Armed with a machine gun, bank robber Willie Sutton made off with over $2 million in cash. He was caught in the late 1950s, and when asked why he chose to rob banks, he responded: “Because that’s where the money is.”
Ah, if only he looked elsewhere. Sutton’s gumption could have allowed him to profit on any variety of legal ventures, from high-stakes gambling to a career as a Wall Street trader.
Although stock movements and a country’s credit ratings may dominate financial headlines, it pays to look elsewhere for clues in this market. There’s always a profit opportunity somewhere.
Investors should look at key commodities, namely copper, oil, and gold. Their performance indicates the workings of the global economy without having to look at scores of other charts.
Here’s a brief overview of what to look at for each:
Copper: We all know copper as a key metal in construction, plumbing, and wiring. But in financial markets, copper has earned an honorary doctorate. Why is “Dr. Copper” so special? Because its price movements have been eerily accurate at predicting economic booms and busts. Copper prices dropped nearly 50% in early 2008, well before the stock market crash.
Since the start of August, copper prices have declined 10%. While that’s not a large enough move to indicate trouble, copper’s annual growth rate has slowed to a crawl. If it goes negative, history suggests another recession.
Oil: The price of Texas tea tends to rise during periods of economic expansion, and fall during economic contraction. So oil’s recent pullback from the mid-$100’s to the mid $80’s suggests a global slowdown.
Of course, this analysis comes with a caveat. Oil has become a popular “carry trade” and several firms have gone so far as to buy oil and hold it in tankers awaiting higher prices (thanks to today’s inexpensive shipping rates). Speculation in the oil market, rather than a pure fundamental outlook on supply and demand, has been attributed to part of oil’s parabolic gain in mid-2008 to $148 per barrel.
Gold: This metal remains a contrarian indicator for economic growth. In today’s zero-interest rate environment, investors have less reservation to hold the metal. Its price is undoubtedly helped by the inflationary policies of Western bankers, led by the Federal Reserve.
As long as central banks are net buyers of gold (which just started last year), prices should rise. Until more individuals start buying gold in the hopes of outlandish gains, any talk of a bubble in gold is overblown.
Unlike copper and silver, which tend to indicate future market movements, the price of gold reacts to immediate concerns. Gold’s current rising price indicates that trouble is here.
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