Gold has always been a major indicator of things to come. It forecasts inflation, deflation, growth, and recessions, to say nothing of geopolitical tensions. This last week as a whole was uneventful. But things looked a lot better by Friday than they did the previous Monday.
The amount of negative news at the start of the week affected all markets, especially the stock market, but by Thursday the forward looking data began to turn up. China's PMI came out higher than expected, cooling fears of a continued slowdown there. The Leading Economic Indicators moved higher in the US, quelling fears of a further downturn here. And home sales turned up in the latest report. The result: a higher stock market and higher commodity prices across the board.
Almost all the indicators I follow are trading at prices they have been at for weeks, or higher. Gold is trading around the 1300 level, right in the middle of its 1200-1400 range for the year. The CRB is trending up at 308. Copper is $3.17 -- well above 3 bucks and holding its upper range. Oil just broke higher to $104. And the Dollar Index is 80, about the same as it has been for months. The stock market, for all its claims of hitting new all-time highs, is actually only up .02% for the year.
The jury is still out on which direction we will eventually go in most markets -- there's still no trend. Bob Pisani of CNBC said this past week that he's been talking to traders on the floor of the NYSE, and almost everyone is complaining about this choppy market that is chopping up traders like never before. He went back 5 years, and this is the only year to date that there is hardly a move up or down -- just up AND down day after day after day. You can make money on a trend up and you can make money on a trend down, but you can only lose money in a market like we've seen recently if you’re a trader.
That’s what has happened with gold. What was a stellar run in gold in the first 2 months of the year, in which we ran up 200 dollars and which led to excellent profits in PM stocks, has turned into a choppy trading pattern with no trend. Gold has leveled off into a tight trading range and is waiting. But waiting for what?
I have expected gold to rise this year along with most other commodities and so far that forecast has been correct. I expect the move to last years, as long as it is inflation and growth that we face and not the reverse. My gold call was made in December of last year when gold was $1180 and most were predicting it would fall to a $1000 or less. The call was predicated on an economy that even after a steep fall in the first quarter would come back and move smartly higher the rest of the year. This I believe will lead to an increased demand for commodities and rising prices.
In this choppy market, keep in mind that the rewards can be huge going forward for resource stocks which are now selling at a fraction of their price versus three years ago. But as always let's not forget the other side of the coin: a renewed bear market in gold.
I am constantly reviewing data and my own theories and premises. If anything, I'm usually the first to question my own predictions and focus constantly on what can go differently than my expectations. As a trader I always have a plan ‘B’. This is especially true today as I'm starting to get concerned that we may not have a second half rebound as I've been expecting. Two new pieces of information worry me: First is the reemergence of new fears of deflation in Europe. Expectations are running 3 to 1 that deflation will take over soon and a deflationary spiral is imminent. Expectations have a way of turning into reality. And fears of a new financial crisis are rising as Central Banks jaw-bone but do nothing as economic growth turns down once again in several countries. Central Banks, it is feared, are falling further and further behind the curve.
The other concern is this:
Notice that the money supply direction is turning down -- not up as all the other years shown on the chart. This could be a foreboding sign of things to come.
So far, my thesis that inflation and growth would rise this year has been correct. In the US there is mounting evidence that GDP will snap back perhaps to a 4% rate in the 2nd quarter. And inflation rates are higher right now than they’ve been in years. Copper, oil, gas, shelter, and food are all up sharply from their lows, confirming increasing growth rates and demand for commodities. But it's the future that is worrying me -- the second half of the year. Money supply is moving the wrong way and inflationary expectations could be peaking right here.
In all the other years shown on the above chart, money supply slowly rose consistently as it should -- and still we saw inflation rates decline from 2-3% rates to .07% last year. Now we see money supply falling. This is potentially deflationary. It may work out that a falling rate of money growth is a good thing, occurring just when we need it if inflation continues to rise and could act to counter future inflation -- but that's hope, not evidence. If both inflation and growth fall from here over time, it will be exasperated by a falling money supply.
Meanwhile, growth has increased in Europe, but it is only running at about 1%. That's better than falling 1% as it had been, but it's a pretty thin buffer against recession. And the inflation rate in Europe has risen to .09%, but again, that's only up from .07%. There's only a short way back to deflation. So we’re still floating in limbo with no real momentum anywhere in the world.
As I've expressed to readers, I think we're getting closer to knowing exactly which direction we will move -- up with more growth and inflation or back to the recession/deflationary bias of the past. I suspect that will become clear this summer. Gold expresses this view eloquently: poised in the middle of its range, ready to move either way...