

The deflation scenario might go like this: Banks worldwide, stung by $588 billion in writedowns related to toxic assets -- especially mortgage-related securities -- will further reduce the flow of credit, strangling growth. That will push house prices lower, forcing additional losses and making banks even more reluctant to lend. As the credit crisis worsens, businesses will find it almost impossible to raise prices.

Prices are already falling in parts of the world economy. Home values dropped more than 10 percent in the U.K. and in the U.S. in the past year. Oil, copper and corn drove commodities toward their biggest weekly decline since at least 1956 on Oct. 3, with the Reuters/Jefferies CRB Index of 19 raw materials tumbling 10.4 percent. The Baltic Dry Index, a measure of commodity shipping costs, has dropped 75 percent since May.

Prices manufacturers paid for materials last month plunged the most since at least 1948, with the Institute for Supply Management's index dropping 23.5 points to 53.5 points.

Deflation may be back in the news, but the context is still incorrect. Falling prices are only a symptom of deflation, and not even a mandatory one. Deflation properly defined is a net reduction in money supply and credit, so let's take a look at at base money supply , courtesy of the St. Louis Fed.

Adjusted Monetary Base


The above charts shows the Fed went on a recent printing spree. However, that printing spree is dwarfed by the decline in the value of credit marked to market on the books of banks and brokerages. Unfortunately I cannot prove a decline in marked to market credit because the SEC has suspended mark to market rules.

However, one can judge by actions, and the Fed in particular, and global central banks in general are in easily verifiable panic mode over the ongoing credit crunch.

Nearly Everything Consistent With Deflation

Commodities are sinking, the dollar is strengthening, the stock market is getting crucified, treasuries are rallying, jobs have contracted for 9 straight months with no end in sight, banks do not trust each other, consumer spending is declining, foreclosures are soaring, the TED Spread (3 month Treasury vs. 3 month LIBOR) is at an all time high, and the Fed Funds Rate fell at the fastest rate in history.

That list does not prove deflation, but it is consistent with what one would expect in deflation.

Given that gold is money, and money should do well in deflation, one would expect the purchasing power of gold to rise. The above charts show exactly that. Gold, especially in real terms is soaring.

So why have the miners gotten pounded? Hindsight may be 20-20 (or not) but here are a few possible explanations.

Mining stocks are leveraged compared to gold and a massive unwinding of that leverage is taking place, especially by hedge funds. There are now ongoing funding questions for some of the miners and explorers. There has been indiscriminate selling of virtually everything.

For more on how treasuries and gold should act in deflation, please see Treasuries and Gold Rise as Global Credit Freeze Prompts More Bailouts .

Those believing in stagflation, hyperinflation, or some sort of 70's rerun can now kiss those theories goodbye. Deflation is here and now, the only question now is how long it lasts.

By Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Click Here To Scroll Thru My Recent Post List

Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management . Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

Visit Sitka Pacific's Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

I do weekly podcasts every Thursday on HoweStreet and a brief 7 minute segment on Saturday on CKNW AM 980 in Vancouver.

When not writing about stocks or the economy I spends a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at MichaelShedlock.com .

© 2008 Mike Shedlock, All Rights Reserved

Mike Shedlock Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules