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A multitude of mavens, pundits, sages, wizards, writers,
and assorted talking heads with various but vested interests in the hard
commodities sector have weighed-in on the supposed demise of the secular bull
market in stuff over
the past few months.
Reactions have been varied but predictable: the usual
suspects in the gold- and silver-bug camps have played the market
manipulation card to explain the overall weakness in precious metals prices;
the China perma-bears have claimed the downtick in industrialcommodities to
be a foreshadowing of the pending collapse of that country s decade-long economic growth; and the hyper-inflationists have
determined the cause to be big banks that will not loan their growing stashes
of Federal funny money, thus leading to decreased demand for industrial
metals and energy. Meanwhile, the deflationists have stated we are simply
living in a deflationary economic environment. Many have commented on US
dollar strength as a contributing factor to lower commodity prices.
I say nonsense to most of the above. In the words and
charts that follow, I will provide irrefutable evidence that the weakness in
hard commodities over the past four months can be overwhelmingly attributed
to the strength of the US dollar. My argument is based on elementary
statistics, a general math requirement to earn a college degree.
As an aside, I had 14 hours of high-level mathematics
beginning with engineering calculus in college, but did not take statistics,
a low-level course that would not credit toward my undergraduate degree.
However, it was a requirement when I entered graduate school at the
University of New Mexico. To get around taking a freshman-level math class, I
convinced the geology department that a course shown as Statics and Dyn on my undergrad
transcript, was a sophomore statistics course. In actuality, it had nothing
to do with statistics but was a civil engineering course called Statics and
Dynamics . LOL.
Let s start by reviewing a key
concept in statistical analysis: the correlation coefficient. I m sure this is way more than most of you need or want to know but
realize I m a scientist who strives to help lay
people understand the concepts and evidence that support my opinions.
Correlation can be defined
as the systematic relationship between two variables. The correlation
coefficient is an equation that exactly quantifies the linear
relationship between data sets.
A perfect positive correlation coefficient (+1) means
that when one variable increases the other also increases in an exact
relationship; these data will plot as a straight upward-trending line on an
x-y graph. A perfect negative or inverse correlation coefficient (-1) means
that as one variable increases the other decreases in an exact relationship;
data will plot as a straight downward-trending line on an x-y graph. Complete
randomness between two variables, a non-linear correlation, or other
confounding variables all result in a 0 value and the data will be scattered
across an x-y graph.
The really important thing to note here is the
correlation coefficient is a number that ranges from +1 to -1.
However, rarely in the real world of measurements,
values, prices, or whatever will the relationship be absolutely perfect
between two variables.
As you know, I like rules of thumb and they certainly
apply here. The following parameters are used by statisticians to categorize
the correlation between two variables:
·Correlation coefficients between 0.9 and 1.0 indicate
variables that are very highly correlated.
·Correlation coefficients between 0.7 and 0.9 indicate
variables that are highly correlated.
·Correlation coefficients between 0.5 and 0.7 indicate
variables that are moderately correlated.
·Correlation coefficients between 0.3 and 0.5 indicate
variables that have low correlation.
·Correlation coefficients less than 0.3 have little if
any linear correlation.
Whew!
Now that we re finally done with
freshman statistics class, let s look at four-month
charts for the US Dollar Index (DXY) and the three major hard commodities
(gold, copper, and oil) that are listed on integrated world exchanges. That
means they are traded in US dollars via both physical (spot) and paper
(futures, options, warrants, and ETF) markets.
A quick perusal of the first chart illustrates the recent
strength of the US dollar with respect to a basket of world currencies
(British pound, Canadian dollar, Euro, Japanese yen, Swedish krona, and Swiss
franc). Four months ago, the US dollar index (DXY) was commencing its upward
march; it has gone from 80.19 on July 11 to 87.60 on November 11 for a gain
of over 9%:
Meanwhile, prices for the world s
most important precious metal (Au), its major industrial metal (Cu), and its
North American energy benchmark (WTI) have all weakened significantly.
From July 11, when New York gold closed at its highest
price since mid-March at $1339an ounce, it has fallen to $1163. That s
a loss of 13%:
During this same
period of time, Comex spot copper went from $3.24 to $3.06 per pound, a drop
of 6%:
Concomitantly, the West Texas Intermediate crude oil
price has collapsed from nearly $106 to just under $78 a barrel, off a
whopping 26%:
My contention that the 4-month weakness in commodity
prices is directly due to the strong dollar is shown by the following
correlation coefficients and charts. I think they are
self-explanatory:
Further evidence
supporting my premise is a 4-month chart showing the price of gold in Euros. Note
the relatively minor 5% drop from 984
to 933, compared to the aforementioned 13%
loss in US dollars:
The four-month commodity and dollar data produce very
high to high correlation coefficients at
-0.96 for gold, -0.85 for copper, and -0.90 for oil.
Although spot commodity prices are based on short-term
supply and demand fundamentals, many other factors affect their daily
fluctuations. Included are industry news, world events, geopolitics, weather,
and natural disasters. Additionally, a good deal of gaming, arbitrage, and
attempts at manipulation are thrown into the mix with traders and speculators
trying to generate short-term profits via the paper and derivative markets.
Considering these often competing factors, I view the
high negative correlation coefficients of the dollar index and major hard
commodities over the past four months as quite remarkable.
My basic statistical analysis has shown the recent drops
in major world commodity prices are simply due to the strength of the world s reserve currency, the almighty US dollar. This much-maligned
fiat currency has suddenly and once again become the world s go-to safe haven.
It is my contention that given the current world economic
paradigm, which includes a slowdown of growth in China, continuing struggles
in other emerging market countries, European banking and currency woes, and
an incipient recovery in America, the US dollar will continue to rise with
respect to other major currencies.
And a higher DXY implies further deterioration in the US
dollar price of all hard commodities traded on the world stage.
Ciao for now,
A Monday Morning Musing from Mickey the Mercenary
Geologist
Mickey Fulp
Mercenary Geologist
The Mercenary Geologist Michael S. Mickey Fulp is a Certified Professional Geologist with a B.Sc. Earth Sciences with honor from the University of
Tulsa, and M.Sc. Geology from the University of New Mexico. Mickey has 35
years experience as an exploration geologist and analyst searching for
economic deposits of base and precious metals, industrial minerals, uranium,
coal, oil and gas, and water in North and South America, Europe, and Asia.
Mickey worked for junior explorers, major mining
companies, private companies, and investors as a consulting economic
geologist for over 20 years, specializing in geological mapping, property
evaluation, and business development.In addition to Mickey s professional credentials and experience, he is high-altitude
proficient, and is bilingual in English and Spanish. From 2003 to 2006, he
made four outcrop ore discoveries in Peru, Nevada, Chile, and British
Columbia.
Mickey is well-known and highly respected throughout
the mining and exploration community due to his ongoing work as an analyst,
writer, and speaker.
Contact: Contact@MercenaryGeologist.com
Disclaimer and Notice: I am not a certified financial analyst, broker, or professional
qualified to offer investment advice. Nothing in any report, commentary, this
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investment advice or an offer or solicitation or advice to buy or sell stock
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My opinions are based upon information believed to be accurate and reliable,
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