Take a look at a very interesting chart:
This is the Commodity Research Bureau (CRB) index based on closing levels and plotted on a 2 point x 3 point and figure chart. As you would expect, this chart reached its bottom at the end of 2001, shortly before the $US index began its present bear market and about eight-nine months after the $US Gold price began to rise from the mid $US 250s. For two years, from late 2001 to late 2003, the index ran up strongly. It then moved sideways for a little more than a year, despite further $US weakness during that period.
You can see this "trading range" on the chart (the yellow box). It lasted for more than a year during which the CRB traded within a 30 point (or a little over 10%) range between 260 and 290. Here's what happened:
On March 11, the CRB index closed at 318.60 points. Remember, the CRB index was in that 30 point trading range for more than a year. Well, in the THREE WEEKS since February 18, the CRB index has climbed 28.6 points. In short, it has TAKEN OFF. In fact, in nominal terms (certainly not in REAL - adjusted for "inflation" - terms), the CRB is approaching its all time highs of late 1979 - early 1980. But, despite this BIG upmove since February 18, the CRB is by no means in "blow off". It has merely climbed from the bottom of a very well established up channel to a point about two-thirds of the way to the top of the channel.
Now here's an interesting comparison. The spot future Gold bull market high so far - on a closing basis - is $US 456.00 reached on December 3, 2004. Here are the levels reached by $US Gold, the CRB index, and the $US index on that date:
If the $US Gold price had "kept up" with the move on the $US index since December 3, the spot future Gold price would now be $US 458.50 (up 0.54% from $US 456). If the $US Gold price had "kept up" with the move on the CRB index since December 3, the spot future Gold price would now be $US 510.90 (up 12.03% from $US 456).
Here are the components of the CRB index as it is presently compiled (Source: Reuters CRB Futures Index):
Corn (C): Soybeans (S): Wheat (W): Cattle (Live) (LC): Hogs (Lean) (LH): Gold (GC): Silver (SI): Copper (HG): Cocoa (CC): Coffee (KC): Sugar #11 (SB): Cotton (CT): Orange Juice (JO): Platinum (PL): Crude Oil CL): Heating Oil (HO): Natural Gas (NG):
A fair number of these components, specifically the metals and the oil and its "derivatives" are internationally traded in US Dollars. When one compares the big rise in the CRB over the past three weeks with the MUCH smaller fall of the $US index, it shows that there is a great deal of anticipation of a lower $US to come. And since pretty well all of these commodities are rising (the precious metals being the anomaly here) much faster than the $US is falling, the message is simply reinforced.
Now, if you haven't already done so, please click on the "Reuters CRB Futures Index" link above - it will open in a separate window. Scroll down to the bottom of the page and you will see three headings, labelled Figure 5, 6, and 7. The charts linked here show the correlation between movements in the CRB index and movements in both the US CPI (doctored as it is) and, far more important, the correlation between movements in the CRB and Treasury bond yields. Here is what is said regarding this - "Besides the strong positive correlation, the CRB Futures Index has often been a leading indicator of interest rate yields."
Remember, the CRB index has only taken off in the last three weeks after having been "range bound" for well over a year. While we have certainly seen some renewed strength in the $US Gold price over those same three weeks, and renewed weakness in the $US index and the prices of longer-term Treasury debt over that same period, these movements are as yet lagging WAY behind the comparative upside explosion on the CRB.
In human action in general and in financial markets in particular, there is no such thing as infallible "cause and effect" relationships. There is no action which always produces an equal and opposite reaction. This is always the case to some extent, but the "shear" between "action and reaction" reaches its greatest extent in times of financial and economic "denial". These are times when the majority of people persist in a course of action no matter how much evidence piles up that such a course of action (which was very profitable in the past) is now becoming more dangerous by the day.
The level of such economic "denial" today has seldom been equalled. No matter how much evidence of a future of higher prices and interest rates proliferates, borrowing continues to increase. This is, unfortunately, especially true in the US. A comparison will make the situation clearer. The Australian Reserve Bank recently raised local interest rates by 0.25% to 5.75%, the first such rate rise in over a year. At the same time, it was announced that the Aussie trade deficit had now blown out to 6.5% of GDP. The result was the biggest dive in consumer confidence in the history of that measure. On the latest measure, Aussie consumer confidence dived more than 16%. In the US, the Fed has been raising interest rates steadily since last June. On March 11, the January trade deficit was announced. It was the second biggest ever at $US 58.3 Billion. Yet the latest measure of US consumer confidence showed that it is UP.
This does not mean that Americans are "dumber" than Aussies. It means that most Aussies are aware that they live in a comparatively small country which is subject to the swoops and dives of the international financial system while most Americans are firmly convinced that they are immune. They have good reason to think this. The US HAS been (comparatively) immune for decades.
The latest and in may ways the starkest evidence that the US is not going to remain "immune" much longer is this sudden explosion on the CRB index. The fact that this explosion in the price of raw resources is going to make itself felt throughout the entire price structure of the US economy is obvious. The (upward) pressure this will put on interest rates is equally obvious, as is the downward pressure it will extert on the US Dollar.
The other thing that is obvious is that these pressures have not YET translated into facts. Yes, the $US Gold price is rising, but much slower than the CRB is rising. Yes, US Treasury yields are rising and the US Dollar is falling, but as yet out of all proportion to the writing on the wall scribed by the explosion on the CRB index. Asians are still recycling their trade surplus Dollars back to the US. The Fed is still adding "bank reserves". The huge bond market funds are still complacent to the "nth" degree over the future of US interest rates - and the Dollar.
The upside explosion on the CRB index is telling anyone prepared to listen that price pressures in the US have increased dramatically. With the $US Dollar bear market about to enter its fourth year, it is warning of the approach of a fall to levels below the 80.00 floor which has supported the $US index ever since the start of the fiat currency era in the early 1970s. Once that happens, the talk of reserve "diversification" recently indulged in by South Korea and JAPAN will become more than mere talk, with potentially horrendous implications for US prices AND US interest rates.
The last time that the CRB was (nominally) this high, the whole world, including Americans, were fleeing the US Dollar. US market interest rates were 20% or higher and consumer prices were soaring upwards. Gold's course was parabolic on its way to its $US 850 all time highs of January 1980. What about Gold now? Well, the most telling piece of evidence of the likely course of future events is the simple fact that with the CRB index at or very near its nominal all time highs, $US Gold has regained less than one-third of the distance to its $US 850 highs from its ($US 255) bear market lows of 2001. As has been the case ever since the bull market began, Gold still has a LOT of catching up to do.