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The Canary in the Deflated Coal Mine
As I perused the market quotes for Friday, I saw the markets were almost completely red. There was just one lone green island in a red sea. The world’s stock markets were sharply lower. Oil was sharply lower. The agricultural markets from corn to wheat to cocoa to sugar to coffee were all sharply lower. Cattle, cotton, hogs and oats were also sharply lower. Silver, copper and aluminum followed the pack sharply lower as well.
That one green island? Despite virtually every other market collapsing on Friday, gold was able to close the day $16 higher. What’s the gold market seeing, and what’s it telling us?
Please accept the fact that no expert is all-knowing; most didn’t see this current financial crisis coming. Just a few months ago, Goldman Sachs was calling for $200-a-barrel oil. Last week they reversed course and are now calling for $50-a-barrel oil. That’s a reversal after it’s already dropped $70.
When it comes to bonds and stocks, the mainstream brokerage community seems to know only one mantra: Hold tight because it always comes back. Advice to sell is rarely heard. Why weren’t they telling us to take some profits when the markets were 40 to 50 percent higher? Wouldn’t that have been better advice?
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Simple to use, safe, natural, and guaranteed favorable results that will please both you and your doctor. Get the full story here . . .There’s no doubt the world’s financial markets have been deleveraging and are currently in the grips of a deflationary spiral. Assets of all types have been heading south; there’s nowhere to hide. The Asian stock markets, the European stock markets and the North American stock markets have all plummeted.
However, you may be surprised to learn there’s one stock market that gained more 500 percent last week. You may have missed this one, but in this market, certain stocks gained more than 3,000 percent. Why didn’t your broker get you in? It’s because I’m referring to the Zimbabwe’s stock market. In Zimbabwe, inflation is running at an official rate of 231 percent, but in the black market, this number is more than 20 trillion percent. The official exchange rate is now 100 million Zimbabwean dollars to one US dollar. With inflation that high, local investors see the only place to keep pace with inflation is the Zimbabwe stock market. It’s all artificial, of course, but this is what happens in a Weimar-type hyper-inflationary scenario brought about by total economic mismanagement using runaway printing presses.
So what does this have to do with our current global financial crisis? In the current environment, all asset classes are falling, including stocks, bonds, real estate and commodities. Gold has certainly not been the safe haven the gold bugs had anticipated it would be during a financial meltdown because it’s gone down with everything else. On Friday, however, it diverged. And unlike just about any other market, it was able to close higher.
Is gold the canary in the coalmine? Now that everyone knows the fires of inflation are totally dead; perhaps gold is telling us embers remain glowing that are going to ignite the next fire. I’m not predicting a Zimbabwe hyper-scenario. However, the seeds have already been sown for deflation to turn into inflation.
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I’ve long felt this outrageous money creation would eventually lead to accelerating inflation. Deflation comes first as the world’s banks deleverage, but when this process has wound itself out, then inflation will heat up again. Nobody believes this now, but when oil was approaching $150 per barrel, nobody was talking about deflation. Now that it’s approaching $50 per barrel, nobody is talking about inflation. Perhaps gold is telling us something here? Perhaps there’s a trading opportunity or two out there?
For my Futures Market Forecaster trading service, here’s what I’m looking for. I see selected commodity prices rebounding sharply while the economy continues to sink. This happened during the Carter administration. Stocks went lower, but commodities surged. The seeds of inflation have been planted, but unlike the late 1970s, demand from China and India for basic goods continues unabated.
China’s GDP grew only 9 percent last quarter, and although that’s a disappointment versus last year’s 13 percent, this still can be considered dramatic growth. The Chinese are huge importers of commodities such as copper and soybeans. These are two of the selected markets in which I anticipate bottoms forming soon. Right now, when nobody’s really looking, I’m looking for additional canaries in the coalmines to signal that deflation is dead, with new selective inflationary trends emerging.
One day up doesn’t make a bottom. But if gold can continue to diverge from the bearish pack in the next few weeks, this will be strong evidence of a change in the wind.