"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


Wednesday, May 14, 2014

PPI numbers send Precious Metals Higher

The Producer Price Index, PPI, which measures prices at the wholesale level, came in sharply higher than expectations this morning, and sent both gold, and especially silver, strongly higher.

The April reading rose 0.6% for the month, well above the 0.2% increase that the market had baked into the cake. That was the sharpest rise since September 2012. When the usually volatile food and energy component was stripped out leaving the core measurement, the number rose 0.5%. The market expectation for the core reading was a 0.2% increase. The number caught the market by surprise and forced a good-sized round of short covering in the PM complex.

The Federal Reserve is no doubt welcoming this PPI number ( the governors are probably doing cartwheels in the hallway)  as they have been scared to death of deflation. Their goal is to produce an annual inflation reading of 2%.

As mentioned yesterday, silver MUST have inflation to rally and rally it did, although I am noticing that once again it has been stymied at the $20 level.

One would have thought that the bond market would have fallen on the news, meaning interest rates on the long end would have risen but oddly enough, they fell lower. I am still trying to make sense out of that. Same goes for the US Dollar which could have been expected to move higher alongside higher US interest rates. That both moved lower has me scratching my head right now and wondering what is the thinking behind this.

If the market was convinced that the uptick in price pressures is the development of a new trend, then that would lend credence to the view that the Fed would raise interest rates sooner rather than later. That would support the US Dollar, especially against the Euro where the discussion over there centers around lower rates. The long bond however is now up over a full point as I type these comments early in the session. Obviously the bond market is not the least bit concerned about inflation pressures. So what in the world is going on? Gold and silver are thinking "inflation" and bonds are thinking ????? - Deflation! Why else would they be moving higher today and sending rates lower on the long end?

The bond vigilantes must be punch drunk.

This is going to be very interesting to monitor to see whether or not it is the beginning of a trend or another one of those "one off's". Also, we will want to see if the feds show any sort of change in the CPI, which measures prices at the retail level to see if producers are passing the price rises along to end users or are absorbing those.

One thing that has me a bit skeptical that we are witnessing a huge shift towards an inflationary bias right now is the forward structure in the grains and beans. Grain prices, if we get a good growing season ( and this is of course always a question), are showing ample supplies for later this year which will mean lower costs. Also pork production, along with beef production, is expected to increase late this year and into next spring, although it will not be burdensome. China's slowing growth is also a negative factor for commodity prices in general so all of this needs to be considered. That being said, I am looking at this data with an open mind and watching closely. Again, this big bond rally today has me really skeptical as the bonds are usually right. We'll see.

Stocks certainly did not like the news one bit. Keep in mind that one of the big drivers behind the consistent rise in equities has been the lack of inflation. An ultra low interest rate environment has thus far driven money flows into stocks. If, and this is a big, big "IF", we do see a shift towards an inflationary bias in these PPI's and CPI's, we might finally see a bit more selling pick up in equities.

I will get some more up later in the session. Let's see how things close today.


  1. Dan, based on the charts, it appears gold was trading near 1308 and silver near 20 well before the PPI was announced. Other factors such as news indicating Russia, China and Iran are very shortly planning to bypass the Petro Dollar and use Rubles or Yuan to settle oil and gas trade as well as news that the LBMA no longer setting a price fix for silver as of August 14, 2014 may have something to do with the higher prices this morning prior to the release of the PPI

    1. Yeah, something feels jumpy. Maybe Putin's about to pull his shirt off.

    2. here's one of the articles from reuters

      LONDON, UNITED KINGDOM--(Marketwired - May 14, 2014) - The London Silver Market Fixing Limited (the 'Company') announces that it will cease to administer the London Silver Fixing with effect from close of business on 14 August 2014. Until then, Deutsche Bank AG, HSBC Bank USA N.A. and The Bank of Nova Scotia will remain members of the Company and the Company will administer the London Silver Fixing and continue to liaise with the FCA and other stakeholders.

    3. Max;

      Thanks for the link. that is interesting...


      It is probably all those goals that Putin made playing hockey the other day. He is a bit fired up right now and considering the NHL after his term is up over there.

  2. Meanwhile jim hired his son in law. I can only hope he pays as much as he pays the corporate secretary (220.000 dollar) or the cfo (550.000). After all you gotta take care of family and what are sheepholders good for if not to keep family warm. Well done jim!

  3. Long bonds break 137. If 30 year bonds are rising on breakout, regardless of any bearish data. The trend will continue.

    Bottom line - lack of new supply with shrinking budget deficit, and high stock prices. Fed even with taper is buying a big chunk of new issuance. I am still looking for 138-140. Poor auction last week was just a blip.

    On the flipside, gold rises as dollar rises. What's up with that? I just hold a hedge position.

    1. shrinking deficit? not according the the GAO!!!

      Despite the Obama administration touting a budget deficit of “only” $680 billion in 2013, the GAO’s more accurate accounting shows a total government cost of $3.8 trillion on total revenue of $2.8 trillion.

      In other words– the administration wasn’t exactly honest with the American people– the deficit was more like $1 trillion, not $680 billion. But it gets worse.

      The GAO added up ALL the US government’s assets in 2013. Aircraft carriers. The highway system. Land. Cash and financial assets. The total is $2.97 trillion.

      The liabilities, on the other hand, total $19.88 trillion. This includes the official public debt, plus all sorts of IOUs and loan guarantees.


    2. Do you think there is anything this administration is telling the truth about? I don't. I bet my last dollar Lew is hiding more than we will ever know. It is all political lies and all about the end of the PETRO DOLLAR.


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