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Tuesday, November 14, 2006 4:38 PM

The PPI, Gold, and Dr. Copper

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On November 14 the BLS released the Producer Price Indexes for October 2006.

Weak September data was followed up by even weaker October data.

PPI Highlights

  • Prices for light motor trucks fell 9.7 percent following a 3.5-percent gain in September. For 12 months ending October 2006 the index for light motor trucks fell 12.4%
  • Passenger car prices fell 2.3 percent in October compared with a 2.8-percent advance in September. For 12 months ending October 2006, the index for passenger cars decreased 3.2 percent.
  • The index for finished energy goods declined 5.0 percent in October following an 8.4-percent drop in September.
  • Residential natural gas declined 9.3 percent following a 1.8-percent advance in September.
  • Gasoline prices decreased 7.9 percent after dropping 22.2 percent a month earlier.
  • Food prices fell 0.8%. This was the largest drop since May.
  • Computer prices dropped 3.1%.
I have been watching the intermediate vs. final PPI for quite some time.
Following is Chart A from the BLS report to consider:

In May, July, and August price pressures in intermediate and crude goods were not being passed on to finished goods. One possible interpretation was lack of pricing power (i.e. inability to pass on cost increases). The more common interpretation was that the PPI on finished goods was poised to explode up. There is no longer any doubt which interpretation was correct.

Marketwatch is reporting First back-to-back PPI decline since July 2004.
  • The producer price index fell a sharp 1.6%, which matches a record low set in October 2001, the Labor Department reported Tuesday.
  • The decline in the PPI pushed the year-over-year rate on finished-goods prices to negative 1.6%, the first time it has been below zero since September 2002.
  • The core PPI, which excludes food and energy costs, fell 0.9%, the biggest drop since August 1993.

Bloomberg is reporting Gold Prices Decline in New York on Easing Inflation Concerns.
Gold in New York fell for the third straight session after prices paid to U.S. producers matched the biggest monthly slide ever in October, reducing the precious metal's appeal as a hedge against inflation.

The 1.6 percent drop in prices paid to factories, farmers and other producers followed a 1.3 percent decline in September. Analysts expect the U.S. to report lower consumer prices on Nov. 16. Gold dropped 1.2 percent in the previous two sessions.

"There's no inflation.," said Marty McNeill, a trader at R.F. Lafferty Inc. in New York. "If the PPI is down, gold usually would go lower."
These writers need to brush up on history. Gold tends to do very poorly in disinflation but very well thank you in deflation. Gold shocked everyone when it rose along with the U.S. dollar in 2005. It will shock everyone again by rising along with treasuries when deflation sets in.

Dr. Copper

The bullish symmetrical triangle that had been forming on the weekly chart has now broken decisively to the south.

$CRB 200 EMA Bounce

The $CRB has put in a weak bounce off the 200 EMA.
Whether or not that bounce holds is likely to depend entirely on energy prices so let's take a look at a weekly chart of crude.

OPEC has dropped production and is considering further cuts in an attempt to defend oil prices. In the wake of a dramatically slowing worldwide economy, a successful move by OPEC to hold oil prices high would only increase recessionary pressures. Historically such actions have failed.

Along with a Plunging PPI, plunging copper, plunging home prices, plunging housing starts, a plunging GDP, and plunging consumer credit there should be no doubt which way the economy is headed. The only unanswered question is: When does the stock market get the message?

Mike Shedlock / Mish

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