The Largest Supply Side Shock Since The OPEC Crisis Of The 1970s

|
 |  Includes: AGOL, AGQ, DBS, DGL, DGLD, DGP, DGZ, DSLV, DZZ, GEUR, GGBP, GLD, GLDE, GLDI, GLL, GYEN, IAU, PHYS, SGOL, SIVR, SLV, SLVO, TBAR, UBG, UGL, UGLD, USLV, USV, ZSL
by: James P. Montes

Summary

World food shortages causing social unrest.

Ukraine crisis spreading.

Inflation will spread beyond food prices.

A future filled with inflation, creative government expropriations and changing borders in Eastern Europe.

The Ukraine was not a local, spontaneous, organic event, but part of a larger pattern of social unrest in Brazil, Argentina, Thailand, South Africa, and across the Arab world, which share a common thread: A rising cost of living for at least two years before all hell breaks out. When food costs rise dramatically, people ask, "Why is the wealth in my society being distributed to some other guy and not to me?" The question led to the overthrow of dictatorships in the Middle East and, in Ukraine, the answer was to join the EU. The Russians said, "No way." If Ukraine joined the EU, it would mean NATO right on Russia's border, which would be like a Cuban Missile Crisis for them.

Russia was far more interested in retaining Ukraine as a close ally. Ukraine is the world's fourth or fifth largest food producer, all the gas pipelines that supply Western Europe go through Ukraine, and Russia's only warm water port, Sevastapol, is in Ukraine.

The crisis over Ukraine is spreading as other pockets of ethnic Russians in Georgia, Lithuania and Latvia, as well as other ethnic groups, such as the Scots in Britain, the Catalonians in Spain, and the Venetians in Italy, decide that, since their governments are in such deep debt, they want greater local control over their economic futures.

What is causing the rise in food prices?

Most people believe that with so much demand for food from China and the emerging markets, that the world does not produce enough food to meet demand. In a world where banks are not lending, farmers are incredibly dependent on credit, especially in emerging markets, and if they can't borrow, then they can't buy feed, so they can't plant. This chain of events is causing the largest supply side shock since the OPEC crisis of the 1970s. Chinese food prices are up 17.3% in a year. US beef prices are at an all-time high. The size of the US cattle herd is at its lowest level since 1951 because the cost to raise cattle is virtually the same as the market price for beef. Inflation has eaten away any profit from the increase in price, so there is no incentive to raise more beef.

Inflation will spread beyond food prices. Even as the United States becomes more energy independent, US energy prices rose 16.5%, far above the official inflation rate. Natural gas is relatively cheap because there is no distribution network, but a network is now being built and, once completed, the price for natural gas will rise rapidly.

In global terms, certainly China, and increasingly Russia take the view that the US, UK and Japan are all choosing to write off their debt or default on their debt by going down a more inflationary path. Therefore, China and Russia want to acquire more gold. The Chinese foresee that if the West debases its currency enough, the Chinese will be left with the only viable, hard currency.

In pursuit of the acquisition of gold, Russia and China are already decreasing their purchase of US Treasuries. Belgium is now the largest buyer of US Treasuries. The Chinese and Russians do not want to buy any more US paper assets. They want to buy real things, infrastructure, property, gold, and agricultural assets.

Since governments lack the funds to fulfill the promises they've made to the public, expect various forms of expropriation to become more common. Inflation is expropriation…It takes money out of your pocket. Colorado's legalization of marijuana is a way to generate government revenue while lowering the cost of enforcing drug laws. Italy imposed a 30% withholding tax on all inbound wire transfers. Governments are also seeking scapegoats for the recent economic downturn. Governments are launching investigations into various exchanges, the LIBOR and other organizations to constrain the financial industry and to raise additional revenue through huge fines.

There are more innovative ways for governments to raise money, which are consistent with raising GDP, rather than inflation, which, hits the poor the hardest. With food prices rising, the poor are driven to eat cheaper food with empty calories, which can only harm their health. There is a coming division in society between those who own real property and stocks, which do well during inflation, and those who do not own such assets. Such a two-tier society isn't sustainable and creates the elements for social unrest.

Gold and Silver

The gold and silver markets have fulfilled multi-year downside objectives in terms of time and price - from a cyclical point of view - with their December 31, 2013 spike lows. This could indicate a more than a two year bear market completion from the August 2011 highs, projecting a cyclical high this year around the middle of August 2014. Intermediate weekly cycles come into play the middle to latter part May 2014.

Gold and Silver were expected to see an initial rally into late February of 2014. This turned the weekly trend to up, confirming our previous projections that a 1 to 3 month bottom was in place. After a spike low of 19.10 was made on Jan 30 2014 the gold and silver market rallied fulfilling upside projections of 22.10 for silver and 1392 for gold as previously documented.

However, the recent spike low of 18.95 and the subsequent rally to close above 1303 for gold and 19.69 for silver, turns the VC Weekly Price Momentum indicator up from neutral.

Let's take a look at the weekly technical landscape for gold and silver and see what trading or investing opportunities we can identify for next week.

Click to enlarge

The June gold futures contract closed at 1304. The market closing above the 9 MA (1292) is confirmation that the trend momentum is bullish. A close below the 9 MA would negate the weekly bullish short-term trend to neutral.

With the market closing above the The VC Weekly Price Momentum Indicator of 1286, it confirms that the price momentum is bullish. A close below the VC Weekly, it would negate the bullish signal to neutral.

Cover short on corrections at the 1280 - 1255 levels and go long on a weekly reversal stop. If long, use the 1255 level as a Stop Close Only and Good Till Cancelled order. Look to take some profits on longs, as we reach the 1316 - 1329 levels during the week.

Click to enlarge

The July Silver futures contract closed at 19.75. The market closing below the 9 day MA (20.37) is confirmation that the trend momentum is bearish. A close above the 9 MA would negate the weekly bearish short-term trend to neutral.

With the market closing above The VC Weekly Price Momentum Indicator of 19.54, it confirms that the price momentum is bullish. A close below the VC Weekly, it would negate the bullish signal to neutral.

Cover short on corrections at the 19.16 - 18.53 levels and go long on a weekly reversal stop. If long, use the 18.53 level as a Stop Close Only and Good Till Cancelled order. Look to take some profits on longs, as we reach the 20.14 - 20.52 levels during the week.

Click to enlarge

The information in the Market Commentaries was obtained from sources believed to be reliable, but we do not guarantee its accuracy. Neither the information nor any opinion expressed therein constitutes a solicitation of the purchase or sale of any futures or options contracts.

Trading derivatives financial instruments and precious metals involves significant risk of loss and is not suitable for everyone. Past performance is not necessarily indicative of future results.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AGOL, AGQ, DBS, DGL, DGLD, DGP, DGZ, DSLV, DZZ, GLD, GLDI, GLL, IAU, PHYS, SGOL, SIVR, SLV, SLVO, TBAR, UBG, UGL, UGLD, USLV, USV, ZSL over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.