Heavy Metal

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People are getting just a little bit squeamish and jittery over the drop in gold prices…

It is down almost $300 from its high in less than a month…

Should you be worried?

Well, that depends on your perspective…

As I have mentioned in recent articles…

Gold sells are often used to cover margin calls triggered by a falling stock market…

And also that gold and silver have recently begun behaving somewhat like currencies…

The big difference is that gold and silver don’t have an economy behind them…

Which is why US Treasuries are rallying…

They are perceived to be safer than any other currency…

And are actually much more useful than gold.

But if you really want something to worry about…

The fall in the price of copper is what should be keeping you up at night…

It certainly is keeping Ben Bernanke up at night…

And for very good reason.

Why would that be?

Because copper, not gold is the real economic indicator.

That is to say…

Gold is a traditional precious metal…

And, in financially turbulent times, it has been a “holder of value” for many investors…

And lately, as the price of gold has skyrocketed…

It has been the ultimate measure of fear, doubt, and distrust in the global financial system among people and governments around the world…

But copper?

It is merely is the indicator of manufacturing activity.

Because when we talk about economic and industrial activity, copper is the metal that really matters; not gold.

When the price of copper rises, it is a hard indicator of an increase in manufacturing demand…

This demand means there is an increase in industrial activity.

However, when the price of copper drops…

It means a drop in industrial activity…

This is a pretty relevant indicator, don’t you think?

And what has happened to the price of copper?

It has dropped 25% in the past 2 weeks.

That’s right; the price of copper has gone down from $4.20 to below $3.25 a pound...

And it’s still dropping.

What is also relevant is which economy has the highest demand for copper…

That would be…China.

China consumes a whopping 37% of the world’s copper.

Compare that with Europe consuming 19%, and North America consuming only 11%.

So what’s going on?

Manufacturing activity in China, as measured by the Manufacturing Purchasing Managers index has dropped…

On September 22^nd, it went down to the 49.4 level…

Any number below 50 is a sign of lower activity in the Chinese economy.

That means only one thing…

That’s right; China’s economy is slowing down.

In economic terms, China’s economy is contracting.

Is it any wonder that when Italy and European financial institutions asked China for a bailout…

Gao Xiqing, President of China’s huge sovereign wealth fund, replied, “We are not saviors.  We have to save ourselves.”

Why is this important?

Several reasons.

That Italy and eurozone authorities would approach China for help, is a stark admission…

That neither the European banks, the European Central Bank, nor the IMF are really not able to “save” Italy…or Europe.

But it also means that China is in rougher shape than many think…

It means that China is facing some formidable economic and social challenges…

And the truth is, at home, China has seen over 180,000 mass riots in 2010 against the government’s policies of land seizures, relocation, and rising food prices…

And, since China’s economy is export-driven, a contraction in China’s economy…

Means less export and less revenue to buy food, and…

It is an indication that the economic slowdown in China is really due to…

Economic contraction with its major export partners…

Such as the US, Europe and Japan.

Which brings us back to Ben Bernanke.

The 25% collapse in copper prices really is a sign that demand—in spite of massive stimulus spending…

Is not rising in the industrialized nations, but falling.

What is worse for Bernanke that sky rocketing gold prices?

Or even falling gold prices?

Falling copper prices.

Because that means that the US economy is…contracting.

And that’s exactly what’s happening.

And economic contraction is often deflationary…

Meaning a drop in prices due to a drop in demand.

The drop in demand results in a further drop in prices…

And the economy contracts into a tiny, ultra dense, wealth-sucking black hole…never to recover…

That is, until pent up savings turns into pent up demand…

This is the self-correcting aspect of the market economy that apparently, will not be allowed to come about…

Not if Ben Bernanke has anything to say about it…

And he will.

The unfortunate outcome of copper’s drop and our economy’s contraction is that Bernanke and company will offer…

Only more of the same stimulus tonic...

Another trillion or so might just be around the corner…

Though neither QE1 or QE2 has yet to revive a comatose economy…

If I may, I might humbly suggest that Mr. Bernanke, in his pursuit of effective stimulus tonic…

Instead, explore the various possibilities of a gin and tonic…or three...

Bought on credit, of course...

Perhaps whilst seated at a copper-topped bar…

A potent stimulus that would at least achieve its desired effect…

Could do no worse than his current poison…

And would leave the economy with much less of a hangover.

Because when you get right down to it…

The drop in copper prices is a global economic signal that industrial demand and output among nations face dire conditions…

After all, who will want to make stuff if no one wants--or is able--to buy it?

That’s what a 25% rapid drop in the price of copper really means.

And, as copper falls, we all fall with it…Stimulus or no stimulus.

Yes, the price of gold is important…

But for different reasons.

Gold, in all its glittering majesty…

Is the stuff of New World legends…

Old World treasures…

And the lubricant for all ranks of piracies throughout the ages.

But when it comes to the key indicator of demand and manufacturing status in our modern industrial economies…

Copper is the real heavy metal.

And those are…The Gorrie Details.

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