Gold News

Inflation? Gold Prices Point to Chronic Slowdown

Gold prices vs. commodities deny the ISM's new-found inflation warning...
MANUFACTURING in the United States expanded again last month, writes Gary Tanashian in his Notes from the Rabbit Hole, as July's strong pace was maintained in August at 55%.
New orders increased at a healthy rate of nearly 5%, but right along with this, prices also increased by 5%.
This is the threat to the Goldilocks backdrop that has supported policy makers' ability to continue the inflation because there has been after all, little inflation by the measure most people look at, which is prices.
The balance of respondents to the Institute of Supply Management's August survey who reported higher rather than lower prices, however, rose to 8% from July's minus 2%. That was thanks to a sharp drop in the number of supply-chain managers seeing prices fall. 
And yet the Broad CCI commodity index has thus far had a failure to launch in the face of a strong economy and rising manufacturer input costs. The daily view shows a potential 'W' bottom at critical support (500).
Here is the bigger picture weekly view showing why 500 is critical support. A lower low would likely signal a return of acute economic contraction and a deflationary backdrop. If however CCI uses the daily 'W' bottom and breaks the red trend line, we may be talking about an inflationary phase in the markets. Stay tuned.
With the gold price outperforming commodities on the big picture and in secular fashion we should consider the question about whether the inflation will take this time.
Yes, the manufacturing economy is growing (as we have been expecting since January when NFTRH alerted that the semiconductor equipment industry was ramping an up cycle) but this does little to change the fact that it is inflationary policy making that has been responsible for the upturn.
The chart above, from the most recent NFTRH, clearly shows that we are in an era of chronic economic contraction (as the metal negatively correlated to the economy stair-steps higher vs. positively correlated broad commodities).
The upturn in gold prices vs. commodities at a 'higher low' is not good news for a continuing economic upturn. NFTRH has often stated that if this ratio makes a lower low then the analysis would be proven wrong (it happens) and that I have no personal agenda other than to do what big picture macro charts like the above tell me to do.
The chart above tells me that gold has just turned up vs. commodities (signifying an end-stage economic up cycle) even as the Federal Reserve appears to have spent the majority of its bullets fighting the contraction. That bullet expenditure comes in the form of rising yields as America's main creditors appear to be rebelling against (or capitalizing upon) policy designed to keep yields low by selling Treasury bonds. Hmmmm.
Markets tend to turn when things look rosiest and legions of trend followers are touting. We continue to hold open the prospect of a final strong rally in the stock market if the S&P 500 gets down to the mid-1500′s in the near term. But on a bigger picture, the gold vs. commodities ratio says another contraction is coming.
Bottom line? The failure of commodities to reflect price increases and cause any sort of inflationary concerns is actually a negative divergence to the policy makers' wishes, which by their own statements is to promote a somewhat higher level of inflation, at which point they would try to put the genie back in the bottle. Greenspan's genie went back in the bottle alight, in the form of 2008′s liquidation.
But here we have a failure to launch (inflation) and a Goldilocks phase that could be ending with rising T bond yields. It is interesting to say the least and several potential outcomes are in play. But one thing is clear, gold has thus far found a 'higher low' bottom vs. commodities and so the ongoing big picture economic contraction continues. Manage accordingly.

Gary Tanashian successfully owned and operated a progressive medical component manufacturing company for 21 years, through various economic cycles. This experience gave Gary an understanding of and appreciation for global macroeconomics as it relates to individual markets and sectors. Along the way, Gary developed an almost geek-like interest in technical analysis (TA), to add to a long-time interest in human psychology. Various unique macro market ratio indicators were also added to the mix, with the result being a financial market newsletter, Notes From the Rabbit Hole (NFTRH) that combines these attributes.

See the full archive of Gary Tanashian.

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

Follow Us

Facebook Youtube Twitter LinkedIn



Market Fundamentals