The Media Has it Wrong Concerning Commodities

Monday, 22 Apr 2013 07:42 AM

By Sean Hyman

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Over this past week, I’ve heard all sorts of wrong thinking regarding commodities. So let’s take a look at what’s been talked about and why they’ve got it wrong on commodities.

The main thought out there lately is that “the world is slowing down so much economically, and therefore commodities are going to be in the tank for a long while as a result.”

Editor's Note: Trump Says U.S. Losing Economic Power To China, No Longer A Rich Country

They first point to the International Monetary Fund (IMF)’s readjustment on global growth. Now, some in the media hopped on the bandwagon and talked about how slow the global economy is becoming.

But what were the actual numbers? The IMF lowered its global growth projections from 3.5 percent global gross domestic product (GDP) growth to 3.3 percent. That’s right! A 0.2 percent difference!

It wasn’t 1 percent or 2 percent lower or even a half of a percent lower. No, it wasn’t even quite a quarter of 1 percent lower. Yet “the world is slowing down” they all say. That’s so minor that it’s not going to halt the rise of commodities over time.

The next fallacy is that China’s economy is slowing down. They point to the latest GDP growth rate of 7.7 percent growth, down from 7.9 percent growth. However, for starters, that’s still some serious economic growth. But secondly, China’s economy bottomed out so far at 7.4 percent growth and has been heading higher overall for the two latest quarters since then. GDP growth doesn’t go upward in a straight line, in China or anywhere else for that matter. So the 0.2 percent slowdown there on 7 percent-plus growth is nothing. So that’s an exaggeration by the media too.

Next, investors point to the slump in copper’s price as further confirmation. Hey, normally this would be a correct assessment. However, what’s different with copper right now that makes it inaccurate is the oversupply of copper due to China stockpiling record amounts of it.

Typically, the supplies of copper are fairly tight. Therefore, if demand backs off of the supply, then the price of copper goes down, and when the demand picks back up relative to the supply of copper, then copper rallies. Generally speaking, when the global economy is growing, the demand for copper grows, and when the global economy is slowing down, the demand for copper wanes.

However, right now, China has record supplies of copper stored in the London Metal Exchange’s warehouses. So we know this is an oversupply issue that is driving copper lower this time around and not a lack of global demand for copper being the issue.

Further proof that things are still OK economically is the Federal Reserve’s Beige Book, which summarizes data on the current economic conditions in each of the 12 Fed districts.

The report showed that “overall economic activity expanded at a moderate pace from late February to early April.” That’s a good thing, not a bad thing. Would I have rather heard them say something even better? Sure. But I’ll take a moderate pace of growth over no growth at all. Any growth is good. More would be better of course, but for now, we are “holding the line” economically just fine. So that’s not going to be bad news for commodities either.

But as you can see, from what we’ve discussed earlier, some reporters in the financial media just have it wrong right now.

Yes, there have been pullbacks in commodities recently, no doubt. However, it has not been caused by slowing growth. It’s been because of the temporary rise of the U.S. dollar.

The dollar spends more time dropping than rising. However, in any bear market, including the long-term one in the dollar, there are always rallies upward within any downtrend. We’re reaching the tail end of the dollar’s “bear market bounce” now. The buck could turn lower at any moment, or it could last 60 to 90 days further. But its rally days are limited.

The dollar has been in a long-term downtrend ever since the government created the Federal Reserve in 1913. But its downtrend has become even more pronounced ever since we came off of the gold standard in 1971. It’s been in a downtrend overall no matter who’s been in the White House, whether democrat or republican.

Yes, I’m a conservative, no doubt. But even I have to admit that conservatives haven’t halted the slide-off in the dollar.

The truth is the government wants to pay back future debt with cheaper dollars. They want to stoke some inflation because you can tax easily in an inflationary environment. But how do you tax in a deflationary environment? It’s tougher to do. But it’s not as hard to do when asset prices are rising.

Also, the higher inflation rises, the poorer the people get over time (unless you do something about it by investing to fend off inflation and dollar dilution). Why would they want the people to be poorer? Poor people are easier to control and have fewer choices than do richer, more well-off people.
 
Editor's Note: Trump Says U.S. Losing Economic Power To China, No Longer A Rich Country

So there are many reasons why the dollar’s long-term trend will remain downward even though we’ll see rallies that last months to a year and a half in the buck. But those still produce “lower highs” at the end of those, which keeps the overall downtrend intact.

In the end, the government will continue to inflate. You’ll see gasoline and food prices rise, not fall. Therefore, you should invest in commodity stocks, which benefit from the rise of inflation over time, and you should invest in stocks that will benefit from a lower dollar and higher foreign currencies over time.

That’s exactly what we do in the Ultimate Wealth Report. Find out more about what I do at www.ultimatewealthreport.com.

About the Author: Sean Hyman
Sean Hyman is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. He is also the editor of Ultimate Wealth Report. Discover more by Clicking Here Now.

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