Precious metals have taken a direct hit this past week as their prices collapsed. Silver dropped over 25% and gold lost over $200/oz. The following article outlines a cogent argument for watching the price of copper. If he is correct, we are about to experience a round of deflation which is the Federal Reserve’s greatest fear.
What does history tell us? As economies collapse, deflation comes first and is then followed by hyperinflation. Does the graphic above look familiar? Keep your gold close and your resolve closer.
People are freaking out that gold has fallen to $1,650, from its lofty highs above $1,800—they are freaking out something awful. “Gold has fallen 10%! The world is coming to an end!!!” I myself took a shellacking in gold—but copper is what has me worried.
Copper fell from $4.20 to $3.25—close to 25%—in about three weeks. Most of that tumble has happened in the last ten days, and what’s worrisome is that, as I write these words over the weekend, there is every indication that copper will continue its free fall come Monday.
From the numbers that I’m seeing—and from the historical fact that copper tends to fall roughly 40% from peak to trough during an American recession—there is every indication that copper could reach $2.67 in short order. And even bottom out below that—say at $2.20—before stabilizing around the $2.67 level.
But we’ll see. The price of copper is not the point of this discussion. The point of this discussion is what the price of copper means. What it means for monetary policy.
We all know the old saying: “Copper is the only commodity with a Ph.D. in economics”, or words to the effect. The ongoing price collapse of copper signals that the markets have collectively decided that there is going to be no resurgence of the global economies—at least not for the next 9 to 18 months. Up until now, the economic data that has been coming out over the last couple of weeks seemed to indicate that there’s going to be a double-dip—but in my mind, this fall in the price of copper confirms this notion that the general economy is going down.
And remember: Market sentiment can not only be a predictor of future economic performance, but its determinant. If today the markets feel that the economy is going to suck tomorrow, often that very sentiment is what makes the economy suck canal water.