Rising Base Metals, Falling Precious Metals Signals Improving Economy

Gold appears to be putting in a double top.

click to enlarge

It may be that the bull market in gold is ending.

This is not the general thesis from which I am working. I believe that inflation will re-emerge in a few years and gold will go to $1500 or $2000.

However, I may very well be wrong. It may be that gold is signaling an end to systemic risk in the financial system.

Some will argue that a gold top is signaling deflation. That may be. However, base metals appear to be putting in a bottom.

Copper

Nickel

Zinc

If base metals are putting in a bottom, then deflation is not in the offing. Rising base metals and falling precious metals would be a signal that the economy will improve in the not-too-distant future.

Note - Donald Luskin was on Kudlow tonight, and he said that gold and precious metals were his long-term favorite trade. I guess the top for gold is in!

Comments

[lark:]

Rising base metals means that China is buying metals instead of US treasuries. USA economy is falling down, TARP is Bailing Out insurance companies, like HIG. etc.

Apr 09 09:41 AM

[Dr. O:]

Stock index futures are rocketing higher this morning off of Well Fargo's (WFC) "earnings beat." The significance of this is open to debate, but the shorts are scrambling for cover, no doubt.

I found several other pieces of data released this morning far more telling of current economic, and hence corporate, conditions.

1) Intitial claims for unemployment still extraordinarily high at 654,000.

2) A drop of 5.1% in imports, resulting in a large drop in the US trade deficit. Multi-year lows in imports from Japan and China.

3) Same stores sales at Walmart up an anemic 1.4% and below consensus.

These three pieces of data point to increasing unemployment and hence decreased purchasing power by US consumers. Unemployment continues to rise rapidly, and consumer demand continues to decline. These data are not supportive of higher stock prices either in the US or in countries that depend on US demand such as China, Japan, and the emerging markets.

I believe at this point stock and commodity prices are rising due to increased investor demand as money moves from cash and bonds into stocks and commodities. Also, there is a "hope" that a few months from now the economic picture will be better than it is now, and stocks "anticipate" this. I personally don't see any signs of this. The only reason I would be long stocks or commodities now would be as a trend follower or trader front-running some major asset allocation shifts.

Apr 09 09:44 AM

[Socialism c...:]

Don't ya think you'd better look at longer than 1 year? The recession has been longer than a year already. I think looking it is necessary to look at charts predating the bubble -- 5 and 10 year charts at least.

Apr 09 11:22 AM

[dcb:]

there was an extensive write up in the Ft yesterday on this subject. the basic idea is that china has been stocking metals and when this stops the price rise will plummet. they are making sure they are well positioned for negotiations with the big producers. I always advocate folowing the baltic dry index and it hasn't been doing well.

Apr 09 11:32 AM

[Larrysyr:]

I think the data is exceptionally inconclusive, leading me to mistrust this rally. It seems like at least a correction is due, but then we get another up day.

Unemployment is a lagging indicator, and doesn't help all that much with forecasting. The drop in imports is probably due to the U.S. consumer's lack of desire for more junk, which I think is actually a good long-term sign, but certainly not a good near-term harbinger. And Wal-Mart's sales seem to be running counter-cyclical.

These data points lead me to think the economy is getting more rational while the markets are getting less rational.


On Apr 09 09:44 AM Dr. O wrote:

> Stock index futures are rocketing higher this morning off of Well
> Fargo's (seekingalpha.com/symbo...) "earnings beat." The
> significance of this is open to debate, but the shorts are scrambling
> for cover, no doubt.
>
> I found several other pieces of data released this morning far more
> telling of current economic, and hence corporate, conditions.
>
> 1) Intitial claims for unemployment still extraordinarily high at
> 654,000.
>
> 2) A drop of 5.1% in imports, resulting in a large drop in the US
> trade deficit. Multi-year lows in imports from Japan and China.<br/>
>
> 3) Same stores sales at Walmart up an anemic 1.4% and below consensus.
>
>

Apr 09 11:35 AM

[dcb:]

By Wendy Leung and Lee Spears

April 8 (Bloomberg) -- China’s shipbuilding industry may be about to get a bailout -- from its customers.

The government may force state-owned shipping groups to buy more vessels as foreign carriers scrap orders, according to Steve Man, an HSBC Holdings Plc analyst in Hong Kong. That risks increasing costs and overcapacity among shipping lines grappling with a collapse in global trade.

“They ‘encourage,’ but my thinking is it’s more of a directive,” said Man. “It hurts every player in the industry and creates excess capacity that will take longer to absorb after an upturn.”

A collapse in shipping rates led to a worldwide 95 percent decline in new vessel orders in March, according to Clarkson Plc, the world’s largest shipbroker. In response to the drop in demand, China is drawing up plans to aid state-owned China State Shipbuilding Corp. and China Shipbuilding Industry Corp. that will likely force state-owned shipping groups to pick up orders abandoned by overseas lines, driving rates down further, analysts say.

“The major overhang for the shipbuilders is potential cancellations,” said Andy Meng, an analyst at Morgan Stanley. The “key message” in the government plan “is to protect order backlogs at the state-owned shipyards.”

Meng estimates as many as 60 percent of existing orders in China may be canceled over the next two years.

Shares Fall

China CSSC Holdings Ltd., the listed unit of China’s biggest shipbuilder, gained 4.4 percent to 66.63 yuan in Shanghai. Guangzhou Shipyard International Co. gained 2.5 percent to 21.15 yuan in Shanghai. Both are units of China State Shipbuilding.

Sinotrans Shipping Ltd., the commodity-shipping unit of China National, may order more ships, depending on prices and market conditions, said spokesman George Yu. The company plans to spend $374.5 million on new ships this year and next, it said last month. China Shipping Development Co., the dry-bulk arm of China Shipping, hasn’t received any details about government plans yet, said spokeswoman Yao Qiaohong.

China Shipping Development shares fell 6.8 percent at the close of trading in Hong Kong.

Dry-bulk rates have slumped to unprofitable levels as China pares imports of iron ore, a key steelmaking ingredient, on slowing construction and cooling growth. The Baltic Dry Index, the benchmark for commodity-shipping costs, fell for a 20th straight day yesterday, extending its loss from a year ago to 81 percent.

Container Oversupply

Oversupply of container ships used to transport products from furniture to electronics is leaving the companies that operate them in a worse position than dry bulk shippers, Neptune Orient Lines Ltd. Chief Executive Officer Ron Widdows said in an interview the Financial Times published today.

Container shippers face a long recession because they have failed to cancel enough orders for new vessels, while dry bulk shipping companies have been quicker to cut purchases, Widdows told the FT. Neptune Orient Lines is Southeast Asia’s biggest container carrier.

The government’s shipyard stimulus will include measures to ease credit and stabilize vessel orders, the state-run China Securities Journal reported today, citing Chen Bin, head of the industry coordination department of the National Development and Reform Commission. Details of the plan will be released gradually throughout this year, the newspaper said.

Order Drought

China’s biggest shipbuilders, who construct more than 70 percent of dry-bulk carriers, haven’t won an order since October, according to Morgan Stanley. The stimulus may worsen the overcapacity that contributed to the Baltic Dry Index’s biggest decline in more than two decades.

China Cosco Holdings Co., the world’s largest operator of bulk cargo ships, last year canceled plans to order 126 new vessels as rates plunged. China Cosco spokesman Hu Yu said he wasn’t aware of any plans to buy more ships. The company had a fleet of 462 owned and chartered dry-bulk ships as of Sept. 30, with another 62 on order.

Shipyards will probably have to share some of the burden by lowering prices, HSBC’s Man said. The government may also sweeten the deal for shipping lines with aid, allowing lines to modernize fleets at reduced costs.

“If they let old vessels retire a bit earlier and buy more fuel-efficient ships at lower prices, it’s good for their future development,” said Jack Xu, a Shanghai-based analyst at Sinopac Securities Asia Ltd. “It all depends on how much in subsidies the government is going to give them.”

Cancelled Contracts

In a bid to revive rates, dry-bulk lines have laid up 15 percent of vessels, according to data complied by Bloomberg. They have also begun to axe orders placed two or three years ago when the market was booming. Chinese yards had 110 vessels canceled from October to the end of February, according to the Ministry of Industry and Information Technology. That was 1.4 percent of their backlog.

Only nine new vessels of any type were ordered worldwide last month, according to data compiled by Clarkson Plc. More cancellations are likely, as yards worldwide hold orders for dry-bulk ships with a combined capacity equal to 69 percent of the existing global fleet. As much as 65 percent of bulk ships due for delivery next year may be axed or delayed, followed by as much as 60 percent in 2011, according to HSBC.

Apr 09 11:35 AM

[Francisco M...:]

that's called speculation

Apr 09 12:38 PM

[Mad Hedge F...:]

It's bad news for short term traders, but l “There is room for bulls and bears, but pigs get slaughtered,” said Peter Munk, the legendary founder and CEO of Barrick Gold, the world’s largest gold producer. This is his admonition to worshipers of the barbaric relic hoping for a quick super spike to $2,000 or $5,000 an ounce. Since 2003 gold has tripled from $300 to $1,000, outperforming every asset class in every currency, and he has no problem with it backing and filling here in a long term uptrend. The fundamentals look great, as the world is running out of the yellow metal. The industry used to be run by demand from the Indian wedding season. The current economic stress has made the country a net exporter of gold for the first time. Global jewelry demand is at a 20 year low. With the help of satellites, the world is pretty well mapped out, so there will be no more surprise Californias or Klondikes found. The only untapped reserves are in the Andes at 13,000 feet, or in countries too dangerous to visit. The cost of extraction has also doubled in ten years to $400/ounce, driven by labor, fuel, trucks, and environmental mitigation. Gold will only go down when the US government turns off its printing presses. With record stimulus packages in place, there is a fat chance of that happening in this lifetime. Ultimately, the price of gold is a barometer of fear, which will not be in short supply in the new era we are facing.
ong term it's still a buy.

Apr 09 01:24 PM

[SW Richmond:]

"It may be that gold is signaling an end to systemic risk in the financial system."

It may also be signaling the primacy of JPM's $85 Billion gold derivative position. A market as small as gold can easily have its charts painted. Given the numerous recent expose's on the CFTC, how will we ever know? I also think that rising base metal prices are signaling a Chinese desire to convert at least some of their dollars to real commodities; dollars can be (and are being) debased, commodities not.

Apr 09 01:32 PM

[Roger Knights:]

"Gold appears to be putting in a double top"

Or maybe a cup and handle.

Apr 09 03:45 PM

[auto44:]

In a market where good and bad stocks go up together and down togehter, and where the dow is up two hundred and then down two hundred, there is to me no sense of rational movements, which lead me to belive this is a suckers rally in a market that shows no real strength and what little there is is due to gov't give aways, not earnings or jobs in real production.

Apr 10 01:59 PM

[5142152-337:]

Another bank failed. That's 23 thus far in 2009. I would say that 10:1 ratio is fair to determine how many banks are being propped up, bought, or TARPed. That's very close to 1000 for the year. And we aren't even CLOSE to ceasing the Obama giveaway program. Buy the yellow and silver stuff--PHYSICAL only, please!

Apr 11 06:51 PM