Forget GoldâWhat Matters Is Copper
Guest contribution by Gonzalo Lira
People are freaking out that gold has fallen to $1,650, from its lofty highs above $1,800âthey are freaking out something awful. âGold has fallen 10%! The world is coming to an end!!!â I myself took a shellacking in goldâ
âbut copper is what has me worried.
Copper fell from $4.20 to $3.25âclose to 25%âin about three weeks. Most of that tumble has happened in the last ten days, and whatâs 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 Iâm seeingâand from the historical fact that copper tends to fall roughly 40% from peak to trough during an American recessionâthere is every indication that copper could reach $2.67 in short order. And even bottom out below thatâsay at $2.20âbefore stabilizing around the $2.67 level.
But weâll 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: âCopper is the only commodity with a Ph.D. in economicsâ, 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 economiesâat 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 thereâs going to be a double-dipâbut 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.
So if copper is falling like a mo-foâwhich both signals and convinces the market that the economy is gonna suckâwhat does this mean for monetary policy?
Prima facie, the fall in the price of copper is deflationary: Less demand means that the prices fallâmeaning the dollar acquires purchasing power.
What does it mean for monetary policy that copper has fallen so low?
It means that Bernanke will carry out more ânon-traditionalâ Federal Reserve stimulus.
Ben Bernanke is famous for being terrified of deflationâand to his particular mindset, this is a reasonable fear. More to the point, Bernankeâs deflation-phobia actually mattersâbecause after all, he is the Chairman of the Federal Reserve. He controls U.S. monetary policy.
Deflation is supposed to be bad because it shrinks an economy. (Personally, I am more afraid of inflation than deflation: The latter is self-correcting, while the former spirals out of control and into social chaos. But thatâs for some other post.)
According to the deflationary world view, falling prices oblige producers to cut back on productionâwhich means firing workers. These fired workersâhusbanding their resources during their unemploymentâspend less, further contracting demand, thus putting more downward pressure on prices, forcing more producers to cut back and fire even more workers, who thus spend lessâ
âyou get the picture: A âdeflationary death spiralâ, in the Deflationistasâ parlance.
This is Bernankeâs fearâand he will do anything to alleviate it. Notice: Itâs not that Bernanke will do anything to alleviate deflationâhe will do anything to alleviate his fear of deflation.
As copper prices continue to tumble, signaling further economic contraction, there is no question in my mind that Ben Bernanke and his Fools of the Fed will view this as evidence of looming dollar deflation.
They will do everything to stop this looming deflation. But since the âtraditionalâ Federal Reserve tools have been used upâthat is, the Fed has its rate at zero, and for all intents and purposes all of its liquidity windows openâBernanke will have no choice but to announce some new ânon-traditionalâ liquidity injection scheme shortly.
Thus I expect some Banana Republic money-printing scheme to be announced by the Bernankster before the end of the yearâperhaps as early as this coming October. The fall in the price of copperâmore than anything elseâis what Benny and his Fools will be looking at, to justify this new scheme.
And my bet is, this scheme they announce will be as bigâand as controversialâas QE-II.
I am giving my people at The Strategic Planning Group a detailed analysis of what has happened over the past week, and what we can expect to happen in the markets over the coming weeks. Youâll have to pay to play for that.
But insofar as my overall view of the situation is concerned, this is what I think:
Bernanke will drive a schoolbus over small children, in order to prevent his notion of deflation from coming true. This fall in the price of copper is much more relevant to his course of action as Fed Chairman than the fall in the price of gold (which was just a combination of options expiration coming up, and gold positions being sold to cover losses in other asset classes).
This dramatic fall in the price of copper signals that the markets do not believe reactivation is anywhere near eminentânot for at least 9 to 18 months.
To the traditional twin Federal Reserve mandates of price stability and full employment, Bernanke has added a third mission: That of âgrowing the economyââwhatever it takes, however unorthodox or reckless the measures.
Therefore, it is my estimation that very soon nowâend of this year at the latestâwe will have QE-infinityâand beyond!
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