Oil prices continue to hover around $70 a barrel, and gold is in the mid-$900 range. Meanwhile the CRB Continuous Commodity Price Index has surged to a level 30% above its March low.

Finally, copper, supposedly a barometer of the global economy, went above $6,000 per metric ton – up more than 96% this year.

And while prices for most commodities are still well below last year’s peaks, the price spike is more dangerous than it looks.

Normally, commodities prices zoom at the top of a global inflationary boom, as in 1973, 1980, or last summer. This time, the surge is happening at the bottom of a recession. If it continues, the commodities price resurgence could cut off global recovery before it really gets going.

Commodities prices usually take off at the top of a normal business cycle, as inflation is accelerating. The price rise then causes commodity consumers to feel poorer. This reduces demand and brings on a recession. Then, new production capacity comes on stream after demand has fallen back, causing prices to remain depressed for several years.

That’s what happened in 1973, with the first Organization of Petroleum Exporting Countries (OPEC) oil price rise, and again in 1980, with the second. After 1980, we didn’t see a real commodities price surge until the middle 2000s. That’s because the tech revolution caused consumer demand to move to things like computer chips that used fewer raw materials than traditional products.

Last summer, we had a similar price peak. Given the depth of the current recession, you’d expect commodities prices to stay low for several years, as new production capacity comes on stream. But that hasn’t happened. Instead, prices have rebounded sharply.

There are three possible reasons for this year’s surge.

First, it could be the result of very low interest rates and loose monetary policy. In that case, it will soon lead to a rise in general inflation.

It could also be due to the worldwide fiscal stimulus – in the United States, China, the United Kingdom, India and most other economies. Much of the stimulus - particularly in China – consists of infrastructure spending. Infrastructure development requires lots of steel, copper, cement and other commodities. If that’s the case, the resulting budget deficits are likely to cause bond market problems. That would restrict the supply of funding for capital investment and other private sector needs.

Finally, the surge in commodities prices could be due to continued rapid growth in India and China. The 2.4 billion citizens of those countries, as they get richer, are demanding more goods that require a lot of commodities to produce, like automobiles.

Thus, when India and China grow faster than the rich West, we can expect commodities demand to surge more than global gross domestic product (GDP). If this is the cause, rapid commodities demand will lead to a rise in general inflation and spot commodities prices that will accompany shortages and price spikes. That would have a deflationary effect on output.

We saw this effect in 2008’s third quarter, when real U.S. GDP dropped 2.7%. That drop must have been the effect of $147 oil in July, since the financial crisis did not hit home until the very end of that quarter.

It’s impossible to tell which of these three is really causing the current commodities price surge. We can, however, be sure that it will choke off global recovery if it carries on much longer.

That’s a miserable possibility, especially if it means we also get inflation and higher interest rates. However, as investors we can make some money from the commodities surge.

Here are some ideas:

Powershares DB Base Metals Fund (NYSE: DBB): This exchange-traded fund (ETF) tracks the Deutsche Bank AG (DB) base metals index, allowing you to invest directly in the price movements of non-precious metals. With a market capitalization of $308 million, it is reasonably liquid. Plus, a lot of money has been flowing into it recently.

Vale S.A. (NYSE ADR:VALE): Vale is the world’s largest iron ore producer and a key supplier to China’s exuberant infrastructure growth. Historical P/E of less than 10; will benefit hugely from price run-ups in steel.

iShares Silver Trust (NYSE: SLV): This ETF Invests directly in silver bullion, which has been left behind somewhat in its relationship to gold’s price rise and can be expected to move up as gold does, possibly by a much greater percentage.

Market vectors Gold Miners (NYSE: GDX): Gold miners benefit disproportionately from a rise in the gold price because their production costs are fixed. They are thus a more leveraged way to play it than the metal itself, particularly as surging speculative demand can increase mining companies’ price-to-earnings (P/E) ratios.

Four Ways to Profit From Resurgent Commodities Prices

It absolutely amazes me how sanguine the Fed, Treasury and Administration are about the prospects for subdued inflation. What they and many economists like to point to as the source of their optimism is the high rate of unemployment, which is currently 9.4%.  But the truth is that inflation actually causes higher rates of unemployment, while it is false to believe that inflation can be prevented by a labor slack in the economy.

To prove his point, Mr. Ponto dives into the unemployment and CPI numbers from 1971, when Nixon closed the gold window, until today.  The conclusion he comes to is grim.  He believes high unemployment speeds up the pace of inflation as there are fewer Joes in the workplace to create goods and services to soak up the excess money supply.  He follows that the destruction of our collective purchasing power, eventually leads to the collapse of the middle class.

Those who are relying on a high rate of unemployment to keep inflation in check will be severely disappointed. There just isn’t any historical basis for that belief in this country or any other. In fact, there are some extreme examples today of countries that experience high rates of unemployment along with runaway inflation.

But you can’t have inflation when money isn’t moving. Something most people don’t realize is that inflation isn’t just the wanton printing of money (although it’s a big part).

In fact, you could print 0 dollars and still have inflation.

That’s because for inflation to occur, the velocity of money – or how fast it changes hands – must also increase.

Today, the Feds are printing trillions in an effort to speed up the velocity of cash. The hope is that ultra-low interest rates will lure people to start spending their money. But so far, banks aren’t lending. And so the velocity of money continues to slow down. Making problems even worse, is the fact that people are already too indebted. So most people are using any spare cash they receive to pay off their debts, not to buy anything new.

And even those that do have money to spare, are now saving it, evidenced by the fact that the U.S. savings rate is north of 6%.

Until the average person on the street begins spending money again, inflation simply won’t be a massive concern.

• Inflation fears were quelled at least temporarily as U.S. consumer prices were raised only slightly last month, and actually experienced their biggest drop in almost 60 years. Higher gas prices contributed to the 0.1% increase in the Labor Department’s Consumer Price Index (CPI) versus the April’s CPI, which was flat. Financial markets had expected a 0.3% increase. The CPI fell 1.3% versus the same period last year, the largest drop since April 1950. “There is no sign that there has been widespread inflation because of the Fed’s quantitative easing regime. In fact, long-term inflation expectations haven’t budged and the Fed is still ahead of curve on inflation,” economic and investment strategist John Canally of LPL Financial told Reuters.

• Four of the nation’s largest banks repaid $54.7 billion to the U.S. Treasury’s Troubled Asset Relief Program (TARP), freeing themselves of government restrictions on lending and pay.JPMorgan & Chase Co. (NYSE: JPM) repaid $25 billion, andMorgan Stanley (NYSE: MS) and Goldman Sachs Group Inc.(NYSE: GS) repaid $10 billion each, Bloomberg News reported. As Money Morning’s Martin Hutchinson reported yesterday (Wednesday), the other two banks, U.S. Bancorp (NYSE: USB) and BB&T Corporation (NYSE: BBT) repaid their debts of $6.6 billion and $3.1 billion respectively. The banks are among 10 other that agreed last week to repay $68 billion in TARP funds,Bloomberg News reported. “Our strong capital position allowed us to pay back TARP in a very short amount of time,” BB&T Chief Executive Officer Kelly King said in the bank’s statement.

• Beleaguered outdoor clothing retailer Eddie Bauer Holdings Inc.(Nasdaq: EBHI) yesterday (Wednesday) filed for Chapter 11 bankruptcy protection and said it planned to sell itself to private equity firm CCMP Capital LLC for $202 million. The sale to CCMP, known as a 363 sale, means the sale needs the approval of a judge, and other bidders could emerge. CCMP is entitled to a $5 million breakup fee if it loses to a higher bidder. Court filings show that Bank of America Corp. (NYSE: BAC), General Electric Company (NYSE: GE) and CIT Group Inc. (NYSE: CIT) will provide up to $100 million in financing during the bankruptcy case,The New York Times reported. Eddie Bauer said its 371 stores in the United States and Canada are operating as usual.

• Berkshire Hathaway Inc. (NYSE: BRK.A, BRK.B) options will begin trading on the Chicago Board Options Exchange (CBOE), enabling investors to bet on the company using a technique Chairman and Chief Executive Officer Warren Buffet has rejected, Bloomberg News reported. “Usually, if you want to buy or sell a stock, you should buy or sell the stock,” Buffett said last year on the weekend of the company’s annual meeting. “Using options, four times out of five you will be right, the last one you’ll miss. I’ve virtually never used options as a way to enter or exit a position.” CBOE will offer contracts on Buffet’s conglomerate starting today (Thursday).

• FedEx Corp.’s (NYSE: FDX) losses more than tripled in its last quarter, and the company said things won’t be much better in the near future, The Associated Press reported. The nation’s second-largest package shipper reported a loss of $876 million, or $2.82 per share in the quarter ended May 30. That compares to a loss of $241 million, or 78 cents per share in the same period last year. “The operating environment for our first two quarters in fiscal 2010 is expected to be extremely difficult,” Executive Vice President and Chief Financial Officer Alan B. Graf Jr. said. The company has not yet decided whether it will have to lay off more workers or make further cutbacks due to poor economic conditions, Graf said in a conference call with investors.

• Newly sold automaker Saab secured a key court ruling yesterday (Wednesday) to cut 75% of the more than $1.28 billion (10 billion in Swedish crowns) of debt after a vast majority of creditors approved the proposal, Reuters reported.  Sweden-based Saab was sold on Tuesday to fellow countrymen Koenigsegg Group ABby soon-to-be former parent General Motors Corp. (OTC:GMGMQ).

• The annual rise in gas prices entered its 50th straight dayyesterday (Wednesday) after crude prices bounced back after an initial slump in the beginning of this week, The Associated Pressreported. Pump prices are now at a national average of $2.67 per gallon. The rising crude prices and less production has added to the typical increase in demand in the late spring and summer months as more Americans take to the roads for vacation-related travel.

• After being dogged by reports of orderless days at the Paris Air Show, The Boeing Co. (NYSE: BA) finally got a $153 million order for two single-aisle planes, The Associated Press reported. But this order pales when compared to the $6.2 billion in orders already attained by rival Airbus S.A.S. Both aircraft makers are feeling the economic crunch by the worldwide recession.

• China will use part of its $200 billion sovereign wealth fund to invest in hedge funds, according to Felix Chee, who will initially run the fund. “We will have a preference for managed accounts,” he said in an interview with Bloomberg News Wednesday at the GAIM International hedge fund conference at Monaco’s Grimaldi Forum. “The platform would like a core of single-manager funds and fund-of-funds.” Chee, is a special adviser to the chief investment officer of China Investment Corp.’s hedge fund and proprietary trading effort, “It’ll be across the spectrum of strategies,” he said. “We’re looking for the best managers and a handful of fund of funds, and when I say handful I mean five or less.”

• A prominent Wall Street analyst sees the benchmark S&P 500 Index (NYSE: .INX) breaking its all-time record by the end 2012. JPMorgan Chase & Co. (NYSE: JPM) Chief U.S. Equity Strategist Thomas Lee said on Wednesday the index should surge back above 1,500, its October 2007 high in less than three years, provided the U.S. economy sees a V-shaped recovery.  “The global economy is in the midst of a synchronized recovery,” Lee said at the Reuters Investment Outlook Summit.  Lee also reiterated his year-end 2009 target of 1,100 for the S&P 500, saying the United States will likely come out of its recession some time this summer, followed by the rest of the developed world.

• Prices on Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE:FRE) mortgage securities rose for the fifth day Wednesday, pushing yields down as they tracked a drop in rates on benchmark U.S. Treasuries, foreshadowing possible further declines in borrowing costs for new home-loans. Yields on Washington-based Fannie Mae’s 30- year fixed-rate mortgage bonds fell by 0.02% to 4.56% in New York trading, the lowest since June 3, according to data compiled by Bloomberg. Treasuries and so-called agency mortgage bonds rallied after a government report showed the cost of living rose less than forecast in May. The mortgage-bond yields are down from 5.07% on June 10, the highest level since the Federal Reserve announced plans to buy home-loan bonds in November.

• Applications for mortgages fell for a fourth consecutive week, with overall demand plunging to its lowest level in nearly seven months, according to a report Wednesday from the Mortgage Bankers Association.  Rising interest rates have tempered demand for refinancings and new purchase applications, as the industry group’s seasonally-adjusted index fell 15.8% to 514.4 for the week ended June 12, the lowest since the week ended November 21, 2008.  Rates on 30-year fixed-rate mortgages averaged 5.50%, down 0.07% from the previous week, but significantly higher than the all-time low of 4.61% set in the week ended March 27,Reuters reported.

Source: Investment News Briefs Thursday June 18, 2009

Cool Beans, eh? OK… Well… If yesterday was Turn Around Tuesday as the writer said, I sure didn’t see it! We had a “stop the dollar at the 1.38 border” Tuesday… But a complete turn around from Monday’s sell off, after Russian Finance Minister, Kudrin, threw a cat among the pigeons? Not that I saw!

We do seem to be stuck in a trading range of 1.37 to 1.40… With probes below 1.37 and above 1.40 short-lived. That’s OK with me, at this point, but it had better not last too long, or traders will grow tired of the boring range… And, I will be yelling at the walls for some price action!

Well… The BRIC (Brazil, Russia, India and China) meeting didn’t really bring about the Thunder and lightening as I thought it would… The leaders of these countries did discuss the need for a “more diversified monetary system to reduce dependency on the world’s reserve currency.” (read the dollar!) They also discussed selling bonds and swapping currency among the group. Now if we rewind back to Monday, I said that I thought this could be what they would do… The crystal ball was bang on that day! HA!

I can’t believe the markets have allowed this to be swept under the rug… This could be colossal if it’s carried through… And this way, all of them can smile and say they believe in the dollar and U.S. Treasuries while not dealing with them! Personally, I think the reason the markets aren’t paying attention to these goings on, is that the media isn’t covering it… The grip that the administration has on the media is really beginning to show just how tight it is…

One other thing from the meeting… The BRIC nations announced that they wanted to take a more active role in the world’s financing system… And with $2.8 Trillion in currency reserves among the 4 of them… That would be more than a “kind gesture”…

Speaking of the media… I have to wonder what the media is thinking on this one… Here’s the skinny… First of all, this story came to me a week ago… But at first, I thought, I had better make certain this is not a hoax before talking about it… What am I talking about? I’m talking about the report that two Japanese men were caught at the Swiss-Italian border with $130 Billion in U.S. Treasuries!!!!!!! Now, Chris and I were talking about this yesterday, and Chris said, “But I thought all Treasuries were book entry for some time now”… Yes, since 1982 (a great year, with the Cardinals winning the World Series!) Treasuries have been book entry only… So… The question I had from the beginning is “are they real or fake?” Because I didn’t want to waste your time and mine if they were fake bonds… But apparently the someone believes them to be real…

Hmmm… $130 Billion in bearer bonds… Does this intrigue anyone? It sure does for yours truly. Does this mean that the U.S. Treasury has been printing bearer bonds and selling them under the cover of a dark night? That’s the only explanation I can come up, IF THEY ARE FOR SURE REAL!

I don’t know what to make of this except it has my attention, and I can’t believe I don’t see one story on cable news… But it’s all over the news in Europe and Asia… More later, as additional news comes to light on this…

OK… Yesterday, I talked about the Current Account Deficit, which is expected to be $85 Billion for the 1st QTR… What I didn’t talk about is that this would be the lowest level for the Current Account in a decade! And would represent just 1.5% of GDP. Now… I used to go out and talk about how the dollar entered the weak dollar trend in Feb. of 2002, after the Current Account Deficit reached 4% of GDP, which historically had been the line in the sand for currency issues…

But let’s put this in perspective, eh? Back in 2001 and 2002, our GDP was running at 4-5%… It’s now negative… So, maybe this won’t be the harbinger to reversing the weak dollar trend, that it looks like on the outside… Besides, as I’ve said over and over again lately, the whole deficit talk used to center on the Trade Deficit (which account for the majority of the Current Account), and with the global recession going on, the Trade Deficit, while still having issues, is no longer the focal point… Instead, the Budget Deficit (the 2nd of the Twin Deficits) has taken the reins of the focal point… If it’s not one thing it’s another, my mother used to tell me! (the you-know-what disturber in me just has to make this comment… “no wonder the Current Account is lower, we don’t report debts or the bonds that represent the debts!”… That’s in reaction to the $130 Billion in bearer bonds!)

I came across a news story yesterday morning that caught my attention… It seems that the Gov’t of Australia, has decided to put Government backing on state issued bonds like the QTC’s (Queensland Treasury). This is HUGE for these issues, especially since the states in Australia were seeing downgrades in ratings! Now, the country of Australia has a higher rating, and these bonds will carry that rating, since they are now backed by the Gov.! The one thing it will do though, is tighten up the yield on these bonds… Probably by about 10-15 Basis points…

Why am I talking about this? Because… If the QTC bonds now have a higher rating, more institutions will be able to buy them, and the more investment in Australia, the more flows into Aussie dollars! The news brought the A$ back to 80-cents yesterday briefly… But this is going to take some time to work through. The thing here is that in the long run, this is good for the A$!

In China overnight, we had an announcement that could really become a problem with protectionism… China has introduced an explicit “Buy Chinese” policy as part of its economic stimulus program in a move that will amplify tensions with trade partners and increase the likelihood of protectionism around the world.

Now, long time readers know that I’ve always banged on 1. the Bush administration when they placed tariffs on Japanese Steel about 8 years ago, 2. Schumer and Graham for introducing a bill to place tariffs on Chinese exports to the U.S. Because… Both represent protectionism… And a currency will normally get taken to the woodshed for being associated with a country that takes protectionism measures…

So… Will this hurt the Chinese renminbi? Ahhh grasshopper, remember, the Chinese renminbi is a “manipulated currency”. The Chinese Gov. decides what value the renminbi will be… So… In a regular floating currency scenario, yes, this would hurt the currency… But in China’s situation, it’s all different.

However, the reason I make a big deal out of this is that this announcement could lead to other countries placing their own protectionism measures to offset China… One protectionism measure, begets another, and another, and another… Oh boy! NOT!

Talk about smashing a bug! This would be just like doing that to the promises of a global recovery… Somebody stop them for they know not what they are doing! Or maybe the Chinese do…

Yesterday, Housing Starts in the U.S. surprised on the upside, and so did Building Permits… I don’t like this for the simple reason that we already have an “inventory” issue with houses that have been built and not bought or occupied. But, the media was all over this new, because… It’s the opposite from what I told you the day before that economists, Shiller, Roubini and Whitney had to say about housing! And the Housing Starts and Building Permits data flies opposite of the report this morning that mortgage applications fell 15.8% this month!

We also saw that Industrial Production fell -1.1% in May… So output was off sharply at factories, utilities and mines, in May, which is completely opposite of those that are saying the recession is over…

Today, in addition to the Current Account data, we’ll also see the stupid CPI data for May… You never know what that data has in store for us, because the Gov’t doesn’t know what they want it to show for us yet! HAHAHAHAHAHAHA! Of course that’s my feeling toward CPI, and I’ve explained it all many times over the years… But, in a nutshell, CPI is kept artificially low by the Gov’t by re-weighting things that get too expensive, or substituting things that get too expensive… We all know why CPI is kept artificially low too, don’t we? Yes… We do…

Now… I spent more time on CPI this month than I care to! It’s just a dumb report that the media will be all over like a cheap suit!

I heard a great old song on the radio this morning that pretty much puts my feelings toward the direction of the country into words… “but you tell me over and over and over again my friend, ah, you don’t believe we’re on the eve of destruction.” – Barry McGuire

And then, I see where the President is going to announce his sweeping regulatory changes today… Hmmm… Do you see what I see? This is a shift from markets driven regulation to Political regulation… Markets to politics… Somebody stop the madness! Serenity now!

Currencies today 6/17/09: A$ .7925, kiwi .6295, C$ .8805, euro 1.3865, sterling 1.6260, Swiss .9190, rand 8.0530, krone 6.4115, SEK 7.8350, forint 204, zloty 3.2580, koruna 19.2570, yen 96.40, sing 1.4580, HKD 7.7505, INR 48.08, China 6.8370, pesos 13.45, BRL 1.9735, dollar index 80.72, Oil $69.69, 10-year 3.67%, Silver $14.10, and Gold… $932

That’s it for today… A pretty busy day for yours truly yesterday, with the monthly Review & Focus due, and the regular daily stuff all rolled into one day… Thank goodness, Chris and Mike help me with the Review & Focus these days! Speaking of the Review & Focus, I did a story on whether inflation or deflation is worse for an economy… You’ll want to check that out, when it shows up in your mailbox! Hey! My beloved Cardinals scored more than 2 runs in a game last night… YAHOO! It’s been a tough month for the redbirds, a June Swoon, if you will. Last night’s game VS the Tigers reminded me of the 2006 World Series match-up, and we all know the outcome of that series! 10th World Championship for the Cardinals! OK, enough of that, time is a wastin’! I hope your Wednesday is Wonderful!

Source: Stuck In A Range

Well… As much as I dislike having to say so, because I told you this might happen… The currencies have given back some major ground VS the dollar since Friday morning. It’s all tied to the fact that the euphoria going around the markets the previous week regarding stocks and the U.S. economy, came to a screeching halt last week. I pleaded and begged for the currencies to break this link to stocks, but it wouldn’t / didn’t happen and voila! What we have here is a failure to break the link, and now that there’s a falling demand for stocks, currencies have tanked too… UGH!

Not that I’m cheering for currencies to go one way or the other, what I’m rooting for is a return to fundamentals… And apparently, that did not happen!

The proverbial straw to break the stock rally’s back was the color of Industrial Production on Friday… Not that Industrial Production is that Big of a piece of data… It just got added on to all the other bad data that acted like a shot of Round-Up on all those so-called Green Shoots! For the record, Industrial Production decline .5% in April, and March’s already bad figure was revised downward to -1.7%… So… The “glass is half full crowd, would say, “Hey!, the pace of decline has slowed, this is an indication of a bottom!” Unfortunately, that’s not how the market participants saw it… You have to think outside the box here, and recall all of the announced shutdowns that will be coming down the pike… I fully expect this data to reverse itself and go deeper into the tank.

We also saw the “stupid” CPI (inflation) number on Friday… CPI fell .7% VS a year earlier, which on the outside screams “deflation”! But… That’s not what I see… I see a CPI that’s dominated by food and energy, and we all know that energy prices have plummeted from last year… So, to me, this is strictly price deflation of energy, and not overall deflation that would include a contraction of money supply. (Like that’s going to happen any time soon!) No… And I’m sure there are few readers that will beg to differ with me on this, as they already do every time I mention inflation, but… This data continues to suggest the risk of deflation remains remote, since the drops are still mostly centered in energy and energy-related products.

So… If we’ve gone back to the black cloud over risk assets that existed July 08 through February 09, that means you can see Japanese yen as the lone wolf rallying major currency… Recall what I told you on Friday about the opposition party in Japan, calling for a boycott of U.S. Treasuries denominated in dollars… Imagine there’s no rift between the two, It isn’t hard to do, China and Japan getting together for currency cooperation… Hmmm… Makes you shiver, eh? Any way… The yen, is back on the rally tracks and trading this morning with a 95 handle…

But wait! What’s that I see? Is it a White Knight for risk assets?

Another Asian currency that I talk about occasionally, the Indian rupee, has been through the spin cycle a few times in the past year… Just when the rupee looks like its on a run, it gets sent back to the spin cycle and comes out looking quite wrinkled… But… We might be seeing a change… This past weekend, India held an election, and the Congress Party – led alliance chalked up a decisive victory… This is the party, led by Prime Minister Singh, that is pro-growth, pro-economic reform. And the news of the decisive victory sent the Indian stocks soaring… Along with the rupee, that’s now trading with a 47 handle for the first time in 5 months! So… The rupee has it all going on today, eh?

This news from India, helped turn the stocks around in Japan overnight, and that’s a good thing! If stocks can maintain this momentum, that’s a good thing for risk assets… But… I’m being pessimistic here… I just don’t see how the Indian stock market euphoria can outweigh the bad data here in the U.S. But… I guess we’ll have to wait-n-see, eh?

I was reading an article in the Wall Street Journal this weekend, and saw this, that caught my eye… “Economists Say Full Recovery to Take at Least 3 Years”… I bet they didn’t make Mssrs Obama and Bernanke happy with that call! Here’s snippet of the story from the Wall Street Journal… “Economists in the latest Wall Street Journal survey see an end to the recession by August, but say it will take years to eat up the slack created by the downturn. Nearly half of the economists said it will take three to four years to close the output gap, while more than a quarter say it will take five to six years. The economists on average expect the unemployment rate to climb to 9.7% by the end of the year, with two million more jobs lost over the next 12 months.”

Don’t know if you remember or not… But some time ago, I told you that I believed the Chinese were stockpiling commodities… They knew they would need them, and it sure seemed like a better investment than buying more dollar denominated assets… Well, the Royal Bank of Canada (RBC) just issued a report that agrees with my earlier statement! Let’s see what RBC had to say… “China is stockpiling commodities such as copper and iron ore as part of a reallocation of its sovereign wealth amid concern that the value of its dollar assets may decline. It’s part of an overall desire to decrease its exposure to dollar assets.”

That’s been a reoccurring theme here lately hasn’t it? I’ve spent a ton of time writing about China and their new found diversification bone… I’ve told you about all this here, in and if you are a subscriber to my monthly “paid” subscriber newsletter, The Currency Capitalist, well, you’re probably growing tired of hearing about China… You see I really have to tell you, that it all gets so intense, from my experience… This is BIG NEWS! Oh, and if you want to see what the Currency Capitalist is all about.

We have a holiday in Canada today… Victoria Day… I had a reader question why I talked about Australia more than Canada… Hmmm, I said… I did talk about Canada twice last week! But he’s right, I do talk about Australia more, and that’s because the story right now is China coming out of the economic doldrums before any other country, and demanding more raw materials from Australia… Now, if the price of Oil were to soar to $75 or higher, than I’d be talking about the “juiced” Canadian economy more and more once again…

Before I left for Viva Las Vegas (admit it, you were doing your Elvis voice there!) I had talked about the “rift” going on in the European Central Bank (ECB) well, ECB President, Trichet hasn’t done anything on the outside to calm the waters there. Bundesbank (Germany’s Central Bank) President, Axel Weber, a very outspoken voice against Quantitative Easing probably stirred up the hot blood again overnight… Let’s listen in on Mr. Weber… “the ECB has done enough to help the economy and shouldn’t consider further measures unless things get a lot worse.” He went on to say a bit more… “the ECB doesn’t see the risk of a broad credit crunch or deflation in the euro area.”

I’m sure his opposition in Italy, Spain, Ireland, to name a few, will take offense to those statements, and we’ll get the “rift” going again, which won’t be a good thing for the euro to have to deal with.

The data cupboard is fairly empty this week, and for sure void of any major data until Thursday, when the Weekly Initial Jobless Claims, Leading Indicators, and Philly Fed Index all print… So… Not too much to deal with every day, which can lead to some strange currency moves. It just depends on the overall bias of whether to sell dollars or buy them. We’ll get a feeling for that today…

Well… If stocks are going back into the sell gear, then look for Gold to push higher… Which is what it’s doing right now, at $930… Speaking of Gold, my webcast Gold presentation last week wasn’t much a draw… We had less than 100 people watch it on their computers… Hmmm… Don’t know if we’ll go that route any more. At least the room was packed!

So… On that note… I’ll head to the Big Finish… This is a bit earlier than usual this morning, as I woke up long before my alarm was to go off, and decided to just go ahead and get up.

Currencies today 5/18/09: A$ .7580, kiwi .5895, C$ .8550, euro 1.3475, sterling 1.5240, Swiss .8910, rand 8.6440, krone 6.5025, SEK 7.8630, forint 212.50, zloty 3.3260, koruna 20, yen 95.60, sing 1.4680, HKD 7.7515, INR 47.90, China 6.8269, pesos 13.26, BRL 2.1150, dollar index 82.97, Oil $57.10, Silver $13.98, and Gold… $930.75

Source: Spraying Round-up

The Dow Jones Industrial Average was up 26.2 points, or 0.32% as of 11:00 a.m. today (Thursday), while the Standard & Poor’s 500 Index was up 4.58 points, or 0.52%.

The surge was prompted by an increase in U.S. wholesale prices, which allayed concern over deflation. Producer prices rose 0.3% in April after falling 1.2% in March. Food prices posted the biggest gain, soaring 1.5% – enough to offset a 0.1% fall in energy prices. Excluding food and fuel prices, so-called core-prices climbed 0.1%.

The rise in producer prices accompanied an increase in import prices, which climbed 1.6% in April, the government said yesterday. Producer prices and the cost of imports comprise two of the three major gauges of inflation. The third measure of inflation, consumer prices, is scheduled for release tomorrow.

The rise in U.S. equities was further supported by a solid earnings report from Wal-Mart Stores Inc., the world’s largest retailer. Wal-Mart posted a profit of $3 billion, or 77 cents a share, in the quarter ended April 30, up from 76 cents a year earlier, matching analysts’ forecasts, according to Thomson Reuters.

Net sales for the quarter fell 0.6% to $93.4 billion, but the company blamed that decline on the negative impact of a stronger dollar, which dented international sales. Wal-Mart’s international operating income fell 16.2% to $880 million on an 11.1% drop in sales to $21.3 billion.

However, international operating income at constant exchange rates was $1.13 billion in the three months ended April 30 on sales of $26.1 billion.

“In almost every country we grew the top line faster than the market despite the strong dollar and a recession that is even deeper in some countries than it is in the United States,” said chief executive Mike Duke.

Wal-Mart’s resilience offered a modicum of comfort to the retail sector after a report yesterday showed retail sales fell 0.4% in April, the eighth monthly decline in the last 10 months. Retail sales tumbled 1.3% in March.

Retail sales have been badly battered by a sharp rise in unemployment. And data from the Labor Department today furthered illustrated the frailty of the current labor market.

Initial claims for unemployment rose by 32,000 to 637,000 in the week ended May 9, from a revised 605,000 the week prior, the Labor Department said.

The economy has shed about 5.7 million jobs since the recession began in December 2007. Payrolls fell by 539,000 in April, as the jobless rate climbed to 8.9% – its highest level since 1983.

Source: Producer Prices and Wal-Mart Results Give the Market Edge Over Weak Jobs Data

We are in the middle of a global economic crisis and commodities are on sale. Buy commodities now while they are still cheap. When we finally emerge from this global economic crisis — prices will explode higher. I’m talking about another long-term bull market in commodities. Let me explain…

Inflation Will Push Commodities Prices Higher

Our Federal Reserve Chairman Ben Bernanke is an inflationist, which is an advocate of the policy of deliberate inflation achieved by increasing the supply of available currency and credit. They call him helicopter Ben because he once quoted a statement made by Milton Friedman, about using a “helicopter drop” of money into the economy to fight deflation.

Bernanke is a student of the causes of the Great Depression, and he has written extensively on this subject. Bernanke knows that deflation is quite negative for an economy and should be avoided at all costs. We have recently seen deflation as prices for real estate and commodities dropped during this recession. But, Ben Bernanke’s Fed and other central banks around the world have fired up the printing presses to combat deflation. They have been dumping new currency into the economy to reverse deflation and stimulate the economy. It’s working! One measure of inflation- the Consumer Price Index (CPI) has recently turned positive. Deflation is out—Inflation is starting.

The problem is, inflation could really skyrocket, especially when we finally emerge from this recession. Inflation eats away at your purchasing power and takes away your wealth.

One of the best ways to protect against inflation is to invest in commodities.

In the 1970s, when inflation in the U.S. was high and the economy was in a deep recession, commodity prices soared.

You want to own tangible assets like metals, energy, agriculture, and livestock as these commodities hold their value in inflationary times.

Exploding Population and Living Standards will Push Commodity Prices Higher

We have already seen a surge in demand for commodities from developing countries, like India and China. Plus, global commodity supplies are low; the inventories for food are the lowest they have been in 50 years. Rising income levels in emerging countries and the spread of western ideologies are having an effect on food consumption. We are seeing greater consumer demand for certain foods like meat and poultry.

The Earth’s population is estimated to be about 6.77 billion, and the world’s population is expected to reach 9 billion by the year 2040. The world’s masses are already demanding more vegetables, fruits, meats and dairy products. Imagine what the demand for agricultural products will be in 10 to 20 years.

Growing global demand from population growth and a rising standard of living will push commodity prices much higher.

Some Good Commodity Picks

The fundamentals make commodities an extremely attractive investment.

Plus, adding commodities to your portfolio gives you added diversification.

Here are some good ways to invest in commodities right in your normal brokerage account:

GLD - This gold tracking Exchange Traded Fund (ETF) mirrors the price of gold.

SLV - This silver tracking ETF mirrors the price of silver.

DBA – This ETF tracks widely traded agricultural commodities like corn, wheat, soy beans and sugar. As agricultural prices rise the price of this ETF goes up.

MOO – This ETF comprises a basket of companies engaged in various sectors of agribusiness like agricultural chemicals, livestock operations, agricultural equipment and ethanol/biodiesel.

PCL – One of the best timber producer stocks. Historically, timber prices have done exceptionally well under inflationary circumstances.

FCX - Freeport is one of the world’s largest copper producers and this copper stock goes up when copper prices go up.

XOM - Exxon Mobil Corporation, a great way to invest in oil.

Take a close look at investing in commodities. We are at the beginning of an unprecedented bull market in the commodity sector.

Source: Commodities Are The Best Place To Be For The Next Decade

More importantly, while the data isn’t a gigantic leap forward, it’s at least not another deathblow to the economy.

Joel Naroff, president of Naroff Economic Advisers, wrote in a note to clients that it doesn’t look like consumer demand will collapse, which will help the forces moving the economy find the bottom of the crisis.

“Neither deflation nor inflation seems to be an issue for the economy right now,” he said, adding that steady consumer prices will allow the Federal Reserve to focus more on repairing the financial sector with “with minimal near-term concerns about inflation.”

For the short term, it’s an encouraging sign – prices are going up because consumers are starting to open their wallets. But until jobs return to the U.S. market, consumer power can only go so high, which is why analysts aren’t giving these numbers a standing ovation.

For the intermediate term, the positive growth in January (0.3%) and February pushed the annual inflation rate to 1.8%, which is within the U.S. Federal Reserve’s target range.

The Real Challenge: Long-Term Inflation Control

Of course, longer-term inflation control is the real obstacle the Fed is facing.

It’s hard to imagine a fairy tale ending to the inflation-turned-deflation plague that kicked off around the time the subprime mortgage market began its collapse.

Too little inflation – or more deflation – doesn’t necessarily mean a prolonged recession, but it makes it harder for the U.S. economy to post a positive gross domestic product because prices are low and consumer demand is dull.

Many analysts and top-name investors – including a handful here at Money Morning – have been forecasting widespread inflation caused by the bevy of government measures (the stimulus bill, bank bailouts, low interest rates) employed to fight the economic slump.

Last week, Chris Caltagirone and Bob Greer, economists for Pacific Investment Management Co. (PIMCO) – which runs the world’s biggest bond fund – said inflation will return as soon as 2010 and will remain a factor for some time to come after that.

“The policies of the Federal Reserve and the Obama administration, which are designed to avoid deflation, are likely to reflate the economy over the next three to five years,” Caltagirone and Greer wrote. “Although we expect growth to contract in 2009, [the] government stimulus [outlays] may reflate the economy as soon as 2010 and beyond that.”

They were preceded by famed investors Warren Buffet, Marc Faber and Jim Rogers. Money Morning’s Martin Hutchinson, who said as far back as November that inflation would reignite sooner than people expected, preceded them as well.

“Everybody thinks that because we’re having a horrible recession, we’re not to going have inflation. I think that’s probably wrong,” Hutchinson said four months ago. “The government is pumping money in so many banks, and that money has to come out somewhere.”

Fed Chairman Ben S. Bernanke voiced that concern last week, but conceded that the No. 1 priority is still economy growth.

“I’m mostly worried about the economy,” Bernanke said. “We do think inflation will be quite low over the next couple of years. At the same time, we have to be very careful to make sure we are prepared to withdraw monetary stimulus at the appropriate time to make sure that down the road we don’t have inflation.”

Source: Inflation Gently Rises in February, Offering Analysts a Sign the Economy Isn’t Collapsing

In a report posted on the Web site of Pacific Investment Management Co. (PIMCO) – which runs the world’s biggest bond fund – Chris Caltagirone and Bob Greer said inflation will return as soon as 2010 and will remain a factor for some time to come after that- a scenario that makes commodities and TIPS (Treasury Inflation-Protected Securities) “two [investment choices] that can provide investors diversification as well as exposure to sectors that may benefit from future economic developments.”

In the near term, however, Caltagirone and Greer expect excess capacity and high unemployment – among the key catalysts of supply and demand – to extend deflation for several more months or quarters.

However, they believe that “the policies of the Federal Reserve and the Obama administration, which are designed to avoid deflation, are likely to reflate the economy over the next three to five years,” Caltagirone and Greer wrote.  “Although we expect growth to contract in 2009, [the] government stimulus [outlays] may reflate the economy as soon as 2010 and beyond that.”

Caltagirone and Greer join a growing chorus of prominent inflation hawks that includes Warren Buffett, Marc Faber and Jim Rogers.

On Monday, Buffett said in a CNBC interview that inflation levels could reach as high as those in the 1970s as a result of the government’s attempts to resuscitate the economy.

That same day, Faber – publisher of the Gloom, Boom and Doom Report – agreed.

“The massive money printing we have and the massive deficits we have now will make it difficult when there are some price pressures for the Federal Reserve to actually increase interest rates,” Faber said in a Bloomberg Television interview.

Likewise this week, Rogers – a longtime commodities bull – said that conventional U.S. Treasuries that aren’t inflation-protected are going to take a beating from U.S. policies.

Inflation’s Catalyst: Uncle Sam’s Wallet

President Obama’s 2010 budget plan is already forecasting a $1.8 trillion deficit for the current budget year

In addition to the $789 billion stimulus bill passed in mid-February, U.S. Treasury Secretary Timothy F. Geithner has said he is ready to commit up to $1 trillion to strengthen the nation’s banks and jumpstart lending.

The basic logic – which Money Morning’s Martin Hutchinson outlined as far back as November – is that with the government pumping so much money into the economy, it’s bound to have an inflationary impact.

The high inflation Buffett referred to peaked in March 1980, when the consumer price index (CPI) gained 14.8% from the year before.

And though it seemed excruciating, the highest the CPI moved last year was 5.6% in July, followed closely by a 5.3% increase in August, according to the Bureau of Labor statistics.

Recently, consumer prices fell 0.8% in December and increased 0.3% in January. February inflation statistics are due for release next Wednesday (March 18).

How Protect and Profit from Rampant Inflation

In their PIMCO report, Caltagirone and Greer recommend investors consider TIPS.

“The decline in TIPS prices makes them attractive now on both an absolute basis and relative to nominal Treasuries,” they wrote. “In addition, although we expect inflation to remain low in the near term, we believe that inflation will rise in the medium term, which means TIPS may be a more strategic, as well as tactical, investment opportunity.”

Starting as soon as next year, they expect government stimulus measures to kick in and reflate the economy.

And with commodities projected to rise in step with inflation, Caltagirone and Greer recommend investing in PIMCO’s (naturally) CommodityRealReturn strategy, which “gains exposure to commodities through derivatives that track the Dow Jones AIG Commodity Total Return Index, and the derivatives are collateralized with an actively managed TIPS portfolio.”

Money Morning’s Investment Director Keith Fitz-Gerald wrote a how-to guide for TIPS investing, in which he suggested a pair of TIPS funds, one by PIMCO, to help investors hedge.

Another way to hedge is with gold.

Investors panicked when the yellow metal dived along with the economy. But Money Morning’s Hutchinson – an investment banker with more than 25 years’ experience on Wall Street and a leading expert on the international financial markets – understood perfectly what other investors did not.

“Gold is not a safe haven against recession,” Hutchinson said. “It’s a safe haven against inflation.”

But with commodities and inflation on the rise, gold could reach as high as $1,500 an ounce by the end of the year, Hutchinson said.

“Everybody thinks that because we’re having a horrible recession, we’re not to going have inflation. I think that’s probably wrong,” Hutchinson said. “I think gold has quite good hidden-store value.”

Money Morning recently outlined five ways investors can play gold – from safe to speculative.

Source:  Two Ways to Protect Yourself When the Inflation Alarms Return

Gold’s stellar run up to $850 per ounce, rising more than 24 times over, also came in the ’70s. So gold, therefore, must deliver its strongest returns when the cost of living shoots higher. Right?

Wrong. “In the long run, stocks have thrashed gold as great long-term hedges against inflation,” says Jeremy Siegel, professor of finance at Wharton University, Pennsylvania. What’s more, the eight-year bull run in Gold Prices so far this decade has come against the lowest average consumer-price inflation since the early 1960s.

In short, the common opinion of gold as first and foremost a defense from inflation is wildly amiss. Just look at the last 30 years.

Consumer prices in the United States, even on Washington’s data, have pretty much trebled since 1980. But starting at what was then an all-time high of $850 per ounce, gold simply failed to keep pace. In fact, it dropped half of its purchasing power (monthly data) over that time.

At its lowest point, back in 2001, gold’s loss of purchasing power for US investors reached beyond 85%. The broad S&P index, on the other hand, stood more than eleven times higher, even as the Tech Crash pushed US equities into a nosedive.

Sure, things have reversed a little since then. But not enough to reverse the cold fact of gold’s losses during the long inflation of the late 20th century. How can we square it with gold’s huge returns amid the inflationary ’70s?

“Well,” you might guess, “perhaps gold only responds to rapid inflation – the nasty kind we got 30 years ago, rather than the ‘mild’ case our money has suffered ever since?”

But again, you’d be wrong – or very close to it. Between 1980 and ‘81, consumer price inflation in the US destroyed 17 cents of the Dollar’s purchasing power, a severe depreciation by any reckoning. Yet the Dollar price of gold dropped 40% during that same period. Longer term over the 1980s and ’90s – a truly horrific period of sustained inflation, then averaging 4.6% per year and vicious by any historical comparison – the real value of gold sank by more than four-fifths.

Look further back – even to when physical gold stored in government vaults underpinned the Dollar, just as it underpinned all major currencies – and you’ll find that gold almost always made a poor hedge against rising prices. In the mid-70s, Professor Roy Jastram at the University of California at Berkeley found that gold failed to keep pace with the cost of living during seven inflations in Britain across more than three centuries. In the United States, Jastram spied six inflationary periods between 1808 and 1976. On average, they saw the purchasing power of gold fall by more than one-fifth!

Only the final period in Jastram’s study – beginning in 1951 – saw the metal gain value, and it continued to gain purchasing power for the next 30 years. By the end of 1980, the average annual price of gold had risen more than 17 times over. But right from that top it was downhill for the next twenty years.

How come?

What changed at the start of the ’80s? Two things in short order, which were entirely connected.

First, Paul Volcker – the famously tall cigar-loving chairman of the US Federal Reserve – raised Dollar interest rates to nearly 20%. So secondly, and as a direct result, the rate of inflation sank from that record peace-time spike above 14%.

Volcker’s strong medicine took nearly two years to slow the rate of inflation. But it killed the Gold Price almost instantly. Before Volcker hiked rates – and before he and his successors gained ample room to cut them year after year – “There was a kind of great speculative pressure,” as Volcker since said. The Fed noted how “speculative activity” in the gold market was spilling into other commodities. One official at the US Treasury called the gold rush “a symptom of growing concern about world-wide inflation.”

So yes, people piled into gold as double-digit inflation and collapsing bond prices destroyed their savings at the end of ’70s. And yes, it took a record return paid to cash for the devaluation of money to slow down, allowing a cautious return to risk assets like corporate debt, listed equities and new private ventures – assets whose long-term appeal rests on stable costs and expenses, rather than a speculative guess at how the central bank might set its interest rates from one month to the next.

But now, in contrast, Britain stands on the brink, the United States will likely confirm it on Friday, and Japan’s pretty much there – yet again – suffering the horrors of inflation’s bleak evil twin, deflation.

How come gold just keeps hitting new record highs?

Before the 20th century, short periods of falling prices were as common as scurvy, and just as harmless for the long-term value of money and assets. Indeed, deflation is a good thing, for savers at least. Provided their savings institutions stay solvent. And provided their cost of living actually goes down faster than the value of the assets they’ve saved. Which is not what’s happening today. And that brings gold’s other key feature – the one investors should note if they buy it as a tightly supplied metal that shot higher in price when inflationary panic struck in the late ’70s.

Because fact is, gold also offers a deep, liquid market (if held in its internationally tradable form of large wholesale bars) with no risk of counter-party default (if owned outright, rather than through a trust or a fund or a similar financial structure).

In our debt-deprived world today – where the outstanding value of what retirees and savers are owed is deflating much faster than costs – it’s this attraction of gold…it’s “off risk” advantage…which is fast-gaining appeal amongst large funds and private investors alike.

Inflation and deflation – both a crisis in money – both also force business and growth to give up. What remains, paying zero and promising nothing, is the need to simply store wealth and savings for a better future, whenever it shows.

Source: Gold Amid Inflation & Deflation