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Katchum
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Albert Sung is the author of Correlation Economics, monitoring breaking economic news on a day to day basis. He started investing in 2008 because of the economic crisis and holds a masters degree in chemical engineering. Previously, he worked several years as a process engineer at Ashland, a... More
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  • Predicting GDP With The Trade Deficit Numbers

    We recently got the trade deficit numbers and it widened the last month. Peter Schiff notices that GDP is influenced by the trade surplus/deficit. He says that GDP will drop when the trade deficit widens. This is very useful because trade deficit numbers are monthly, while GDP numbers are quarterly measures. I will upload a little clip later on. But I think this theory is faulty, because there are other things to consider.

    So I looked up the definition of GDP:

    GDP (Y) is the sum of consumption (C), investment (I), government spending (G) and net exports (X - M).

    Y = C + I + G + (X − M)

    Here is a description of each GDP component:

    • C (consumption) is normally the largest GDP component in the economy, consisting of private (household final consumption expenditure) in the economy. These personal expenditures fall under one of the following categories: durable goods, non-durable goods, and services. Examples include food, rent, jewelry, gasoline, and medical expenses but does not include the purchase of new housing.
    • I (investment) includes, for instance, business investment in equipment, but does not include exchanges of existing assets. Examples include construction of a new mine, purchase of software, or purchase of machinery and equipment for a factory. Spending by households (not government) on new houses is also included in investment. In contrast to its colloquial meaning, "investment" in GDP does not mean purchases of financial products. Buying financial products is classed as 'saving', as opposed to investment. This avoids double-counting: if one buys shares in a company, and the company uses the money received to buy plant, equipment, etc., the amount will be counted toward GDP when the company spends the money on those things; to also count it when one gives it to the company would be to count two times an amount that only corresponds to one group of products. Buying bonds or stocks is a swapping of deeds, a transfer of claims on future production, not directly an expenditure on products.
    • G (government spending) is the sum of government expenditures on final goods and services. It includes salaries of public servants, purchases of weapons for the military and any investment expenditure by a government. It does not include any transfer payments, such as social security or unemployment benefits.
    • X (exports) represents gross exports. GDP captures the amount a country produces, including goods and services produced for other nations' consumption, therefore exports are added.
    • M (imports) represents gross imports. Imports are subtracted since imported goods will be included in the terms G, I, or C, and must be deducted to avoid counting foreignsupply as domestic.

    So this basically means that if we have a bigger trade deficit (or X-M becomes smaller), then the GDP will drop. Correct.

    The question is, by how much? Looks like the X-M part isn't that big (only 3%). But it does give an indication...

    So I don't expect the trade deficit to be an accurate measure to predict GDP. What is more important are the durable goods and we know about the durable goods orders metric. Let's look at the durable goods orders.

    (click to enlarge)

    Something amazing can be found between durable goods and the trade deficit.

    Whenever the trade deficit widens (red chart goes down), then the durable goods orders go up (blue chart goes up). This means that GDP could increase, if the trade deficit widens. Very weird right, but it's reality. Because Americans buy things via imports and thereby the trade deficit gets worse.

    (click to enlarge)

    Conclusion, if the trade deficit widens, GDP growth will probably accelerate and the stock market will go up (not down). So you can predict the GDP with the trade deficit.

    Jun 05 2:55 AM | Link | Comment!
  • Managed Money Short Positions: Predicting Short Squeezes In Gold And Silver

    What do we look at when we want to know if there will be a short squeeze to the upside in gold and silver?

    Well, we look at the managed money short positions. These are the hedge funds and commodity trading advisors (CTA's). If these people go short, then the price goes down and when the get long again, the price goes up.

    You can find all info on the COT report site.

    For example, the chart (May 28 2014) below indicates that there are a record amount of silver shorts at this moment. Each peak in the blue chart marks a bottom in silver price. So at least we will see some sort of price spike in the coming weeks in silver, when these hedge funds go long again from a record short positioning.

    Managed money short positions silver

    You can always find the latest numbers here. The latest managed money short number is 38453 shorts, which is a record high number of silver shorts, even higher than in the chart above. There is potential for a good short squeeze.

    (click to enlarge)

    Silver COT report

    As for gold, the last chart I could find is from March 2014. But you can always find the latest numbers here.

    Managed Money Short Positions Gold

    The latest number for the managed money gold shorts is 53577. If you compare that to the chart above, that's also a pretty high number. So again, there is a potential for a short squeeze a few weeks from now.

    (click to enlarge)

    Gold COT report

    So now you will have another report to look at. This will at least give you the tools necessary to predict sudden gold/silver price spikes.

    Tags: GLD, SLV
    May 31 12:51 PM | Link | 2 Comments
  • Indian Gold Premium Drops 50%

    As I wrote here exactly a week ago, I saw that Indian gold premiums would fall. And they did.

    Premiums have indeed dropped from $90/ounce to $30/ounce, that's more than a 50% drop.

    So with premiums of gold going back to this low level, gold jewelry will be cheaper for the people to buy and I expect pent-up demand to come back.

    As you can see on this chart, the premiums have come back to the 2012-2013 level of $30/ounce.

    Local gold price premiums

    This also means that the India gold import trade will go back to the 2012 levels. I expect that the official numbers will double. This will add at least another 30 tonnes/month of demand from India, which balances the recent decline in demand from China.

    (click to enlarge)

    India Gold Trade (In Gold We Trust: Koos Jansen)

    Tags: GLD
    May 31 5:58 AM | Link | 2 Comments
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