Commodities: And We’re Off…

Gentlemen, I have had men watching you for a long time and I am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the bank. You tell me that if I take the deposits from the bank and annul its charter, I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin!  Should I let you go on, you will ruin fifty thousand families, and that would be my sin! You are a den of vipers and thieves.

Government directors an official report establishing beyond question that this great and powerful institution had been actively engaged in attempting to influence the elections of the public officers by means of its money, and that, in violation of the express provisions of its charter, it had by a formal resolution placed its funds at the disposition of its president to be employed in sustaining the political power of the bank.
– Andrew Jackson on the Second Bank of the United States (the prior Central Bank before the Fed) which Jackson destroyed.  Some things never change…

Commodities: And We’re Off…
This week has been tremendously significant for commodities in numerous ways.  Copper first got my attention on Monday and Tuesday as it breached the $3.50/lb area and then proceeded to climb above the early January high of $3.52/lb.  The action is crude today is very important since it has finally breached its own prior high from early January as well of $83.95/b.  Crude has been able to sustain above $80/b for the entire month of March despite some recent headline bearish DOE numbers and reports that much of the oil floating in tankers as storage has been liquidated.  In addition, the DXY was very strong in March yet crude held its ground in the face of this as well.  This is just further proof that there was no dollar strength just a massive devaluation of the euro.  Have you looked at the EUR/CHF cross?  That says a lot.  So does the fact that the Indian rupee keeps hitting new post-crisis highs versus the dollar.  There is no dollar strength, there is dollar propaganda.  While the topic of conversation now is that OPEC will raise volumes to keep a lid on prices I do not believe this will work.  There hasn’t been enough capex spent on the supply side since the crash from $150/b to $35/b and any boost from OPEC will merely be seen as a reduction in spare capacity and they could lose control of the market again rather quickly.

Other bullish news came in the form of reports that Vale had agreed to a 90% price hike in iron ore prices to $100-$110/ton for the April-June period with Nippon.  Not only is this a huge hike but it also seems to be a key shift in the official pricing structure from annual contracts to quarterly (which to me makes complete sense given the world we live in).  While a major hike in iron ore prices has been expected by the market, there was chatter that Beijing might try to get involved to negotiate a lower price for Chinese steelmakers but this news makes that almost inconceivable in my view.  Most analysts are stating that this sort of iron ore hike will lead to a jump in steel prices of 20%-35%.  Steel goes into a lot of things as you all know so this certainly augurs for a major ramp-up in inflation in the months and quarters ahead.  Anyone that tells you there is no inflation because of excess capacity is either being completely disingenuous to advance an agenda not in the best interests of your investors (think the Federal Reserve) or is somewhat out to lunch when analyzing the fiat/gamed financial system we are living in.  Inflation is PARTICULARLY a problem when there is excess capacity and insolvent governments.  This results from the fact that such governments (in this case much of the Western world) will print money to give the people “bread and circuses” which in turn causes private capital to shrivel and flee, fails to stimulate growth in productive capacity and then causes major currency debasement.   The best thing an investor can do is use common sense and assume that government statistics are meant to mislead as is the Fed.  Otherwise, you will be stuck owning treasuries and thinking you are doing ok because the CPI is only 2%.  Give me a break!  According to John Williams at Shadow Stats, CPI using the 1980 methodology is currently running at just under 10%.  The chart can be found here http://www.shadowstats.com/alternate_data/inflation-charts.

The final bullish item for the week came last night when Newcrest Mining (Australia’s largest gold mining company) offered a 30% premium to buy Lihir Gold.  This deal was rejected by Lihir as inadequate.  This may be a huge turning point for M&A in the precious metals sector.   One key thing it tells you that the recent underperformance of the shares to the commodity cannot last as deals will be done at current valuations.  I also take my hat off to Lihir management for rejecting this deal.  If I am right and gold moves multiples higher in the coming years they will be rewarded handsomely for holding out.

Deflation??  Why Hyper-Inflation Concerns Me Much More
One of the key arguments of the deflationists is that a credit bubble leads to a deflationary collapse that cannot be prevented.  As I have said many times before I agree with that.  The outcome of such a credit bubble is always disastrous for economies and societies and this time is NO DIFFERENT.  The key area where I disagree with many of these folks that often times have done extremely good homework and have as good an understanding of the macro as anyone is the conclusion.  This is because one of the outcomes of such a bust can be a destruction of the currency.  So if we are faced with two extremes, one being deflationary collapse where markets are allowed to clear and the other being a major hyper-inflationary type period you need to look to the politicians and Central Bankers for your answers.  To this argument the deflationists argue that there are quadrillions of derivatives and the like and no amount of money printing can cover them.  This may be true, however the governments and Central Banks have already made one thing very clear.  Everything is backstopped with guarantees and more printing of monopoly money.  So do you really think these guys are going to let the market for anything clear?  Who owns the government in any event?  Follow the money and the lobbyists and you will know what the puppets in D.C. will do.  Markets being allowed to actually clear is the only way that the monopoly money will increase in purchasing power and you will have traditional inflation.  It’s not going to happen.  So expect QE to infinity and a massive debasement of all major Western currencies.  There is NOTHING more risky than the sovereign debt of Western nations.  See you in Harrare!

Mike

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