The Hidden Inflation
Robert M. Williams
Back in 1980 the US experienced high inflation, close to 20% and with
interest rates in excess of 18%, before the Fed finally got things under
control. Companies had to raise prices and sales suffered as a result. In
today’s world we are experiencing inflation, but it’s a lot harder to see.
The government has changed the weighting of its inflationary indexes so the
true effects aren’t reported. We also have more subtle ways of hiding
inflation. Companies have learned not to raise prices since everyone can see
that. Instead they’ve learned to quietly cut back on content while
maintaining prices at previous levels.
I do my own shopping and I’ve noticed that the cereal boxes carry less
content, in terms of weight, although the box size often remain the same.
Then there are companies like Starbucks! In Latin America they carried a
certain brand of mineral water that costs them +/- US $1.10/bottle, and then
they sold to the public for US $2.50/bottle. I should add that it is a
quality product. Four months ago they switched to a much cheaper brand,
costing US $0.60/bottle, and yet they sell it at the same price. Then
we have beer, a popular drink in Latin America selling for around US
$2.70/bottle. Over the last two years the bottle size has been reduced from
640 ml to 600 ml, and now there’s a plan to reduce it to 580 ml. I suppose I
don’t have to tell you that the price has remained constant.
I could go on but I think you get the idea. Companies find it difficult to
raise prices, especially with Asian countries producing at excess capacity.
So they quietly go about reducing content. The next time you go to the
supermarket take a good look at the content you get for the price you pay.
Pay attention to it over time and you’ll be surprised to see it shrink.
They’ll be no notices or fan fair, just less content for the same price.
That’s inflation, and it will never show up in the statistics.
We currently live in a world where the US, Japan, China and Europe are all
printing currency at excessive rates and that is inflationary.
On the other hand the Asians are flooded with excess capacity and are
willing to export at cheaper and cheaper prices, even if it means a loss, in
order to keep people employed. The standard of living has gone up
considerably in Asia over the last decade and their leaders are afraid that
rising unemployment will lead to civil unrest. Better to export at a cheaper
price than lay people off! This of course is deflationary and
that’s where we find ourselves today, trapped between two huge conflicting
forces.
Demand in the US and Europe have been on the decline for two years and that
is evident in the preceding chart of the Reuters CRB Index. You can see the
series of lower highs and lower lows that have developed, but if you look
closely you can see that the 50-dma has crossed back up above the 200-dma
and the index has moved and closed above both. Can the CRB Index move up to
post a higher high? Now look at the Baltic Dry Index and we can see the same kind of deterioration over a long period of time. Then look at the far
right of chart and you can see two higher lows. If prices are going to
finally turn higher we’ll see the BDI move and close above the 50-dma as a
first step.
One of the best warning signs of a coming inflation is gold so I want to
take a fresh look and see if there are any new developments:
You can see that gold enjoyed a nice long run from its March 2009 low to the
September 2011 all-time high. Then came the correction, shallow by past
standards, and less than commodities like oil and copper. The correction
lasted eight months and now gold is undergoing a process of accumulation. The
difference between this accumulation and past accumulations is that this
is the one that will push the gold bull market into its third and most
profitable phase.
How close is gold to moving up and out of the accumulation stage? Take a
look at this:
The spot gold has been headed higher for two weeks after making a
significant higher low at the 1,630.00 support level. This move is taking us
toward the higher end of a “flag formation” that has
developed over the last three months. Once it breaks out of this formation
with consecutive closes above 1,705.00, it will be a strong buy signal.
Since gold is a long way from being overbought, it could easily run up to
the next level of good resistance at 1,746.20. Now look at the Point &
Figure chart below:
It has a bearish price target of 1,560.00 but a move and close above
1,710.00 would switch the signal from bearish to bullish, so we’re getting
the same message from both charts.
In conclusion gold is about to do something significant and the key is the
1,700.00 to 1,710.00 price range. It is probable that we’ll see some
sideways movement, maybe as much as a week, before we see the breakout. We
may even see a break and close above the resistance only to see price fall
back in the current range (1,674.50 to 1,700.00) for another week or so.
This of course is nothing more than market noise and will serve to frustrate
investors looking for fast profits, but that’s what gold does best. The gold
bull is an expert at getting investors to do the wrong thing at the wrong
time. For those of you who hold positions you should just sit tight right
now. If you’re looking to add on you do it with a break down toward
1,674.50 should it occur, or consecutive closes above 1,710.00.
Either way gold is going higher over the coming weeks and months, so if you
pay a few dollars more or less for an ounce of gold right here, it makes
little difference.
Robert M. Williams
St. Andrews Investments, LLC
Nevada, USA
(I very seldom write for public consumption, content to talk to myself
when I feel I have made some worthwhile observations. I do however feel
that we are at a critical stage, and since so little is known about
gold, some comment is necessary. Should you have any questions, you can
reach me at [email protected] and I will do my best to respond in a timely manner.)
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