Are Weak Commodity Prices Signaling Deflation Ahead?


In 2008 the Federal Reserve announced the first round of monetary stimulus that would later become known as quantitative easing (QE).  Since then, the Fed has announced more rounds of QE with the latest dubbed "QE-finity", a name resulting from the open ended nature of the program. Although a few assets have recovered their 2008 losses, namely equities and precious metals, most other assets have not. Most commodities, housing prices, and emerging equities markets (NYSEARCA:EEM) are still below their peaks. On the economic front, this is true too, because many fundamentally driven data points such as unemployment and incomes still haven't fully recovered.  Equities and precious metals are the exception, not the norm, as the commodities markets warn us that QE may not be all it's cracked up to be.  Not only have commodities not recovered their pre-crash prices, after a rise into 2011, their prices have been declining ever since.  If Mr. Bernanke's ongoing stimulus program is supposedly creating inflation, it is failing.  Commodities are telling us something, and we should listen.The Commodities Barometer: Copper In 2008 U.S. Copper's spot price peaked around $4.00 per pound as worldwide demand for building materials remained strong.  As the financial crisis took hold, copper prices crashed.  By August 2008 its price was down to $3.50 per pound, but by the end of the year its price was more than cut in half to $1.50.More recently after QE1 and QE2 in early 2011, copper (along with most other commodities) again peaked in price as the recovery seemed on good footing.  Today, though, it is down 30% from that recovery high to around $3.00, a significant fall accompanied by most other commodities.  This disconnect should raise some questions.First, why are prices of commodities across the board down since 2011, even as the Fed continues to stimulate with $85B/month?  Second, why are assets such as equities up, but inflationary hedges such as commodities down?  Finally, are commodities warning us just as they did in 2008 of impending deflation?The downtrend in commodity prices is something we have been following for awhile as we advised as far back as July 2012 concerning gold and silver, "If $25.50 (on SLV) fails as support, look out below as there is little support south of $25.50 (NYSEARCA:SLV).  If/when that occurs, a great short opportunity will likely be upon us".  That breakdown occurred April 12, 2013 as SLV now trades around $23  It has been three weeks and Silver (NYSEARCA:AGQ) still sits near the lows of its mini-crash.Now we are watching Copper for a similar breakdown.Just what the Doctor (Copper) OrderedThe chart below was included in our ETF Profit Strategy Newsletter as support for a focus article on why precious metals are likely in a bursting bubble, helping signal deflation, not inflation.  It seems the Federal Reserve is fighting a fight it just isn't winning as Doctor Copper's prescription is thus far not what Bernanke ordered. 

The above chart of copper sums up what is happening in the commodities markets, and it has us worried as it sets up a bearish technical pattern that shows a market that is rolling over.  The price support where buyers have stepped in numerous times in the past failed in April and the technical pattern that may be forming would be very bearish. Copper's recent pop in price thus far is just a normal reaction after such a large decline through previous support (See Gold's recent example in "Have Gold Prices Capitulated?")How copper performs the next few weeks and months will be very telling as to the inflation versus deflation debate.What Next?Copper is not the only commodity down significantly since 2011.  Coffee (NYSEARCA:JO) prices have been crushed, down over 60%, cocoa (NYSEARCA:CHOC) prices are down 40%, and industrial metals (NYSEARCA:HEVY) as a whole (including copper) are down 30%.   Energy commodities also are down double digits as a group since 2008.Precious metals (NYSEARCA:GLTR) and livestock are the only major commodity groups up in price since 2008, and their price gains are more than offset by the decline in agricultural, industrial metals, and energy related commodities. Overall commodities are coming down in price, not going up, and that is signaling a risk of deflation, not inflation. Luckily, we can stay ahead of the curve. Deflationary forces in commodities are saying that now is the time to protect your investment portfolio.  Even if the recent weakness in commodities is just a temporary setback, there are better protection alternatives than the bubble-like gold and silver. What are they?The ETF Profit Strategy Newsletter follows copper and other commodities using technical,fundamental, and sentiment analysis along with common sense to see what isreally going on and find ways to capitalize in the stock, bond, forex, andcommodity markets.

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