Commodities, Precious Metals and Economic Contraction

The commodity complex is famous for a sort of ‘Whack-a-Mole’ quality to it.  Do you remember back in the go-go days when it was NatGas (2005)?  Uranium (2007)?  Crude Oil (2008) and then a cluster of Copper (2011), Grains (2011) and Silver (2011)?

Well today none of them are doing much.  Oil went up but could be topping, Copper went down but is bouncing hard, Uranium, Gas and Grains are nowhere.  The result is this…

The CCI index is at support but in an intermediate bear trend.  A break of 550 brings on the commodity/inflation trade.  That is a long way away and I have my doubts it will be able to get going any time soon.

They are already talking about the death of the dollar again in the inflationist camp.  That is because the dollar has been dropping hard.  Here is the daily chart showing that it is simply in the same Reverse Symmetrical Triangle that we used to note its risk of correction in early July.  Now we note its support, with maybe a little more downside room before it finds a platform from which it can rally again.

Exercise caution when an inflationist tells you about hyperinflation and the death of the dollar.  Again, NFTRH is not a gold bull and certainly not a gold stock bull because of the inflation argument.  The gold sector analysis is bullish because the big picture economic contraction environment is intact and that is more likely to include a stronger dollar than a weak one.  Here is the USD bull signal chart introduced back in NFRH 230:

Bottom Line

The US dollar is in an uptrend out of the 2011 inflation hysteria lows.

We are on a big picture economic contraction.  Within this there are people on the right and left goring each other out over politics [NFTRH 251 included discussion about political motivations in other segments.  Rabid members of each political pole suffer extreme bias and should be rejected by successful long-term market players].  The Gold-CCI ratio just stair steps through time and space and does not care about any of it.  It went nowhere during Bush and the last inflationary cyclical bull market.  Today it is biased up with huge swings in a deflationary phase during Obama and unprecedented policy making by the current Fed regime.

If Au-CCI breaks down NFTRH terminates its biggest picture view.  If it is bottoming here, we are good to go.*  Gold declined vs. commodities in the post 2008 period.  That was inflationary.  Gold has declined vs. commodities in the post 2011 period.  But this period is not inflationary.  Something has changed.

Meanwhile, we might as well add the Ag-CCI ratio to the mix since silver has done so much hard work in bleeding off the [inflation-fueled] excesses from 2011.  It is at a major support zone vs. commodities and may be ready to emphasize the ‘money’ side of its monetary/industrial commodity cross-dress routine.

* With respect to the sector that in my opinion now has the best risk vs. reward proposition in the stock market, we noted the following in another segment:

“To review, a gold mining operation wants to see an ongoing economic contraction in place.  The problem of late is that policy makers have been fighting the contraction – and winning!  Yes, as we have reported for months, the Semiconductor canaries are tweeting in the coal mine and wouldn’t you know that manufacturing followed them to recovery.

That is the past and present.  What we are interested in is the future.”

We spent the last 8 months in risk management mode (with respect to the precious metals) and now are intact and ready to capitalize on coming trends.  If macro analysis tells me that the bull view is the wrong view on gold, silver and the miners we will take that bitter pill and deal in its reality.

But the thing is, the work (which goes well beyond this snippet excerpt) is signaling a major risk vs. reward setup even as legions of trend followers (see the 2 year decline in Gold-CCI above) have all the intellectualized reasoning and hard evidence (of economic growth, which we saw coming before most currently chest thumping bulls) they need to call Gold’s Fear and Uncertainty Trade Dead.

Folks, these are the markets and they are going to wash away people with political blinders, impenetrable egos and all sorts of others who refuse to do the daily work to remain unbiased.  If you would like a service that works hard to manage what is, not what preconceived notions would have us believe is, join me at NFTRH in managing what look to be big changes coming to a macro near you in the months ahead.

[edit]  A reader rightfully questioned what I mean by inflation.  To be clear, from day one I have defined inflation – or more accurately the ongoing inflation attempt – as increasing money supply with things like the stock market’s rise or commodities’ current failure to get the inflation bid as the back end or the tail that the dog is wagging; the effects of inflation.

NFTRH 251 went into great detail about money supply and its relationship to the stock market and gold too, for that matter.

I should have called it a would-be commodity inflation ‘effects’ trade rather than an ‘inflation trade’.  Indeed, an inflation ‘effects’ trade is in progress and maturing.  It is happening in the US stock market.  The effects of previous inflationary operations are still firmly embedded in other areas of the economy and not likely to be relinquished any time soon in my opinion.  That is what inflation does, it festers in prices long after any given operation has terminated.

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