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The Storm Clouds are Gathering.
by Professor von Braun
October 20th, 2001
It is interesting to watch events unfold in economic wonderland these days. Once again the months of September and October have proved difficult for the stock market "bulls". Gold and silver both rallied after Sept 11, but have since given up their gains, which should not come as a surprise. Given the fragility associated with financial markets it is unlikely that Greenspan's rescue attempts would be defeated by a rising gold price. Central bankers have too much to lose, way too much in terms of perception and apparent strength. The game of trusting paper currencies which has been aided and abetted by falling commodity prices is likely to continue for some time yet.
What is of interest this past week are the movements in the CRB index. It came within a whisker of taking out the 1999 low. Will the ever so slight recovery on Friday continue from here? Well it's worth watching from now on in, for several reasons.
Currently there are some commodities, which are now priced at lows not seen for several years and they are also below the cost of production. Cotton is a good example, as is coffee; although Mr. Starbucks has yet to pass this on to his customers.
Should the CRB Index begin to move in a northerly direction, as it should be doing from a cyclical event point of view, then commodities may be the place to be focused. Paper assets will continue to come under pressure as well, more pressure than what appears at present.
During the wonder years of rising stock prices based on pure speculation, commodity production has suffered as a result of declining prices. The list is long and includes copper, base metals, gold, silver etc. Any increase in demand would see rising prices as increased production would be some years away. Restarting mines that have been mothballed is not simply an exercise of re-opening the gates. Finding new reserves is not something that has been a high priority either, so there will be a lag period.
Grain production also will be declining due to low prices, so will cotton and coffee. Now if this is the case and demand begins to increase then we will see movement in the CRB Index fairly quickly I suspect.
The trillion-dollar derivatives market must also be coming under pressure at present and this market, while relatively secretive, has the potential to derail Mr. Greenspan's green, you know the stuff he likes to print and print and print.
Now we all know, or should by now, that paper assets come and paper assets go. One only needs to look at a chart of the Nasdaq, or the Nikkei to see that this is so. It may even be plausible that Maria Bartiroma, the squawk in CNBC's Squawk Box program, has finally figured this out for herself, although I know it's a long shot.
The poor old American consumer, that's the one described as the locomotive that pulls the world's economy -- so we are told by the expert economists (or is that ecocomicalists) -- is starting to get a tad confused. While being exhorted to go out and buy something, anything, that is getting more difficult because most of them don't have any money left. Even the ones that do are having trouble figuring out what to buy simply because they already have what they need. The locomotive is running out of steam.
A saturation point of widgets, twidgets and gadgets may have been reached within the US. We at the Rocket School still believe that capital expenditure should have the potential to provide a return on investment and we have marveled at the seeming ability of the American consumer to completely ignore this concept. Why go into debt to purchase items that are for entertainment purposes and that become obsolete in a short period of time? Unfortunately the debt does not become obsolete.
Should the gold price decline from the current levels and we believe it will, then it has buy written all over it. Should the CRB index begin to rise from this point, which would begin to signal inflation, the opposite of deflation and the gold price still declines, then it has BUY NOW written all over it.
The Central Banks will not admit we have an inflationary environment until it is well under way and they may even be silly enough to use their remaining gold reserves to counter a rising CRB Index. After all, even some of the ecocomicalists as seen live (so they tell us) on CNBC continue to point to a low gold price as evidence of no inflation.
The only danger in this scenario of a low or declining gold price coupled with a rising CRB Index is a massive derivatives implosion (perhaps related to the paper gold market) somewhere within the financial universe, and to counter this a reverse-and-go-long strategy should be considered if gold breaks through $305.
The Prof can be contacted by email at firstname.lastname@example.org
Copyright by Professor von Braun. All Rights Reserved. Reprinted at USAGOLD by permission.
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