A Melman Minute
| By | Leonard Melman |
|---|
Every so often, we reach a point where conventional analysis does not appear to be working well. At those times, perhaps it is necessary to 'look outside the box'. This may be one of those times.
WHAT IS GOING ON WITH COPPER???
For example, conventional analysis would tell us that the world's collective economies are improving, consumer demand is gathering strength and, therefore, it would appear reasonable to suggest that demand for commodities used in the manufacture of consumer items is on the rise - and prices should most likely be moving in the same direction.
If that is so, how can we explain the dramatic LOSSES which copper has encountered in the past few trading days?
Not only has copper lost a full eight percent of its value in just a few trading sessions, but, in our opinion, it has also given off several profoundly negative technical signals in the process. First, it has fallen below important multi-year chart support in the $3.00 area. Second, that support area also constituted the boundary of an enormous, spread "descending-right-angle-triangle" chart formation and these recent declines have resulted in the chart breaking to the downside. In our view, the declines have also been sufficiently large to cause several moving averages to roll over toward the downside at the same time.
For that many important signals to take place at one and the same time suggests to the technician that something out of the ordinary - and negative - might be in the near-term offing.
AND HOW ABOUT GOLD???
Conventional analysis should suggest that copper and gold price movements should at least be somewhat similar in nature. After all, if copper is rising sharply, that would suggest strong upward pressure on inflationary expectations, a force which has historically benefited past golden bull markets.
However, at one and the same time, we have the opposite situation with copper plunging and gold continue to move higher, once again reaching a new 2014 high this morning just under $1,370 - or fully $190 higher than the bottom of late December, 2013.
Looking outside the box, so to speak, we might suggest that copper is falling because industry participants are seeing demand dry up, at least relative to new supply and demand could be drying up because the world's economies are hardly performing as advertised by the political establishments. If that was the true case, it might also explain the continued advancement of gold and silver this year as central banks and their governments were being forced into policies reflecting greater and greater stimulation.
With that in mind, here is another point of view.
ENTER MR. SHILLING INTO THE DEBATE - AND MORGAN STANLEY
During the many years when I have been acquiring economic information, both academic and 'out there', one of the gentlemen who offered commentaries which seemed a bit above the average in terms of perspicacity and logic was Gary Shilling, President of A. Gary Shilling and Company, who has just published a commentary this morning through the Bloomberg News organization.
According to Shilling, a renewed bout of recession is, "...long overdue by historical standards." He then offers six suggested reasons why an event of that nature might occur in the near time frame:
The crisis between the Ukraine and Russia could ultimately destabilize the transfer of vital natural gas supplies from Russia to the rest of Europe.
A possible blow-up in the Middle East could jeopardize the world's petroleum markets.
Several emerging markets are hitting difficulties at one and the same time with the somewhat lengthy list including nations such as the Ukraine, Turkey, South Africa, India, Argentina, Venezuela, Thailand, etc.
China's giant economy may indeed be slowing down.
Consumers appear to have entered a period of retrenchment as levels of personal debt continue to reach new historic highs.
From our point of view, if Shilling is correct and the odds of a new recession are growing, that could easily foretell a period of rising government expenditures, declining government taxation revenues, increasing government deficits, increasing government debt and rapidly rising rates of artificial, fiat currency creation by central banks - all of which lie at the heart of our ultimate pro-precious metals arguments.
By one of those interesting coincidences, Morgan Stanley just issued an economic report of their own in which they call for a much less robust economic outlook going forward than has been previously suggested - particularly by the Fed. They suggest that at best the outlook is for growth in the area of a modest 2% and blame declines in productivity and the size of the labour force as reasons.
After providing detailed information regarding a general turn toward lower worker participation rates and lower productivity per hour rates, the report contained what for us what a real eye-catching chart that identified a cluster of data items which normally congregate just prior to critical economic downturns and those appear to be in accumulation in this time frame. According to the chart, we saw such clusters in 1989-91; 1999-2001; 2006-08 and in the present period.
When that last item is compared to the writings of Gary Shilling, we must indeed be open to the possibility of a major economic downturn in the near to intermediate future.
From our point of view, that would open the door to massive interventions by central banks, thereby leading to the possible precious metals bullish influences noted above.
As of 9:00 AM PDT, financial markets in Canada and the USA have advanced somewhat from earlier selling and now stand near unchanged for the Dow Industrials and +15 for Canada's TSX Index. Gold continues to trade sharply higher and now stands near $1,367, ahead by over $17 while silver has gained almost 30 cents to about $21.20 per ounce. Base metals are little changed on balance while mining share indexes have gained more than one percent so far today.
In other markets, the US Dollar Index continues its recent declines, off by 11 basis points to 79.63, its lowest reading in several weeks. Crude Oil is also selling sharply, down by $2.44 per barrel to $97.59 and the TYX Index of rates on US Treasury 30-year bonds is down by 30 basis points to 3.679%.
All quotes US$ unless otherwise noted.
Next "Melman Minute" scheduled for Friday, March 14, 2014