Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
AI Mega-trend Tech Stocks Buying Levels Q2 2020 - 1st Jun 20
M2 Velocity Collapses – Could A Bottom In Capital Velocity Be Setting Up? - 1st Jun 20
The Inflation–Deflation Conundrum - 1st Jun 20
AMD 3900XT, 3800XT, 3600XT Refresh Means Zen 3 4000 AMD CPU's Delayed for 5nm Until 2021? - 1st Jun 20
Why Multi-Asset Brokers Like are the Future of Trading - 1st Jun 20
Will Fed‘s Cap On Interest Rates Trigger Gold’s Rally? - 30th May
Is Stock Market Setting Up for a Blow-Off Top? - 29th May 20
Strong Signs In The Mobile Gaming Market - 29th May 20
Last Clap for NHS and Carers, Sheffield UK - 29th May 20
The AI Mega-trend Stocks Investing - When to Sell? - 28th May 20
Trump vs. Biden: What’s at Stake for Precious Metals Investors? - 28th May 20
Stocks: What to Make of the Day-Trading Frenzy - 28th May 20
Why You’ll Never Get Another Stimulus Check - 28th May 20
Implications for Gold – 2007-9 Great Recession vs. 2020 Coronavirus Crisis - 28th May 20
Ray Dalio Suggests USA Is Entering A Period Of Economic Decline And New World Order - 28th May 20
Europe’s Coronavirus Pandemic Dilemma - 28th May 20
I Can't Pay My Payday Loans What Will Happen - 28th May 20
Predictive Modeling Suggests US Stock Markets 12% Over Valued - 27th May 20
Why Stocks Bear Market Rallies Are So Tricky - 27th May 20
Precious Metals Hit Resistance - 27th May 20
Crude Oil Cuts Get Another Saudi Boost as Oil Demand Begins to Show Signs of Life - 27th May 20
Where the Markets are heading after COVID-19? - 27th May 20
Silver Springboards Higher – What’s Next? - 26th May 20
Stock Market Key Resistance Breakout Is Where the Rubber Meets the Road - 26th May 20
5 Ways To Amp Up Your CFD Trading Today - 26th May 20
The Anatomy of a Gold Stock Bull Market - 26th May 20
Stock Market Critical Price Level Could Soon Prompt A Big Move - 25th May 20
Will Powell Decouple Gold from the Stock Market? - 25th May 20
How Muslims Celebrated EID in Lockdown Britain 2020 - UK - 25th May 20
Stock Market Topping Behavior - 24th May 20
Fed Action Accelerates Boom-Bust Cycle; Not A Virus Crisis - 23rd May 20
Gold Silver Miners and Stocks (after a quick drop) Ready to Explode - 23rd May 20
3 Ways to Prepare Financially for Retirement - 23rd May 20
4 Essential Car Trade-In Tips To Get The Best Value - 23rd May 20
Budgie Heaven at Bird Land - 23rd May 20
China’s ‘Two Sessions’ herald Rebound of Economy - 22nd May 20
Signs Of Long Term Devaluation US Real Estate - 22nd May 20
Reading the Tea Leaves of Gold’s Upcoming Move - 22nd May 20
Gold, Silver, Mining Stocks Teeter On The Brink Of A Breakout - 21st May 20
Another Bank Bailout Under Cover of a Virus - 21st May 20
Do No Credit Check Loans Online Instant Approval Options Actually Exist? - 21st May 20
An Eye-Opening Perspective: Emerging Markets and Epidemics - 21st May 20
US Housing Market Covid-19 Crisis - 21st May 20
The Coronavirus Just Hit the “Fast-Forward” Button on These Three Industries - 21st May 20
AMD Zen 3 Ryzen 9 4950x Intel Destroying 24 core 48 thread Processor? - 21st May 20
Dow Stock Market Trend Analysis and Forecast - 20th May 20
The Credit Markets Gave Their Nod to the S&P 500 Upswing - 20th May 20
Where to get proper HGH treatment in USA - 20th May 20
Silver Is Ensured A Prosperous 2020 Thanks To The Fed - 20th May 20
It’s Not Only Palladium That You Better Listen To - 20th May 20
DJIA Stock Market Technical Trend Analysis - 19th May 20
US Real Estate Showing Signs Of Covid19 Collateral Damage - 19th May 20
Gold Stocks Fundamental Indicators - 19th May 20
Why This Wave is Usually a Market Downturn's Most Wicked - 19th May 20
Gold Mining Stocks Flip from Losses to 5x Leveraged Gains! - 19th May 20
Silver Price Begins To Accelerate Higher Faster Than Gold - 19th May 20
Gold Will Soar Soon; World Now Faces 'Monetary Armageddon' - 19th May 20

Market Oracle FREE Newsletter


Inflation Deflation Chaotic Trend Towards Stagflation

Commodities / Stagflation May 14, 2008 - 02:11 PM GMT

By: Christopher_Laird


Best Financial Markets Analysis ArticleSeeing the gold market correct, and oil in a speculation mania, and other commodities with speculation, then combining weakening US consumer demand, one wonders what the heck is going on. The markets are in a chaotic battle between inflation and deflation forces.

The USD is rising, from a bottom around 70. It fell for years since 02. At this 70ish number on the USDX (US dollar index heavily Euro weighted) the USD rebounded. The EU is screaming the Euro is too strong. Germany is the only one who is not screaming. Even so, the EU has a much better trade balance situation (on the whole) than the US.

There are signs that the out of control US trade deficits are cooling. US exports are up significantly with the new cheap dollar. Imports are dropping a bit.

China, India, Japan are feeling some heat from a slowing US consumer…

But, we see inflation gathering steam in the EU, Asia and the Middle East especially, and the US. Energy and food prices are forcing those countries to start addressing inflation pressures. The EU holds interest rates steady due to inflation concerns. The strong Euro certainly has helped Europe to escape the 10% inflation besetting the Middle East and Asia. But the EU still has uncomfortable inflation, and the Germans won't tolerate inflation. 

But on the deflation side, a maxed out US consumer is shifting from a bedraggled housing market to using credit cards to cover expenses. The housing market shows little sign of improving. Morgan stated that the US recession is only beginning. EU housing markets are in trouble now.

When the entire world economy, that was predicated on ever more borrowing from mid 1990 on to now, turns to a tight credit market, you can be sure that many conflicting signals appear.

A very serious world grain shortage is spreading. This is causing serious food inflation, is driving world inflation, and the poorest 1 billion people in Asia who live on (Imagine this!) $2 a day or less and who were paying half or more of their income on rice or bread, now cannot afford to feed themselves. This fact has China, Egypt, India, much of Asia, and poorer South American countries in a quasi panic.

Rising diesel and fertilizer prices are forcing farmers to cut planted acres, cut / cull livestock herds, just when the world needs more, not less food. It is said that, unless the world has record grain harvests in 08, there will be real world famine in 09. So far, what we have seen is some scattered food riots that are scaring the hell out of nations with big poor populations…

There is a report that 25% of the world wheat crop is at serious risk of a new virulent wheat rust that chokes the wheat before it comes to head. (Mid East to Asia). The US has its own concerns over a wheat rust spreading through the Mid West. So, what are the chances of a record grain harvest in 08?

Just to give an idea of the concern about food, China just spent a $400 a ton premium on fertilizer that used to cost $170 a ton Jan 08. It was a huge order. Reason? They are afraid that if they don't have great harvests this year, tens of millions may starve in 09. It is a grim situation. Other poor countries in Africa, Asia, South America, are also very concerned about grain shortages.

Oil is at record prices (nominally). US economic activity is slowing because of that, not to mention the big drag the housing bubble is putting on things.

There is huge inflation in energy and foods, and other essentials, while in the non essentials there is price weakness. It's a combination of inflation and deflation. The biggest deflation is in the financial/housing markets being forced to deleverage. There is also some big credit contraction in the Western consumer sector.

In short, there is a conflicting set of signals, some very deflationary, but big inflation in essentials such as food and energy.

Gold is in the midst of a correction from its highs around $1020. It's now down $150 from that level at $870 ish. I would think gold would be near a bottom. At some point, the inflation in essentials such as food and energy should bring gold back up with it.

Some other markets, such as oil should be due for a correction, as there is likely a $30+ speculation premium. But, as speculation goes, it's hard to call a top. I would think that oil at $150 would be ripe for a nice correction. There is some significant new refining capacity coming online later this year. Refining bottlenecks are a key driver to higher gas and oil prices.

In all of this, a big speculative involvement in oil, grains, and commodities should be ripe for a fall. Nevertheless, there is so much money searching for a home and going into essentials such as food and energy commodities, since equity markets are stagnant at best, and in Asia, downright in crash territory.

Just a lot of mixed signals out there. It's not a surprise because the entire world economy is now shifting from an unprecedented Western credit bubble and consumer bubble to a new phase – something else than that, anyway. We can for sure at least say that the world economy after 1995 to 2007 has definitely entered a big phase change. It's chaotic too.

One thing I would say in this situation is that technical indicators are not as reliable. It's more important to track the food crisis, the oil bubble, the shift in the USD, and the political instability that will be caused by food riots in 09, than to worry as much about technical indicators that are more of a study of the past markets. When there are big shifts, one has to do more fundamental market analysis. That is our focus. IE very little technical analysis, and more searches for changing market trends.

A number of weeks ago, we predicted the USD had bottomed for subscribers. That has happened. It is possible, that after falling for 5 or 6 years after 2002, the USD is forming a base.

It will be important to see the Fed's stance on future inflation in the US to determine if that is the case. One thing that is of concern is rising world inflation and probably slowing economic growth.

We would expect that gold and precious metals will form a base well within the long term trend from Aug 06 to the present that extrapolates to around $800. That should be a rough base. At some point, inflation and stagflation should propel gold and precious metals higher. This does depend significantly on developments in the credit crisis, good or bad.

There is a caveat with oil. Oil has a lot of speculation, and if oil falls, gold may fall more with it. Even so, oil would settle, perhaps near $90 or $100 like it did the last time it corrected after hitting $120. The ever present risks of new negative credit market developments would be gold bullish. There is also a caveat that if financial markets sell off, gold would sell off as well during the fall. But gold has show resilience shortly afterward. 

It could be said that central banker's credit crisis battle is inflationary, and that is finding its way into speculation in essentials such as energy and food, and some general commodities.

I would expect gold to remain in its overall up channel, with a range from $750 roughly to $900, even if there was a bunch of oil correcting or world stock sell offs. If oil goes to $150 and or we do not see world stock sell offs, gold can re attain $1000 + this year.

A rising USD would take some of the pressure off rising commodity prices. In fact, it might just be the catalyst for a break in oil and other commodity speculation, and subsequent corrections.

Nevertheless, inflation worldwide is very much in force, and stagflation will ultimately be prevalent, not only in the US but elsewhere. Longer term, that is quite gold friendly.

In the mean time, we await gold to find a bottom. I personally am not worried about the gold and precious metal correction. I view it as a chance to buy some bullion coins. I know that metal stock fans have a tough time riding this volatility. It's just part of the game, if you like metal stocks. 

By Christopher Laird

Copyright © 2008 Christopher Laird

Chris Laird has been an Oracle systems engineer, database administrator, and math teacher. He has a BS in mathematics from UCLA and is a certified Oracle database administrator. He has been an avid follower of financial news since childhood. His father is Jere Laird, former business editor of KNX news AM 1070, Los Angeles (ret). He has grown up immersed in financial news. His Grandmother was Alice Widener, publisher of USA magazine in the 60's to 80's, a newsletter that covered many of the topics you find today at the preeminent gold sites. Chris is the publisher of the Prudent Squirrel newsletter, an economic and gold commentary.

Christopher Laird Archive

© 2005-2019 - 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

6 Critical Money Making Rules