Tom McClellan – McClellan Market Report

Gold leads CPI inflation

Ben Bernanke needs to wake up and listen to gold’s message.

Late in 2010, Fed Chairman Ben Bernanke was confident that inflation would remain low, and that the Fed could “remove policy accommodation” at the appropriate time.  But rising food and gasoline prices are forcing him to start changing his tune.  Here is a sampling:

Overall, inflation remains quite low.February 3, 2011

The most likely outcome is that the recent rise in commodity prices will lead to, at most, a temporary and relatively modest increase in U.S. consumer price inflation.March 1, 2011

I think the increase in inflation will be transitory.April 5, 2011

Bernanke’s complacency seems to be weakening, and it may have come from an over reliance on the Consumer Price Index (CPI) numbers.  The CPI data have continued to show low inflation in spite of the evidence that is all around us.  Part of the explanation for that is the huge weighting of housing prices in the form of “owner equivalent rent”.  The weighting of all housing items is 42% in the main CPI, and even more in the “core” rate which subtracts out food and energy.  Housing prices have remained depressed due to oversupply in the wake of the housing bubble.

This week’s chart looks at the relationship between gold prices and the CPI inflation rate.  It is important to note that the price plot for gold is shifted forward by 15 months to reveal how it used to give a really good leading indication for what the inflation rate would do.  It does not show gold’s most recent zoom up above $1400/oz.

The correlation in the 1980s and 1990s was very high, except for a couple of instances when OPEC and Saddam Hussein but their thumbs on the scale.  But then something strange happened starting in 2006.  The once-great correlation seemed to suddenly break in 2006, and it has not gotten itself restarted.  My guess is that rather than a breakdown in this relationship between gold and inflation, something else is happening to explain this: all of the heuristic adjustments, reweightings, and other monkeying with the calculations of the CPI have resulted in a huge misreporting of the actual inflation that we are all noticing.

John Williams of Shadow Government Statistics has done a lot of work on unwinding all of the adjustments that the US government statisticians have done over the years to “improve” the CPI calculations.  He finds a much higher inflation rate of 9.6% for the 12 months ending in February 2011, versus the BLS version at 2.1%.  So it just may be that the relationship between gold and inflation has not really broken down.

The breakdown is instead in the way that our government keeps track of it, which is sad, but not really a surprise.  It is time for Bernanke and others to wake up to the message that gold is screaming to anyone willing to listen.

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McClellan Financial

The McClellan Market Report and its companion Daily Edition are produced by Sherman McClellan and Tom McClellan. Both are technical analysts and educators whose innovative insights have helped countless investors succeed. The McClellans' work has been repeatedly quoted in Barron's, and their market timing signals have ranked them in the top ten timers for both intermediate and long term by Timer Digest.

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  • svg

    “I think the increase in inflation will be transitory” does not indicate that his complacency is weakening. It indicates that he is in denial. This man did not see the credit crisis coming. And now we expect him to get it right? As Jim Rogers says, Bernanke has been wrong about everything important. The proof is there. He should have never been appointed to a second term.

    When does the public wake up and demand that these madmen take their hands off the economic levers? It is THEIR meddling that has caused the bubbles and turmoil. And now we have yet another bubble (commodities). It would be funny if not for it being so destructive. Look at the economic and political instability that QE2 has caused! It’s a deadly combination – politicians who won’t do their job (i.e. fiscal responsibility) combined with the tinkerers (central banks) who won’t stop trying to fix that which is not broken. What will they do for an encore the next time crisis hits? Super-duper-magic-XYZ-QE Turbo?

    Does Bernanke really think you can pull on one lever without it impacting the others? Every action has a reaction. You get an immediate change of circumstances – but with unpredictable medium and long-term consequences.

    It’s madness. Absolute madness.

  • Dimm

    “9.6% for the 12 months ending in February 2011″
    yeah right

  • franch1se

    All this shows is that a bubble has formed in gold and commodities. How can inflation increase when wages are stagnant, capacity utilization is low, and credit demand is almost non existent as bank reserves keep piling up. We are in the midst of a huge deleveraging cycle and the secular force which Bernanke is trying to fight is deflation. The problem is the way he is trying to fight it (QE) is having unintended consequences.

  • LZ

    I can’t believe the author is so naive that he called Bernanke to listen to “gold market”. Bernanke does not listen to gold market, nor oil market. He never ever will. The only voice he listened to is his boss. Remember back to 2006, the last time he raised rates to 5.25%. He cited high oil price was a concern. Now oil price nearly doubled and interest rate is at 0.25%, but it is not a concern for him anymore. Just go figure.
    The fact is Economics is so subjective, that makes a perfect tools for politics. As shenanigans worked in DC can spin out anything at anytime, backed by data that has been taken out of historical and social context.

  • AWF

    The McClellan Market Report is off track—It is hardly creditable analysis to say that the CPI does not represent Inflation and then post a Gold price 15 months in advance as an Indicator of Inflation– BOGUS!

    Dimm–Shadow Stats maintains the “Old Code” to measure Inflation
    Williams is probably correct as the “Price of Gold” in the (Here and Now) Confirms.

    franch1se—You and “Bubbles” are failing to see ALL ALL ALL the drivers of Inflation–TPC also has had the blinders on–only recently has he noticed other possibilities.

    BTW–AWF has mentioned Inflation several times over the past months–taking flak but leaving the lantern out for others to see.

    From the Kitchen Table: Wk-End Update 04/10/2011

    Confidence Ratios: For IntermediateTerm & LongTerm Investors (Ma&Pa)
    Stock/Bond Ratio: Prefers Stocks: MidCap/SmallCap: Last Buy Signal 09/17/2010
    Bond /Bond Ratio: Prefers High Yield: HYG : Last Buy Signal 04/2009
    Stock/Gold Ratio: Prefers Gold

    Note on the $USDollar:
    Strong Downtrend–No News here–but how about a “Forecast”
    AWF see’s UUP our proxy for the $USDollar Index going to 19.75-20.00 range over the next 2 months—I’m sticking my neck out with the stochastic os at such a low point and ready to reverse–

    Earnings Season: Earnings will be Grand, Great, Wonderfull
    Might be a good idea to “Sell into Strength” head to the sidelines and watch the show in June!

    These notes are for INFORMATION ONLY
    NO recommendation to buy or sell the above Bonds/Stocks/Gold.

  • Johnny

    Listen to gold? Have you heard some of the dudes in this market?

  • Widgetmaker

    C’mon, Johnny! You mean to tell us that you don’t find Glenn Beck and his sponsors credible???

  • Misthos

    Gold is telling us that the current system is breaking down. It actually already broke down; we are merely in the zombie phase right now.

    In a world where many governments are increasingly being seen as incompetent with the stewardship of their economies and currencies, gold’s strength increases as it has no nationality.

    Sorry, I know many here prefer a complicated academic argument, but sometimes the answer is just that simple.

    The global imbalances of trade and capital flows and debts will not re-balance on their own in a smooth manner. Neither does there exist a supra sovereign body that can cooperate, coordinate, and manage the re-balancing needed. No, those imbalances are correcting by themselves; those imbalances are in breakdown mode – real time, right now.

    Ever build a sandcastle that was a wee bit too high? Guess what, more sand doesn’t make it any stronger. Sand, like capital, has its own gravitational laws it abides by and the architect of the sand castle becomes powerless. He can only patch it up so much, for so long.

  • Charles R. Williams

    It is a mistake to look at this through the macroeconomic lens of inflation. We should be asking ourselves why the value of our houses and our salaries has fallen by two thirds in terms of internationally traded commodities. There are huge relative price movements underway. Bernanke is not responsible for these movements and Bernanke cannot do anything to change their course.

    Investment has collapsed in the US partly because of low capacity utilization but mostly because of a lack of confidence in the administration’s policies, a vast expansion of the scope of government regulation, the politicizing of the business climate and uncertainty over how the entitlements crisis will be resolved. Capital is fleeing the US and the only way to finance the government’s deficits is for the dollar to fall.

  • boatman

    well said mist…..i guess this means an obscure conservative commentary host is not driving the precious metals market since 1999, huh.

    funny, everytime the ponzie stock market goes up, i’m not all over kieth oberman(oh thats right, he’s fired) telling everyone he’s just a shill for ben.


    I am a noobie at best when it comes to financial markets and investments. Having said all of that, small business owners including myself are not doing anything but holding onto money investing it as we do not know what the fed is going to do. I do not trust Obama as he is definitely anti business. More regulations more work if I hire more people, more of everything. Thus the reason alot of us will not hire more people. We do not want to go bankrupt because of all this uneasiness in the country. My wife and I do not make 6 figure salaries, we do live confortably and plan on staying that way.

    I do think that the fed is devaluing the dollar and it is the root cause of our commodities rising and yes it is passed on to customers so we can stay in business.

  • prescient11

    I am so damn sick of everyone blaming BB for everything.


    What should he do, act as that fool Volcker did and jack rates to 17%?????

    Or how about sell ALL OF OUR SILVER for .93 an ounce??????????

    The power of one man to DOUBLE our national debt by himself, with no vote in Congress is insane. Look at the Reagan years again, revenue and spending were balanced when you back out the crazy interest expense.

    Again, leave BB alone. TPC has it right on the head as far as that goes. QE could be said to have some effect on what is going on, but the real problem is not inflation, it is solvency.

    Gold is a hedge against unsound government finances. Where do you think this is headed?? These morons can’t even cut $40B. We are in for a world of hurt I am afraid, and it is coming this decade.

  • prescient11

    Agreed boatman, mist, well said. Frankly, if the constant deficits are not brought under control who knows what is going to happen.

    The bubble is not in commodities. The bubble is in government paper…

  • Steve

    AWF – you reference the “kitchen table” every so often in your posts. Where do the “kitchen table” views come from? Are they yours? Are they available on a website somewhere? I was unable to find them on google… just would like to learn more.


  • Inkfarmer

    We’re staking the financial health of our nation on the opinions of a man who was completely blindsided by the housing bubble.

  • AWF

    Steve: The views from the “kitchen table” are from me–AWF
    The goal of these post is to keep (Ma&Pa) investors on the right side of the market–this is not for the daytrader.

    The ideas from the “kitchen table” are based on Trend following and Momentum
    I DO NOT know the future– NO WARRANTY is given!!
    You may also find that TPC’s post on market direction are very good and timely.

    This site offer a wealth of information from “Wall Street strategist” “FED Speeches” to the trading ideas of the Individuals that post here.
    You may also become educated on “The Macro”, “MMT” from the likes of Scott Fulwiler and the Illuminati at Kansas city–look for these post because you will not get this info anywhere else!

    I read over TPC’s post several times–you should to—)

    All the Best

  • D

    I have a simple business question…if the price of something tradable is going up, would you as a business owner buy that tradable something or try to sell it?

    Real world question, do you see more cash for gold commercials or do you see more gold bars/coins for sale commercials?????

  • Steve


    I appreciate the additional information. Good advice. I have been a regular “lurker” on PragCap for the last ~15 months. It has opened my mind to MMT and helped me stay more in tune with macro economic trends.

    A bit about myself… I am definitely not a day trader. I am basically a buy and hold / asset allocation practioner (I know the PragCap readership is gasping). However, PragCap has opened my mind to finding a better way. I recognize I need to be more tactical in my approach. I have been using themes from PragCap and other research for some of my taxable investment money. The largest portion of my portfolio is still employing buy and hold. This is why I was curious about your kitchen sink views. I am not looking to become a day trader. I would like to learn to “adjust my sails” depending on which way the macro economic winds are blowing.

    Thanks again.