Two Market Indicators: Gold and Baltic Dry Index

One of the interesting charts I have been watching is that of Gold (below). Gold bulls have said for years that a run-up in inflation, a weak dollar, and a global financial crisis would all serve to send a flight of investors into gold. They also said that all of this would push prices well above $1000.

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Well, guess what? We haven't seen it. To be fair, gold did have a nice run, but it didn't surpass $1000. Moreover, look at all of the panic we have seen in the markets lately. And during all of this, gold prices have been unable to make new highs, and have now moved lower.

Gold hasn't even been able to surpass its highs from mid-July. To me, this series of lower highs speaks to lower prices and not higher ones in the near future. Moreover, if this hasn't been the absolute best period or market phase during which to own gold, what is? Gold bugs had better craft a new story to sell.

Last, I wanted to show a snapshot of the Baltic Dry Index (below). This index tracks the activity of global shipping rates, and is a proxy for how robust the global economy is.

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As you can see, this index has absolutely plummeted. This is a sign that the global economy is slowing markedly. For those that continue to think that emerging markets will continue to grow through this period without a hiccup, this chart begs to differ.

Comments

[SW Richmond:]

More on the inflation/deflation debate. BDI certainly is indicating a sharp slowdown, but also a lack of faith in the creditworthiness of bulk buyers. Frankly, the word "Baltic" in the "Baltic Dry Index" indicates its regional nature, and anyone who's been paying attention should know about the financial troubles of the Baltic states, so perhaps the value of the BDI as a global indicator is not all it's cracked up to be.

Gold is a small market which also happens to be the anti-central bank. It comes as no surprise to anyone that gold might "fail to perform" in the early stages of a crisis. We have an environment where appointed elites are literally in charge of the value of our currency, and gold is their report card. No one expected them to allow gold to float freely and tell the world that they are idiots.

These central banks have just "added liquidity" to the tune of $3Trillion new dollars and have offered banks "unlimited" lending. Does the author know what "unlimited" money means for gold? Does the author know about the historic demand for physical gold that the world is experiencing right now? Does the author understand how paper markets can be used (temporarily) to suppress gold? Does the author expect the dollar to remain the world's reserve currency, and does he know that Trichet is calling for another Bretton Woods? Does the author read?

2008 Oct 17 06:52 AM

[westwest888:]

Gold hasn't reached a high in dollars but has reached a high in euros and pounds. The dollar is temporarily strong because European banks have a high demand for dollars to cover their losses in dollar denominated instruments. Specifically, AIG losses, Lehman losses, ARS, ABS, MBS, CMBS securities. When the losses are covered, the dollar goes back to where it was.

You should read Brad Setser at CFR before you post, bro.

2008 Oct 17 08:48 AM

[HBWOW:]

"Program trading" by the greedy (see Joseph Shaefer article on Oct. 16)
is what is hourly controlling the market. The investment wealth of middle Americans is being drained daily, hence there goes the economy as their fear and losses prohibit their buying ANYTHING other than necessities.

The U.S. appears to be in the same economic shape as pre Hilter Germany.

2008 Oct 17 10:21 AM

[User 163397:]

If we plot gold versus the DOW or S&P or any equity index for that matter we will find that its performance has been relatively quite strong. To what extent is the recent pressure on gold's price a function of holders attempting to get liquid or de-lever by selling anything? I haven't purchased any physical gold in some time, but have read that there is a shortage. If that is the case, it is curious. I am not a "gold bug" but I do see the value in holding some gold as insurance against a dollar decline and against inflation. The fundamental question re gold in the near term would seem to be, are we entering a period of inflation of deflation; there are cogent arguments in support of each view.

2008 Oct 18 07:03 AM