Mark J. Lundeen
21 February 2012
The Department of Laborâ€™s Consumer Price Index would have us believe price inflation is â€ścontainedâ€ť; but many commodity prices have leaped out of a trading range theyâ€™ve been in from 1973 to 2006. Interestingly, since 1957 this is the second time such a threshold shift has occurred. Letâ€™s look at the chart for corn, which is typical of many commodities. From 1957 to 1973, the price of corn oscillated between price boundaries of $0.91 to $1.61 a bushel. But in August 1971, the US government severed the dollarâ€™s last link to the Bretton Woodsâ€™ $35 an ounce link. Eighteen months after the US government defaulted on its dollarâ€™s gold oblation to other global central banks, the old $1.61 resistance line became a new price support for the price of corn. I call such a jump in a commodityâ€™s trading range a price threshold shift, when old resistance price levels become a new support for the price of a commodity.
Of interest to us in 2012, basic commodities have once again seen an upward threshold shift about six years ago (2006-07), as is evident in the price of corn, wheat, soybeans, live-cattle, copper and silver.
I wish I had more samples, but in 1957 Barronâ€™s only listed * cash * prices for what today would seem strange commodities. Beef tallow and hides, flasks of mercury, and other items not seen in their current * futures * price table for commodities. Also, energy contracts didnâ€™t begin to trade until the early 1970s. No matter, the six charts above are significant commodity markets; markets which do have global impact on peoplesâ€™ daily cost of living. These six commodities all display the same pattern of significant shifts in prices after August 1971, when the US Government defaulted on their gold obligations for the second time in the 20th Century, and now again after 2006-07.
What happened in 2006-07? An explosion of credit injected into the US mortgage market. Obviously, some of the â€śliquidityâ€ť began leaking out of the â€śpolicy makerâ€™sâ€ť garbage bag and began seeping into basic commodity prices. Now that the ECB has joined hands with the Federal Reserve in expanding credit in 2012, in their forlorn hope of saving their precious banking system from their past multi-trillion-dollar blunders in high-finance, there is no limit to what a bushel of corn, or anything else can go for.
The potential for price increases in basic food and energy prices can be seen in the table below from an article I wrote last May. Currently, most of the global money in commodities is in financial contracts. Should funds begin to exit financial futures mega-markets, and enter the relatively tiny agricultural and energy contracts, the inflationary impact on the cost of living would be profound.
Note: these are just the nominal size of regulated markets trading in NY and Chicago. The notional valuation of the unregulated OTC derivate market dwarfs all the above markets by orders of magnitude. Is it possible for a massive fund shift from financial futures into food and energy futures? Iâ€™d say yes! The fear of such an event is THE driving factor in the â€śpolicy makersâ€ť need to continue to kick the can down the road every time a dead-line for Greek debt approaches. Remember, the reason for the existence of financial futures and other derivatives is to hedge risks in financial market investments, such as the risk of default on Greek sovereign debt. Should these financial derivatives catastrophically fail in the tiny Greek debt market, there is no rational hope they would perform should larger sovereign fixed income markets default, exposing these financial instruments for the frauds they are.
The guys on the inside know the score; thatâ€™s why the ECB just walked over every other class of Greek creditor and pushed their way to the head of the line with their insistence that the Greek government issue a new bond to the ECB that gives them head of the line privilege to plunder Greece when the bottom falls out. Itâ€™s notable that the current government of Greece is not only unelected by the Greek people, but headed by a former Greek central banker who was appointed by the ECB and other EU bureaucracies to manage the interests of Europeâ€™s â€śpolicy makersâ€ť in the current Greek crisis. This embarrassing grab would have been unnecessary had the ECB had any faith in Credit Default Swaps (CDS) that many big banks would have been happy to sell them by the hundreds of trillions of dollars (or euros in the ECBâ€™s case), CDS the ECB still claims to be viable financial instruments for others, but evidentially not for themselves.
Just remember we may live in uncertain times, but a bushel of corn hasnâ€™t changed since 1957. However, the unit-of-trade, the play thing of the â€śpolicy makersâ€ť, what people confused for money, and what these commodities are priced in â€“ money controlled by the worldâ€™s central banks now changes with every new press release by this or that central bank. In times like these, there is no better means of preserving your wealth than in gold and silver.
Mark J. Lundeen
21 February 2012
21 February 2012