“Woe to the land whose king is a child and whose leaders are already drunk in the morning. Happy the land whose king is a nobleman, and whose leaders work hard before they feast and drink, and then only to strengthen themselves for the tasks ahead”. (Eccl 10: 16-17)


"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat


Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput


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Monday, February 17, 2014

Personal Consumption Expenditure Index

I ran the data series from this index, which is supposedly one of the favorites that the Fed likes to monitor, to see if we could detect any sort of pattern. Here is the chart going back to the beginning of the data series near 1960. I took the numbers and converted them to an annual percentage change from the previous year and then plotted that on the chart. By the way, this particular data series excludes food and energy prices. When those are included, the changes are far more volatile.


Here is the same data set INCLUDING FOOD and ENERGY prices. Notice how much more dramatic the charts becomes. As a matter of fact, using this data set, one can see that the result of the credit crisis that erupted in 2008 actually led to the first DECREASE in price rises since the beginning of the data set!



If you are like me, I was immediately struck by the sharp jump that occurred in this series during the 1970's. Some of you will recall that was the era during which gold embarked on its previous massive bull market.

From its peak in that period, the index then moved lower, with a few, rather brief period of exceptions. This just so happened to coincide with a 20 year bear market in gold. Note then in 1999, the index moved higher and shifted into more of a uptrending pattern. I find it no coincidence that gold then embarked on its next massive bull market higher bottoming in price that very same year.

Here is a closer look at the same chart this time starting from 1999.Do you see what happened after 2008? The index fell sharply. Even though prices did increase then increased at a slower rate than anytime during the lifetime of the data series. Remember that was  the year that brought us the eruption of the credit crisis and the subsequent massive deflationary impact across not only the US economy, but the entire global economy.


Enter Quantitative Easing....Look at what this policy produced in the index beginning in 2009. Price appreciation began to increase at a faster clip once again. It is interesting to overlay the gold price chart over this index during this same time period.

More to the point, the index registered another very small annual percentage  increase in 2013. Prices in general were falling or flat. What was gold doing during this time frame? why it was falling... not unexpectedly at all based on what prices in general were doing.

While this index does not march in perfect lockstep with the price of gold, it is however rather revealing in that sharp moves higher in the chart tend to coincide with sharp moves higher in the price of gold while sharp decreases in the index tend to coincide with periods of lower or stagnant gold prices.

That is why I am keenly interested in what this index will be doing over the next few months/quarters. Are we entering a period during which upward price pressures will be the norm or will we see stagnant prices? Who can say at this point. Emerging market issues have the potential to put downward price pressure on commodity prices should they flare up further. Would that be a hiccup, a bump in the road, or would it be a more ominous occurrence that could produce a more widespread and enduring result? Those are questions that we are all going to get answers to in the months ahead.

In the meantime however, please understand that a fall in the gold price is far more complex than the simplistic notion that it is under attack by the powers that be. That concept has been a favorite face saver employed by too many in the gold community to justify their flagrant misreading of a market and their inability to come to terms with the simple fact that a period of falling prices (deflationary wave) does not favor an upward move in the price of gold.

Gold does not move in a vacuum. If anything, the above index provides us a bit more of a glimpse into the many factors that go into establishing a price for the yellow metal. Investor appetite for risk, currency factors, safe havens, overvalued/undervalued issues, geopolitical uncertainty, confidence, physical jewelry demand, etc... all contribute towards the price of gold.

Trying to get a handle on all of these various inputs is not an easy task. For one reason - who among us is wise enough to be able to process all of these various inputs and arrive at a price target that takes them all into account? Answer - no one. That is why I prefer to use the price charts and the action of the metal. More than anything else, it is a perfect synthesis of these various factors and how they are at work in creating money flows either INTO or OUT OF gold.












14 comments:

  1. Sound thoughts as usual Dan; Short weeks typically favor the bulls it seems, and this week looks to fit that pattern. Hopefully we can break back down to break-out price of $20.50 in silver for new entry; sparks

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  2. Dan
    Being and old fart I clearly remember those periods of runaway inflatiion price controls and the like. Certainly hurt the average guy.

    Thanks for considering food and energy. Although it makes the charts more volitile we all have to buy them. It's useful to be able to separate the affects but not including them is at best distorting and maybe disingenuous.

    I am uncertain what is cause and effect here but when combined with your recent treatise on money flaw and bank reserves it does give me concern.

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  3. Citibank's call for continued advance in PM's reported on Zero Hedge along with a plethora of outlandish moonshot price predictions on KWN means sharp, fast correction is right around the corner in gold and silver.

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    Replies
    1. Wonder is Marc Faber will be pulling his pony tail in disbelief again.

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    2. look for the overnight thieves to pounce. Hit them when everyone is sleeping. That's when I would dump a huge position. When there are no buyers...lmao

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    3. Mark,
      You have interesting point of view, my problem with you is that you are exactly like the ones who piss you off, on the other side.
      You are criticizing them for their permabull religion, but you show yourself only one side of the story.
      For Bitcoins, you were posting twice a day during the rallye and I asked you to tell us when you would sell them.
      Are you still in?
      Suddenly your posts about bitcoins disappeared.
      Wait a minute, is it because the price crached?
      Will they be back at the pace of twice a day as soon as it goes back up?
      If so, how different are you from the gold bugs and KWN you constantly criticize?
      No offense meant, simply I'm suprised to see you on such an edge against those guys, when you are using kind of the same philosophy in your posts.

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    4. Hubert; Nice trades of late on your part. As far as Mark goes, I think he is ok and just looking to be a burr under everybody's saddle. Bitcoin is a farce, just like the Dutch Tulip Bulb episode and the South Sea Island Scam; that is all from sparks

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  4. Big crater by Bitcoin, ah well who expected anything different. When you start to see it in local newspapers you know the end is near.

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  5. Dan, as you say there are many factors all across the macro spectrum that affect flows and nobody can track them all and how they interact with each other. maybe the Elliot wavers are right in that you don't have to, the charts tell you the results and factor in sentiment. idk?

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    1. northwind;

      while I do not subscribe to the Elliot wave theory as far as having any practical trading application, I do agree that the charts tell you what the sentiment is towards any market.

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  7. steve brasseyFebruary 18, 2014 at 7:53 AM

    Shark Krishna; Maybe I am wrong to be bullish the $, but here are some facts for you; to wit, Cable topped vs. the $ about 85 years ago, the Loonie in '07, Euro '08, and the Swissie and Aussie in '11. Now as far as wanting to own the paper of Venezuela, Argentina, Turkey, Iran, Thailand, S.Korea, and so on, well help yourself. And as far as the Iran-India-Russia-China oil deals and so forth in their currencies, well, the size is about a pimple on an elephant's ass, is all. It is the same old tired bullshit we hear from the stopped clocks over at KWN day in and day out. As for the big picture on China, I recommend you look back at Japan, circa '89 and then fast forward to the present. China imploding will make that episode look like child's play; that is all from Sparks
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    1. Go to a shop and look where things are produced. China may have problems but they have also got production and savings and investment. US has a printing press, debts, low savings, low investment. China has a rising middle class, US has a rising lower class. China equates to a newly employed the US a retiree living on savings and past glory.

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