Today's Commodity Prices Forecast Tomorrow's Inflation 52 comments
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by Sean Hyman
I know this is a hard one to believe, being that we are obviously in the middle of a deflationary period, but savvy institutional players are already starting to position themselves for inflationary times ahead.
Inflation! Have I lost my mind? Actually, no... Let me explain what I mean.
Former central banker Volcker (who is on Obama’s economic team) is prepping the world for deficits of $2 to $3 trillion dollars as the U.S. goes into one of the biggest spending sprees that (believe it or not) will make George Bush’s spending look like child’s play.
The financial world is listening. They’ve seen the leading indicators of the economy in the beginning stages of perking up. They’ve seen stocks stabilize and they’ve seen the down draft in commodities halt.
Commodities are pointing the way (ahead of time) to an inflationary environment that is coming!
In fact, some of the most convincing arguments for the coming inflation are what is transpiring in commodity prices lately.
For instance, the downtrend in gasoline futures has been broken and the cheapest gas prices are now behind us. This is largely due to the stabilization of oil prices of late. Oil appears to have found a floor around the $30 to $40 a barrel range. It may take some time to consolidate at these levels before oil and gas move materially higher, but money is made by being a bit preemptive about coming moves, rather than getting in them once things are obvious to everyone.
Another sign of inflation that has crept up on the radar screen has been the sharp move higher in gold prices. Yes, of course some of it has been brought about by the fears in the economy. However, much of the latest moves higher have been on the thought that the Obama administration will finally turn the tide for the economy and get us back to an “inflationary, growth” mode.
Gold recently broke a short term downtrend line or what technicians would call a “neck line” on a bullish inverse head and shoulders chart pattern. I think you will see gold easily run up to the $1,200 to $1.500 before the end of the year.
Another commodity that traders say has a PhD in economics has recently bolted higher in the short term too. That commodity? Copper. So why the PhD status among traders? Here’s why. Copper is a major commodity used in residential and commercial construction. It’s also used in electronics and automobiles among other things.
So since this commodity is so broadly used, investors watch this commodity as a barometer of strength and growth coming to the U.S. and even the world economy.
One thing you have to remember is that corporations ramp up their inventories just before they think they will need them. Therefore they buy just ahead of the demand increase by the retail and corporate market demands it.
Learn to think like the “forward looking” institutional investor and not like the retail investor… who is always “late to the ball game”!
So once copper starts the process of perking up, as it is now… it starts investors back in the offensive mode and away from the defensive posture in their portfolios. This change up in many institutional portfolios is beginning now before the retail investing public realizes that they should do the same.
You see, the retail public waits until they can see the economy turning around “in the here and now”. In fact, they even wait a bit after the economy turns up “just to be on the safe side”. However, this delay is what causes the huge differences between the forward thinking institutions that gain a better pricing and the sluggish retail investor who is historically always late to the ball game.
This “expectation” for inflation to resurface in the months ahead is also causing foreign currencies to begin to perk up and the U.S. dollar’s gain to slow down. This is yet another sign of a shifting that is beginning to take place across all markets even though it is still in the beginning stages.
So prepare yourself like the big institutional players are. Buy with cash, no margin. That way you don’t have to “time” the exact turnaround and incur a ton of margin interest while you wait. Buy broadly at first with ETFs or mutual funds. Don’t bottom fish in individual stocks because we are not at a place yet to where we know “who will survive” and “who will fall by the wayside”.
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As stockpiles rise, the future inflationary aspects are reduced. IMHO
I do lean toward the coming inflation argument. The most interesting refusal of this argument that I have read is even with all the new money pumping and approved bailouts, the public sector debt to GDP ratio of the US will still be below that of other OECD countries.
If this is true, then it does not necessarily portend the end of the dollar and hyperinflation. If Italy can live with 150% debt/GDP ratio then why can't the US?
Anyway, I have no idea if these numbers are correct and am too lazy to do a Google search.
And I was hoping that someone with an understanding of this issue might address it...
On Jan 28 04:16 PM paultaut wrote:
> MyW: okay, play it your way. Commodities work on the same principal
> that equities do. They have to be bought to rise. Stockpiles continue
> to go up in all categories except Gold which is an Inflation Play.
>
>
> As stockpiles rise, the future inflationary aspects are reduced.
> IMHO
On Jan 28 01:18 PM MGA_1 wrote:
> Shoot - i think the fed + govt intervention were the precipitating
> force behind the housing bubble, but nothing to be done now except
> let it deflate.
>
> Right now my plan is: short t bills then into gold.
>
> You talk about commodities - futures/options? EFTs?
It's like the news...you'll see the crime in the city on the news....but not all the good that people do.
On Jan 28 02:58 PM auto44 wrote:
> If institutions are so smart why did they all get creamed in the
> downturn showing 30 50 70 percent losses and worse.
On Jan 28 03:02 PM nmelendez wrote:
> Think more in terms of stagflation vs. inflation. We are about to
> repeat the 80's.
On Jan 28 04:16 PM paultaut wrote:
> MyW: okay, play it your way. Commodities work on the same principal
> that equities do. They have to be bought to rise. Stockpiles continue
> to go up in all categories except Gold which is an Inflation Play.
>
>
> As stockpiles rise, the future inflationary aspects are reduced.
> IMHO
Even when the British pound ceased to be the world's reserve currency its still a valid currency...just not near what it used to be...and may never be...
On Jan 28 05:50 PM Maximus wrote:
> I don't purport to be an economist but I have taken the standard
> MBA curriculum in finance in economics. Therefore I have been pretty
> on the fence as to my own view on inflation or deflation.
>
> I do lean toward the coming inflation argument. The most interesting
> refusal of this argument that I have read is even with all the new
> money pumping and approved bailouts, the public sector debt to GDP
> ratio of the US will still be below that of other OECD countries.
>
>
> If this is true, then it does not necessarily portend the end of
> the dollar and hyperinflation. If Italy can live with 150% debt/GDP
> ratio then why can't the US?
>
> Anyway, I have no idea if these numbers are correct and am too lazy
> to do a Google search.
>
> And I was hoping that someone with an understanding of this issue
> might address it...
www.kitcometals.com/ch...
www.kitco.com/charts/p...
But nothing wrong with investing in copper at all. It's at the long term support on the 5 year chart. Inventories do need to be worked down...but once you get the global economy ticking just a bit better, people find out that the world is a big place and can start soaking up those inventories.
I like those charts. Thanks for sharing. I appreciate you reading my articles.
On Jan 28 09:11 PM Dissenter wrote:
> Why is everyone so into Gold? I'm thinking copper will be a better
> play. If you invested $1000 in physical copper in 2004 and sold at
> its 5 year high you would have made $3000. If you invested $1000
> in physical gold in 2004 and sold at its 5 year high you would have
> made only $1500.Sure copper has surplus inventories that needs to
> be worked through but I'm thinking long term. Gold may have its time
> to shine in the world markets but I think it will be short lived.
> Also with gold one to has to deal with higher amounts of volatility,
> fear of confiscation, and central bank manipulation of gold prices.
> Here are the charts for gold and copper:
>
> www.kitcometals.com/ch...
>
>
> www.kitco.com/charts/p...
Thanks for your input on copper. I would like to buy physical copper for the same reasons why people buy physical gold. I have a fear that if the dollar goes bust all stocks with go with it hence the desire to own physical copper but is it worth it versus owning a copper stock company instead? If so how would I go about obtaining the physical copper?
As for your comment... ""For instance, the downtrend in gasoline futures has been broken and the cheapest gas prices are now behind us. This is largely due to the stabilization of oil prices of late. Oil appears to have found a floor around the $30 to $40 a barrel range.""
The cheapest gas prices may be behind us, but the reason is primarily do to the fact that refiners have finally reduced production. They are now running at about 85% efficiency. There is finally a reasonable crack spread between oil and gas. That is what is now pushing gasoline prices up, and that is why the refiners have recently rallied.
I do not believe that there is a world wide shortage of oil. There were never any supply problems. Oil was up because it bacame a specultive play. Just look at the enormous increase in the number of future constracts written in the last two year vs. earlier years. The volume tripled. In additon, in the next few years, a lot more oil will come to market via the Ukraine, Iraq, Brazil and, believe it or not, North Dakota in the short run. In addition, all the major refiners can now process considerable quantities of Heavy and Sour crude. This opens up an entirel new supply avenue. Bio fuels are now being made everywhere from anything which contains sugar, starch or oil. In California, biofuel is being made from used fry oil and animal fats. In Indonesia, cola nuts are a source of bio fuel. And syn fuel projects (coal to diesel) are springing up everywhere. And, we certainly should not ignore the fact the world is placing a huge amount of emphasis on improving automobile effeciencies. There are now many gasoline powered cars which get over 30 mpg. The new plugin electric cars whic will soon be offered by nearly every major automobile company, will go the first 40 miles on electric power (coming mostly from coal powered electric plants). Since the average driver, on average drives less than 40 miles/day, over their lifetime, these cars will actually use 70 to 80% less gasoline. T Boon Pickens, Mr. Oil himself, thinks the US should swich commercial vehicles with large fleets such as UPS trucks, US Postal trucks, Telephone and Cable companies etc. to Natural Gas. That makes economic sense for the companies to do this when you consider that 1 therm of NG which currently sells for about $4.50 provides the same amount of energy as 7 gallons of gasoline. All that really needs to happen is for these trucks to become available out of the factory with motors that are setup so that they will run on NG. This is a minor cost at the factory but it is a $2000 conversion if put on later.
I think investing in oil is a risky bet right now because the world finally realizes that oil is the source of most of the political friction in the world.
The Baltic Dry Index lost more than 90% of its value, it wasn't going to go to zero. It and the sector bounced.
How long it remains down? who knows.
In other words, there is no transparency. You take it on "Faith", I do not take anything on faith other than the existence of God.
You want to stay bullish on gold, go with UGL.
There are a few SA Article writers who deal specifically in charts, none of them has noted the H&S bottom proclaimed in this article.
Now, If you are referring to the common stock of Randgold (GOLD), then there is an H&S bottom in progress. But then that's not the chart being depicted.
On Jan 28 10:03 PM Dissenter wrote:
> Sean,
>
> Thanks for your input on copper. I would like to buy physical copper
> for the same reasons why people buy physical gold. I have a fear
> that if the dollar goes bust all stocks with go with it hence the
> desire to own physical copper but is it worth it versus owning a
> copper stock company instead? If so how would I go about obtaining
> the physical copper?
However, at $30-$40s...that risk is greatly diminished.
Thanks for reading and commenting. I appreciate it.
On Jan 28 11:39 PM beegdawg007 wrote:
> I think you are right, but very early in your forecast. When this
> finally occures, I believe the way to play it is Steel and Coal.
> When things again start to rip, Steel will move first because most
> of the stumulus plans in the world, particularly in China, are focused
> on infrastructure building. That means rebar, beams, rail, siding,
> ships, storage tanks, new cities, power plants..etc.. All will require
> mega tons of steel. Every ton of steel requires .6 tons of coal
> in the form of Coke. Cement for concrete is made by heating limestone
> to 1500 degrees for a long period of time. That is most often done
> with coal as the heat source. As for electricity, between India
> and China, there are now 500 new coal powered electric plants in
> process. This is why I prefer steel and coal over oil or gold.
>
>
> As for your comment... ""For instance, the downtrend in gasoline
> futures has been broken and the cheapest gas prices are now behind
> us. This is largely due to the stabilization of oil prices of late.
> Oil appears to have found a floor around the $30 to $40 a barrel
> range.""
>
> The cheapest gas prices may be behind us, but the reason is primarily
> do to the fact that refiners have finally reduced production. They
> are now running at about 85% efficiency. There is finally a reasonable
> crack spread between oil and gas. That is what is now pushing gasoline
> prices up, and that is why the refiners have recently rallied.
>
>
> I do not believe that there is a world wide shortage of oil. There
> were never any supply problems. Oil was up because it bacame a specultive
> play. Just look at the enormous increase in the number of future
> constracts written in the last two year vs. earlier years. The volume
> tripled. In additon, in the next few years, a lot more oil will
> come to market via the Ukraine, Iraq, Brazil and, believe it or not,
> North Dakota in the short run. In addition, all the major refiners
> can now process considerable quantities of Heavy and Sour crude.
> This opens up an entirel new supply avenue. Bio fuels are now being
> made everywhere from anything which contains sugar, starch or oil.
> In California, biofuel is being made from used fry oil and animal
> fats. In Indonesia, cola nuts are a source of bio fuel. And syn
> fuel projects (coal to diesel) are springing up everywhere. And,
> we certainly should not ignore the fact the world is placing a huge
> amount of emphasis on improving automobile effeciencies. There are
> now many gasoline powered cars which get over 30 mpg. The new plugin
> electric cars whic will soon be offered by nearly every major automobile
> company, will go the first 40 miles on electric power (coming mostly
> from coal powered electric plants). Since the average driver, on
> average drives less than 40 miles/day, over their lifetime, these
> cars will actually use 70 to 80% less gasoline. T Boon Pickens,
> Mr. Oil himself, thinks the US should swich commercial vehicles with
> large fleets such as UPS trucks, US Postal trucks, Telephone and
> Cable companies etc. to Natural Gas. That makes economic sense
> for the companies to do this when you consider that 1 therm of NG
> which currently sells for about $4.50 provides the same amount of
> energy as 7 gallons of gasoline. All that really needs to happen
> is for these trucks to become available out of the factory with motors
> that are setup so that they will run on NG. This is a minor cost
> at the factory but it is a $2000 conversion if put on later.
>
>
> I think investing in oil is a risky bet right now because the world
> finally realizes that oil is the source of most of the political
> friction in the world.
On Jan 29 12:31 AM Tedspick wrote:
> Unfortunately I recognize myself as one of those "retail" investors,
> always late to the party and one of the reasons is simple fear to
> plunge in before the trend is so obvious that it ends up nearer the
> top of the bubble. Thats why this post is so interesting to me and
> I am looking for true early warning indicators. A new one for me
> is the "Baltic Dry Index" which is showing a rather clear bottom
> formation and even the start of upward movement. This action looks
> distinctively unique when comparing it to the chart over the last
> several years. I have read that when raw materials start moving
> it is a sign that manufacturing increases are on the way. Another
> advance indicator for eventual inflation.
On Jan 29 01:20 AM paultaut wrote:
> Auto44: I am by no means "all Knowing". GLD is a ticking time bomb
> as far as I am concerned. A few of their large counterparties no
> longer exist. There are no external audits of the amount of physical
> gold actually in their Vaults.
>
> In other words, there is no transparency. You take it on "Faith",
> I do not take anything on faith other than the existence of God.
>
>
> You want to stay bullish on gold, go with UGL.
>
> There are a few SA Article writers who deal specifically in charts,
> none of them has noted the H&S bottom proclaimed in this article.
>
>
> Now, If you are referring to the common stock of Randgold (seekingalpha.com/symbo...),
> then there is an H&S bottom in progress. But then that's not
> the chart being depicted.
>
>
>