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January 27, 2014

Why Aren't Commodities Rallying?

Gold's Day to Shine Still Lies Ahead

So why aren't commodities rocketing higher despite the Fed's multi-trillion dollar counterfeiting campaign over the last few years? The charts below say it all.

Money velocity has collapsed to the lowest levels in the 55-year history of its measurement. During the last decade, MV has been collapsing but remain high enough to spur demand and push commodities higher. Since 2011, however, money movement has slowed to stifling levels.

Now compare this pattern to excess bank reserves:

The economy has been so poor that banks have opted to sit on $2.4T of free money rather than lend it out. We can derive two conclusions from this data. First, if MV is collapsing to historic lows despite a multi-trillion dollar stimulus effort, the next downturn is going to be much nastier than the last. Second, once those reserves start moving, we are going to go from a 2% CPI to a 15% CPI pretty darn quickly.

Folks, gold may not have performed well over the last couple of years, but its day to truly shine still lies ahead.


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