Having traded commodities for years I love to refer to them to get a few clues about where inflation and global growth are headed. As commodities are the raw materials required by all economies of the world, their prices reflect as pure a demand and supply curve as can be found anywhere. Obviously there is also a lot of speculation and at times manipulation of commodity prices but by and large the globally traded commodities of gold, copper and oil provide a very good insight as to inflation and global growth prospects.
I will start with a look at the price of gold. Gold is thought to offer a hedge against inflation and is used in as a wealth protector in times of fear of global armegedon. At present it appears that with fear of a global meltdown subsiding that most of the price is reflecting expectations of inflation.
The chart above shows clearly that gold has broken down giving a clear picture that the prospects of global inflation are muted. I know, I know, the price at the pump and the price at the grocery store and on your insurance premiums are going up quickly, but that is not what comprises the entire basket of products that you consume. So if inflation is muted that must mean that the input prices are coming down in price. Well one of the main contributors of inflation is oil and the following chart will show you one of the major reasons why gold is falling in value.
The crude oil chart, while not completely broken is on the verge of breaking down. This should translate into reduced prices at the pump and this will also, in time, feed through into other prices. The caveat with oil is that prices can spike at any moment due to unrest in the middle east or any one of the oil producing states. As there always seems to be a high probability of this happening prices can spiral higher at any time however what this does point to is the potential that demand does actually exceed supply and this could only be the result of weakening demand as the supply of oil is relatively stable. So let's look at global growth prospects and there is no better guage of this than my old friend doctor copper!
High grade copper is used in everything and its price directly reflects global demand and this demand is based on global growth. No economic growth and the price drops quickly, resume global economic growth and the price rises. As you can see it appears that the price of copper is coming under strain and this points to a global economic slowdown. This also confirms the above presumptions that point to lower inflation and hence lower prices in gold and oil.
Now these commodities are not necessarily linked together, in fact there is often a time when they are not moving in tandem, but looking at these charts shows that on the commodity front that the future points to lower inflation and anemic global growth and this is further confirmed by weakness in Europe, China and the United States. Until these commodities point to global growth it appears that the slow grind to economic health will continue for a long time to come.
So if global growth is anemic and inflation is coming down there is no reason that interest rates will rise any time soon and furthermore there is no reason that stock prices will continue their march north. There is a high probability under this scenario that stock prices bumble sideways for a long time or, if Europe cannot contain their problems, that they are met with a large downdraft.
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