Best of the Week
Most Popular
1.The Greatest Stock Market Crash Of Your Life Is Just Ahead… – Warns Harry Dent - GoldCore
2.Budget 2016: Borrowing, Lifetime ISA, House Prices, Economy, Syria, Brexit and Stocks - Nadeem_Walayat
3.Gold Price Intermediate Top - Clive_Maund
4.Brussels Terror Attacks, Death of the European Union, BrExit Wake up Call - Nadeem_Walayat
5.Stock Market Maybe This Time is Different? - Tony_Caldaro
6.UK House Asking Prices Break Above £300k! Housing Market Paralysis - Nadeem_Walayat
7.A Big Reason Why Silver Price Is Set To Soar - Hubert_Moolman
8.The Financial Crisis Has Just Begun; Is The American Dream Is Over? - Chris_Vermeulen
9.Gold Stocks Spring Rally - Zeal_LLC
10.GLX, GLDX, Baby Gold Bull Market Stillborn? - Rambus_Chartology
Last 7 days
Gold Stocks Rise Too Far Too Fast? - 6th May 16
US Jobs Report punches SPX beneath the 50-day Moving Average - 6th May 16
Gold and Silver Companies with the Potential to Move the Needle - 6th May 16
Markets At Crossroads: Huge Moves Brewing In Stocks And Gold - 6th May 16
The Bitcoin Drama Continues: Craig Wright Disappears and Andresen Says He Was Bamboozled - 6th May 16
When Gold Confiscation Is a Personal Choice - 6th May 16
Stock Market Getting Ready for the Next Flash Crash - 6th May 16
arclays 100% Mortgage Pours Fuel on UK House Prices Bull Market - 5th May 16
Central Planners Versus Contrarian Logic - 5th May 16
Euro Desperation will achieve Self Destruction - MAP Wave Analysis - 5th May 16
Stocks Extended Their Short-Term Downtrend But Will They Continue Lower? - 5th May 16
Monetary Liquifaction, Gold And The Time Of The Vulture - 5th May 16
US 2016 Election Is a Global Risk - 5th May 16
A Few Facts About Gold That Nay-Sayers Conveniently Ignore - 5th May 16
Save the Environment and Your Retirement: Sell Tesla - 4th May 16
Silver Bullion Has Key New Player – China Replaces JP Morgan - 4th May 16
Gold Stock Picks Up Over 400%, What's Next ? - 4th May 16
U.S. Treasury Secretary Jack Lew: Puerto Rico Needs Urgent Action - 4th May 16
Technical Trading Mastery for Traders & Investors - 4th May 16
Derivatives Crisis Of Banks…Worldwide - 3rd May 16
Bank of North Dakota Soars Despite Oil Bust: A Blueprint for California? - 3rd May 16
Stock Market Technical Analysis - 3rd May 16
Central Banks Need a Higher Gold Price : Hello GATA - 3rd May 16
A Currency War Battle That Europe and Japan Can’t Afford To Lose - 3rd May 16
When the Truth is Found to be Lies, Confidence in Currency Dies - 2nd May 16
How Brexit Could Help All of Europe - 2nd May 16
US House Prices Outpacing Official Inflation Rate, Household Income - 2nd May 16
USD Still Declining... - 2nd May 16
Gold & Silver Rally Huge as Central Bankers & Analysts Flub - 2nd May 16
Stock Market Bounce Day - 2nd May 16
Stock Market Uncertainty Following Two-Month Long Rally - Will It Continue? - 2nd May 16
Stock Market Correction Underway "Upside Objective Reached" - 2nd May 16
USD, Yen and an ‘Inflation Trade’ Update - 2nd May 16
Gold Commitments of Traders and More - 1st May 16
The Magic of Gold Ratio Charts - 1st May 16
Consensus Forming: China Heading Back Into Financial Crisis - 30th Apr 16
The Next Technical Price Targets for Gold & Silver - 30th Apr 16
Stock Market Downtrend Should be Underway - 30th Apr 16
Gold And Silver – A Clarion Alarm Call For All Paper Assets - 30th Apr 16
US Economic Statistics LIES, LIES AND OMG, MORE LIES - 30th Apr 16
Stock Market Strong Elliott Wave Relationship is Developing - 29th Apr 16
Fed's Kaplan: Brexit to Factor in US June Interest Rate Decision - 29th Apr 16
Silver Miners Strong in Grim Q4 - 29th Apr 16
Is Silver a better bet than Gold in the Near Future? - 29th Apr 16
How to Use the CoT Report in Gold Investing? - 29th Apr 16
Sri Lanka is Intriguing: Areas to Consider for Value Investing - 29th Apr 16
Gold “Chart of The Decade” – Maths Suggest $10,000 Per Ounce Says Rickards - 29th Apr 16
Are We or Are We Not in a New Gold Bull Market? - 29th Apr 16
Silver: The “Five Year Plan” and the Great Leap Forward - 28th Apr 16
Michael Hudson: The Wall Street Economy Has Taken Over The Economy and Is Draining It! - 28th Apr 16
AUD/USD - Trend Reversal or Just a Bigger Pullback? - 28th Apr 16
A Gold Revaluation Could Transform Your Financial Status - Overnight - 28th Apr 16
Monetary Policies Misunderstood - 28th Apr 16
Gold Bullion vs Gold Miners - 28th Apr 16
OECD Suggests BrExit Would Cut Net Migration by 1.2 Million by 2030 - 28th Apr 16
MP Naz Shah Punished for Tweets Made During Israel's Genocide of Gaza Palestinian People - 28th Apr 16

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Catching a Falling Financial Knife

Commodities, Another Bubble that Breaks the World?

Commodities / Liquidity Bubble Mar 30, 2011 - 03:22 AM GMT

By: Clif_Droke

Commodities Best Financial Markets Analysis ArticleIn 1931 a financial writer named Garet Garrett wrote the now classic book, “A Bubble That Broke the World.” Garrett’s contention was that the Great Crash of 1929 was made possible by the Federal Reserve’s monetary policy. Eighty years later another Fed-induced crisis is forming which, if allowed to continue, threatens to again break the back of the U.S. economy.


Before we get to that let’s take a look at some current trends. The dominant theme for stocks and commodities has been the continuation of the Fed’s QE2 program. QE2, which is the Fed’s way of increasing liquidity, has been a tremendous success for both stock and commodity investors and there’s no question the stock market likes the Fed’s quantitative easing program.

During the credit crisis the old Wall Street bromide, “Don’t fight the Fed,” was called into question. But in light of the market’s strong performance since the Fed commenced its Treasury buying program there can be no doubting that when the interim trend for stock prices is up, fighting the Fed isn’t a winning strategy.

QE2 hasn’t been without its problems, however. Commodity prices have risen disproportionately to the relatively low level of domestic demand. Demand alone doesn’t account for the big run-up in the oil price, for instance, but there is ample reason for believing QE2 is behind the run-up in oil above $100/barrel. The oil price spike, should it continue, threatens to undo the Fed’s work toward economic recovery over the last three years.

When Fed Chairman Bernanke first began the quantitative easing program after the credit crisis, his nominal concern was the below-normal level of inflation (read deflation). But at this point he faces the very real prospect of continuously increasing food and fuel prices, which in turn could imperil the economic recovery.

Nearly everyone can see this problem developing…everyone, that is, but Bernanke. When questioned about the possibility that QE2 could spark another commodities bubble, the Fed chairman responded that the currently low level of domestic demand would likely prevent this from happening. He emphasized that bringing down the high unemployment rate was the Fed’s primary concern. The cost of food and fuel is getting higher, however, and has already led to a dramatic increase in many categories of goods and services.

In the latest edition of his Real Estate Timing Letter [www.RealEstateTiming.com], Robert Campbell asks, “If we double-dip into recession, what can the Fed do?” He suggests: “If soaring oil prices do cause the U.S. economy to double-dip back into recession, the Federal Reserve Board could find itself between a rock and a hard place as to what to do to resuscitate the economy and re-stimulate a recovery.”

Campbell pointed out that in nine out of the last nine recessions since WWII the Fed was able to pave the way for economic recovery by dramatically lowering the fed funds rate to encourage lending. This time, Campbell continues, the Fed no longer has that option since the fed funds rate is already at zero. “Houston,” he writes, “we have a problem – a big problem.”



Many observers are asking what the Fed could do if the high oil price threatens to take the economy back into recession. Atlanta Fed President Dennis Lockhart has suggested that one solution would be a new round of asset purchases, or QE3.

“Of course,” writes Campbell, “many market watchers feel that one of the reasons that oil prices are going up is because of the massive injections of liquidity the Fed has forced into the system by way of Treasury purchases. This process is known as quantitative easing – or QE1 and QE2 – because they were the first and second round of such purchases. Since then, economic growth has picked up, but it seems likely that a lot (or maybe most) of these massive doses of liquidity have flowed into stocks, oil and commodities – which would explain some of the huge price increases that have occurred in the last 12 months.”

Campbell concludes that “if the Fed were to respond to rising oil prices by engaging in even more quantitative easing, it could backfire and cause oil prices to go even higher – and thus worsening an economic downturn.”

The recent surge in the crude oil price has raised the specter of $4.00/gallon gasoline. When the national gas price average topped $4.00/gallon in the summer of 2008 it broke the back of a consumer already weakened by the housing price collapse. The economy and financial market situation is arguably in better shape than it was three years ago but does anyone really believe the consumer is in a strong enough shape to absorb another spike in fuel prices?



As we pointed out in a previous commentary, in the last 40 years, year-over-year rises in oil prices of 80% or more have always been followed by recession. No matter which way Mr. Bernanke turns, it seems he’s confronted with some rather ugly scenarios. And another potentially “world breaking” oil price bubble should be the chief of his worries.



Gold

Gold is about to test an important and long held theory, namely that the yellow metal is a “crisis hedge.” The front cover of two of the leading mainstream magazines last week bore adequate testimony to the crisis at hand: the Japanese earthquake and its aftermath. The front cover of Businessweek said it succinctly: “Crisis in Japan.” As if to further underscore the widespread feeling of anxiety over the latest global problems, the cover of the latest issue of Newsweek magazine says it even better:



When we think of crisis in connection with gold, most people think in terms of financial crisis, such as a stock market crash or banking crisis. But what about natural disasters that afflict major regions of important countries? Are such episodes bullish for the gold price? One of the most recent natural disasters to afflict a country of major import was Hurricane Katrina back in 2005. Katrina was one of the five deadliest hurricanes in U.S. history and it devastated New Orleans and parts of the Gulf Coast, inflicting over $90 billion in damage. The hurricane was a financial setback for the federal government and it was followed by a correction in the stock market. It proved to be a turning point for the gold price, however.

Although the gold price, like other asset categories, was briefly sold off when Katrina hit in late August of 2005, it quickly recovered and went on to new highs. Unlike the stock market, gold was a beneficiary of post-Katrina crisis investors who were seeking a safe haven. It should again benefit from the latest crisis.

Moving Averages

With the return of volatility in 2011, it’s important for traders to have a sound trading discipline. Classical trend line methods can be useful but they aren’t particularly suited for a fast-moving, dynamic market environment. This is especially true where turning points occur rapidly in a market that is subject to cyclical crosscurrents as has been true in the year to date. That’s where moving averages come in handy.

With a good moving average system a trader can be reasonably assured of catching most of the important moves in an actively traded stock or ETF while eliminating many of the whipsaws that attend trading choppy markets. In the book “Stock Trading with Moving Averages” we discuss some market-tested methods that have proven successful across most major stock sectors and industry groups, and is especially geared toward the gold and silver mining stocks and ETFs. Here’s what one reader had to say about the book: “...you were the one who supercharged my charting with your moving average book ‘Stock Trading with Moving Averages’ and your constant analysis of the double and triple moving average series.”

Moving averages offer another advantage over trend lines in that they can be tailored to closely fit the dominant short-term and interim market cycles. They’re also more compatible with a trading range-type market…if you use the right moving average system. These and other strategies and tactics are discussed in “Stock Trading with Moving Averages.” Order your copy today and receive as an added bonus my latest mini-book on how to best use moving averages for riding longer-term trades. Click here for ordering info:

http://www.clifdroke.com/books/book14.mgi

By Clif Droke
www.clifdroke.com

Clif Droke is the editor of the daily Gold & Silver Stock Report. Published daily since 2002, the report provides forecasts and analysis of the leading gold, silver, uranium and energy stocks from a short-term technical standpoint. He is also the author of numerous books, including 'How to Read Chart Patterns for Greater Profits.' For more information visit www.clifdroke.com

Clif Droke Archive

© 2005-2016 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife