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Oil Prices, the Baltic Dry Index, Stock Markets & Gold.

December 7th, 2011 · Greg Atkinson · 34 Comments

The interest rate cut yesterday by the Reserve Bank of Australia suggests that finally the RBA understands that the Chinese economy will not keep expanding at a rapid rate while its major trading partners are struggling. But even if the Chinese economy slows more than most economists expect this is unlikely to send the global economy back into a GFC-like slump.

For over a year I have been outlining the reasons why the Chinese economy would slow and highlighting how Australian policy makers should have been taking measures to buffer the economy from such a slowdown.

While many mainstream economic media reporters were saying it was certain that interest rates would rise this year, I suggested the next move should be down.  Where others saw strength I saw weakness.  Do I have a crystal ball or were the warning signs obvious?

The answer is that the warning signs were obvious. The global economy was always set to hit a weak spot once economic stimulus measures were scaled back or terminated.

It’s not that hard to get a basic grasp on what the global economy is doing by looking at oil prices, the Baltic Dry Index, the stock market and the price of gold.

If oil prices for example are rising then this generally suggests demand is strong and if demand is strong, then this suggests the major economies are doing well. Of course oil prices can surge due to geopolitical issues but we can easily identify these as the cause when it happens and not link the higher prices at those times to a surge in demand.

The Baltic Dry Index (BDI) gives us an idea how much trade is moving globally since the shipping sector carries around 90% of the world trade.  If the global economy is ticking along nicely then the shipping rates are around or above the long term average and the shipping companies are doing well.

If the demand for oil is strong and the world shipping fleets are busy then generally speaking the major stock markets are edging upwards and most investors are happy.

The we have gold which tends to lag stock returns when times are good.  But when the market is fearful the gold price heads higher as investors sell out of other investment classes in order to get a warm and fuzzy feeling by owning a lump of metal. (while plenty of other cunning investors ride the price up and take profits along the way)

I have looked at these economic and market indicators many times over the last few years and they have generally been able to give me a fairly good idea of how the global economy is tracking.

So now as we draw close to the end of 2011, let’s look at these indicators again and see if we can get a feel for the state of the global economy.

Oil Prices and Oil Demand

Oil Price 5 Year Chart – Brent Crude

oil_price_chart_5_years_dec_11

The price of oil per barrel never did make it to US $200 in 2007-2008 despite the bullish calls of many commodities traders back then. It did however head for the floor during the GFC but has since recovered pretty well.

Overall the demand for oil appears to be increasing and according to the International Energy Agency (IEA)

“Global oil demand is expected to rise to 89.2 mb/d in 2011 (+0.9 mb/d y-o-y) and reach 90.5 mb/d (+1.3 mb/d) in 2012.”

Source: Highlights of the latest OMR (IEA)

So it appears at this stage that the demand for oil is holding up pretty well and this suggests to me that the global economy is still expanding. Yes it is pretty tough going in many advanced developed economies, but the world is till open for business.

Next let’s look at one of my favourite economic indicators, the Baltic Dry Index (BDI).

The Baltic Dry Index

Baltic Dry Index 1 year Chart

baltic_dry_index_dec_11

The BDI is currently just under 2000 which is roughly the long term average for the Index. It however is a long way below the high of 2007 where it was trading briefly up near the 12,000 level! (yes I really mean 12,000 it isn’t a typing error)

The BDI looks weak to me and the major shipping companies are doing it tough right now. Many are still cutting capacity via such means as scrapping ships or slow-steaming, but at the moment many of the big players are still running at a loss.

So my reading of the BDI is that global trade remains weak at this stage and that we won’t see a sustained market rally until the BDI regains its mojo.

The Australian Stock Market

ASX All Ordinaries Index 5 year Chart

all_ords_5_year_chart_dec_11

As for the stock market, well the ASX All Ordinaries & S&P/ASX 200 are still trading at recession-like levels. Stock market investors haven’t had much to be cheerful about in 2011 and it looks like it will be many months before we see the All Ords/ASX 200 up near 5000 again.

Gold Prices

Lastly let’s look at gold prices by using the chart for the ETF ASX:GOLD.

ETF:GOLD 5 Year Price Chart

etf_gold_5_year_chart_dec_11

Certainly gold has done well over the last few years (along with many commodities related stocks) and it is likely to hold up fairly well whilst investors are fearful.

However I believe gold prices are too high and will undergo a sharp correction at some point. Since my market timing skills are poor I have chosen the safe option and am not storing gold bars under my bed.

What the gold price does suggest is that there is still a lot of fear out there and this fear will keep the market volatile. The fairly big stock market swings up and down will be with us for some time to come.

Summary

My view is that the global economy is not going to crash and we won’t see another massive crisis as we did in 2008/2009.  Many developed economies will struggle while they sort out their debt issues but on the other hand many developing economies will continue to expand.

With some luck, 2012 might be the year where the markets settle down and we get back to focusing on the fundamentals again like P/E ratios and company earnings.

Greg Atkinson is the editor of Shareswatch Australia and the Managing Director of Ohori Capital He is originally from Australia but currently resides in Japan. He can be followed on twitter via @GregAtkinson_jp


34 responses so far ↓

  • 1 Matthew // Dec 7, 2011 at 1:48 pm

    Hi Greg,

    I’m a fan of the Baltic Dry Index so I’m happy you brought it up. Even in the stockbroking industry, this index is often ignored.

    But I would consider it under its long term average? I suppose it’s all relative to how far you’re going back.

    Either way, I agree. Even if you have a spare cargo ship lying around, now probably isn’t the best time to pull it out of storage.

    Matthew

  • 2 Greg Atkinson // Dec 7, 2011 at 3:12 pm

    Matthew if you average the BDI out over a fairly long period then I reckon you are right.

    It’s certainly not a good time to own a cargo ship and from what I have been reading it’s not a good time to own an oil tanker either, especially a really big one.

  • 3 Lorenzo // Dec 8, 2011 at 4:06 pm

    Another good post. I knew that your calls would turn out correct, well done.

  • 4 Greg Atkinson // Dec 9, 2011 at 8:27 am

    Thanks Lorenzo. Unfortunately my guesstimate in regards to where the All Ords would finish at the end of this year is not looking too good, but I have not given up on late rally if the Europeans can sort themselves out.

    Having said that, once the Europe mess looks like it might be sorted I suspect all eyes will be on China and the news is unlikely to be good.

  • 5 Biker // Dec 13, 2011 at 1:16 pm

    Cheerful outlook here:

    http://www.oecd.org/document/15/0,3746,en_2649_34573_45268687_1_1_1_1,00.html

  • 6 Greg Atkinson // Dec 14, 2011 at 9:18 am

    Well the OECD revises it’s forecasts on such a regular basis that the odds are that one of them will be right. If the Chinese economy does hit a rough patch you can be sure that the OECD will change their forecast for the Australian economy.

    At this stage we seem to have two views about China. Either the property sector is in a bubble or it isn’t.

    If you watch this clip Jim Chanos explains why he thinks the property market in China is going to hit a rough patch. Having seen examples of overbuilding myself when I was there this year I am (and have been for a year or more) in the bearish on China camp.

  • 7 Biker // Dec 14, 2011 at 1:39 pm

    Cheer up, Greg. It’s almost Christmas.

    Remember you live in the most fortunate of countries and celebrate your good fortune.

    Your New Year’s resolution probably needs to focus on the US situation more. An _American_ forecasting doom in China?
    Gotta believe THAT one… . 😉

  • 8 Biker // Dec 14, 2011 at 1:56 pm

    Correction: You’re entitled to live in the most fortunate of countries. It’s an entitlement countless millions would grasp, given the opportunity.

    Seriously, mate, cheer up!

    http://www.youtube.com/watch?v=LxQgXgS5G3c

  • 9 Not Fooled By Property Spruikers Hype // Dec 15, 2011 at 7:19 am

    Greg

    Jim Chanos is not the only one voicing concern about the Chinese Housing or Construction sector.

    See article in the LA Times on the topic:

    http://www.latimes.com/business/la-fi-china-housing-bubble-20111213,0,6222603,full.story

    Europe is looking to China playing a White Knight role to solve their problems however China looks like they will have their hands full sorting out their own mess.

  • 10 Greg Atkinson // Dec 15, 2011 at 9:41 am

    @NF – Yes there are quite a few people talking about the slowdown in the Chinese property market as well as the economy as a whole. It’s no longer a question of if the Chinese economy is slowing but a question of how severe the slowdown will be.

    @Biker – My investment outlook has no influence on if I am cheerful or not. As for the U.S. I already watch that market enough, it’s some of the other major markets I need to pay more attention to such as India, Brazil, Russia & South Korea.

  • 11 Stillgotshoeson // Dec 15, 2011 at 10:43 am

    I am still cheerful even though I am bearish on the economy (short term) longer term I think Australia will do quite well.

    $125000 worth of share purchases today, 2Kg of Silver yesterday and 2Kg of Silver today.

    A few stocks have reached levels that screamed buy to me so I did.

    As for China, How much will it slow? AND How bad an impact on the Australian economy will it have?
    I have doubts Chinese domestic consumption will be enough to stop a fairly significant slowdown there.
    External influences will dictate more, Exports slow then manufacturing will slow, less labour needed, workers will return to farms.

  • 12 Biker // Dec 15, 2011 at 8:59 pm

    You have every right to be cheerful, Shoes. 😀

    Looking over your projections almost a year ago, I figure you’re a multi-millionaire, several-times-over, by now:

    “Somewhere in between (prolly closer to reality.. $750000)
    I put my money where my mouth is, and took the miners… ”

    What a pity I didn’t take your advice on _that_ one!~
    (or your other EBTH projections… .)

    The good news? Over at MMA, they reckon Melbourne is ‘a buy’. 😉

  • 13 Lachlan // Dec 16, 2011 at 10:41 am

    Purchased a couple tubes 1 oz Perth Mint Ag’s this week Shoes and good buying too …I think Ag will hit 22 but I possibly wont be around to grab the bargain….anyhow Oz prices track a little different.

    Oz doom from ZH
    http://www.zerohedge.com/news/australian-banks-given-one-week-prepare-european-meltdown

  • 14 Plornt // Dec 16, 2011 at 11:40 am

    Yep I will buy some silver in the next couple of weeks. However, I’ll wait and watch first and see how gold plays out before committing any more funds to my silver investment at 34$.

    Disc: I am short NCM from 34$, system targets 23.50$. Doesn’t mean it will go down there, just a statistically likely scenario right now and subject to rapid change.

    This drivel should not be taken as financial advice. Seek to obtain professional
    advice before proceeding with any financial decision.

  • 15 Plornt // Dec 16, 2011 at 12:27 pm

    I have traded and invested in silver physical and futures btw. So trade wise it would probably not be prudent to touch silver here for the next few months imo; however, investment wise next couple of weeks should give great buying opportunities (buying into panic and fear) for the long term, as Lachlan has intelligently suggested.

    I’m just a little more pickier with my price, as I want to really get my small exiting pathetic 1% silver investment position (ive held for 6+ months) average down, with a much bigger parcel size. Might increase it to 5% if we can get into the low 20’s. However i’d think to get into the low 20’s we’d need a complete crash and capitulation for gold, and that may not necessarily occur; albeit 2 of my systems are firing short for gold which doesn’t happen often, so I will back my systems again and not my opinion (which thinks it may go sideways here or bounce), even if I end up wrong.

    This drivel should not be taken as financial advice. Seek to obtain professional
    advice before proceeding with any financial decision.

  • 16 Stillgotshoeson // Dec 16, 2011 at 3:34 pm

    I purchase small amounts of Silver Bullion on dips. I think Silver may go as low as $25AUD. I, however, have no crystal ball so I buy on dips.

    $22USD for Silver is possible, however for us to get there I think our dollar will be down so the AUD price will be higher.

    Gold I am leveraged into through shares in varoius Gold Miners, Silver is my preferred bullion to hold.

    Increased my holdings this week in those miners by a considerable margin.. The recent dip gave me strong buy signals at what I feel will turn out to be reasonably strong support levels for those stocks.

  • 17 Plornt // Dec 16, 2011 at 4:02 pm

    “$22USD for Silver is possible, however for us to get there I think our dollar will be down so the AUD price will be higher.”

    Thats true, which will partially hedge the silver price in AUD terms. Thats on the assumption the positive correlation between AUD.USD and silver continues to some degree.

    I’m working on a quant system based on fundamentals for long term investing atm. Its only half done, but it gives out 10+ year buy and sell signals. So hopefully I can share the outputs (not components) of that with everyone, once i’ve fixed all the bugs with it. I’m optimistic it will be very useful at taking out most of the noise we are seeing and capture outlier multi-decade duration moves.

    It is very difficult (for me at least) to grow wealth unless you buy and hold for a considerable time (i.e. invest not trade). Additionally, you don’t need to be right often, you only need 2 or 3 of your many ideas to blossom. So the question is, are your 2 or 3 great ideas over your lifetime enough to make up 70-80% of your long term gains over the next 10 years? And will you be brave enough to capitalise on those great insights, instead of sitting there worried about the world and irrelevant volatility risk, later to become bitter?
    Atm about two of my ideas I am heavy on, and I anticipate they will make 90% of my returns over the next 10-15 years, by sitting on my arse and not watching them lol. If I want to destroy my wealth, i’ll become active on those ideas.

    This drivel should not be taken as financial advice. Seek to obtain professional
    advice before proceeding with any financial decision.

  • 18 Stillgotshoeson // Dec 16, 2011 at 5:56 pm

    Buy and hold does not cut it for me in this volatile market. I am holding 20 stocks at the moment and I doubt I will have any of the 20 in 5 years time.

    I will be nearly 50 in 5 years time and will be looking to change my investment focus to income and be less concerned about “gaining” wealth so to speak.. preservation of capital and income will become my focus.

  • 19 Plornt // Dec 16, 2011 at 6:28 pm

    I guess we have different goals as we age. I have no problem with volatility, it creates opportunities for those brave enough to handle the temporary draw downs. If you try and limit investment downside risk with timing you inevitably cut upside returns and seriously lower your long term returns. Seems counterproductive to smooth the equity curve.

    Really at the end of the day volatility is what kills people’s wealth, not what investments they choose. They panic at the first sign of trouble and look at what is directly in front of them and react, instead of keeping an eye on the bigger picture and ignoring short term fluctuations.
    However, I can understand why you think the way you do, and you must do what suits your circumstances and income requirements.

    This drivel should not be taken as financial advice. Seek to obtain professional
    advice before proceeding with any financial decision.

  • 20 Lachlan // Dec 16, 2011 at 9:14 pm

    I never thought silver needed to go to 22 for any free market reason. That market is an engineered market and that is beyond dispute at this stage. The powers that control Ag pricing have been effective and ruthless with silver and we’ve seen extremes in both directions. The price can be taken down, therefore I think it may do however a move below horizontal support around 22 would be costly considering the amount of naked paper shorts required to mop up buyers and get it there. Gold has been a steadier market for now though I agree Ag upside is likely higher. I dip buy too Shoes and go a little harder on the big smash. Eventually fundamentals should revalue silver higher but I like a discount.

    If Ag goes significantly below 22 I’ll eat my hat, quietly.

    My own simple investment mo….a fundamental case, price analyses to improve entry, no stops, anticipate holding for long terms but evaluate along the way… as we all do.

  • 21 Lachlan // Dec 16, 2011 at 9:18 pm

    “If you try and limit investment downside risk with timing you inevitably cut upside returns”
    I agree Plornt. I liked CFDs once for several reasons but for that reason especially. My final analyses was that this post GFC market senses and punishes that strategy.

  • 22 Stillgotshoeson // Dec 16, 2011 at 9:40 pm

    I am still bearish on the stock market and still expect to see new lows, how low? The million dollar question.
    Then will see a change in mood to buy and hold again for the long term.

    “If you try and limit investment downside risk with timing you inevitably cut upside returns”

    I think different investment sectors perform best at different times. Economic fundamentals play a large part on how and where I park my money. There is overlap between these. I never try to pick the ultimate high to sell out nor the ultimate low to buy in, I know I can not do this.. Mr Market will do me in every time. I set buy/sell limits and limit exposure

    My energy stocks would be the ones I would most consider a long term play, I still think I will invest elsewhere. 5 years I may switch focus to property and look at locking in a relatively predictable monthly income from said. Capital gain will be less of a concern.. (the kids get em when I die so it matters not to me what they are worth) It is how I can fund my lifestyle that is important to me.

  • 23 Ned S // Dec 16, 2011 at 9:48 pm

    If I actually had a bunch of spare cash I’d be tempted to randomly gamble it on a number of different currencies – On the assumption their central bankers will just fiddle things periodically to move their ER up or down according to their whim at the time.
    And if I didn’t get greedy I could possibly make a couple of % every few months just selling the stuff that had moved up while holding the stuff that had moved down on the assumption it was only a matter of time ’til their central bank fiddled their ER so it did move up. (The EUR aside – That one’s all pretty dodgy at the moment.)
    Hmmm – Swissy’s dropped from being worth a fair bit more than the AUD a few months ago to only a bit more now if my recollection on it’s all correct.
    It’s a weird world we live in.

  • 24 Greg Atkinson // Dec 17, 2011 at 10:39 am

    At this stage I think some cash sitting in a term deposit sounds pretty good to me. I don’t feel tempted to do much else until I see how far the Chinese economy slows. The BDI is basically moving sideways now so I don’t think we will see a major rally over the next few weeks unless the Europeans can magically sort themselves out for Christmas.

  • 25 Ned S // Dec 17, 2011 at 8:15 pm

    Tend to agree Greg. Though I still do occasionally get tempted to have a think about ways I could have a little flutter.

  • 26 Don // Dec 18, 2011 at 6:51 am

    Good to see all you guys again! Biker, Ned, Shoes, even Notfooled! Hope you are all well.

    I have not ended up buying silver, rather I am working at a silver mine now – or what will be a silver mine in a few months. Left that copper/lead/zinc far behind in NQ….

  • 27 Lachlan // Dec 18, 2011 at 9:40 am

    I love a little gamble too Ned 😉

    Take it your still in some part of Qld though Don.. what about the inside tips on your silver show? 🙂

  • 28 Biker // Dec 18, 2011 at 10:49 am

    G’day Don,

    Things are looking pretty good in WA. Bears are growling “China! Europe!” but we’re humming over here.*

    Silver? Never been able to erase memories of Bill-and-Nelson and silver’s crash from around $50 to <$11. It did help the transition from halides to non-halides, but digital photography would have done that eventually.

    Maybe silver's use in increasing solar technologies will keep it buoyant… .

    * We don't know the words… 😀

  • 29 Don // Dec 18, 2011 at 5:40 pm

    I have left Queensland far behind Lachlan – I have nothing against the place but the 8/6 roster in the new place was too much to give up. 5/2 4/3 just blows….. That and the fact that I have worked in the area I am in several times before and have joined a good team of my old workmates here made it a no-brainer.

    As for tips – I see no reason to doubt any of the projected production figures we have put out but that doesn’t mean there wont be nasty surprises. It is my job to make them disappear like magic!! We have hedged the first couple of years production so the price movement doesn’t matter much at the moment. It gives us some time to sort things out at least.

    As for the uses of silver, I think the antibacterial properties will make it’s use more widespread but of course that doesn’t mean the price will skyrocket. In fact who really knows?

  • 30 Lachlan // Dec 18, 2011 at 6:30 pm

    Sounds like you have good reason to be upbeat there Don. In another life I would certainly be a geologist or some such, probably for an exploration Co and definitely for metals. The silver is great play imo because it is a very undervalued commodity. How many commodities can you cay are almost 50% cheaper than they were in 1980. If we get a complete global collapse the purchasing power will increase a lot being monetary metal. If we don’t, (i think US is doomed to a major depression and Europe to lesser degree) and I think we will see an east west transfer of wealth into and continued growth in China for a very long time…typical business cycles,booms and busts included, then I see it as a cheap commodity bet on that story. Lots of gadgets in demand there. I’d like to see solar become a greater part of the energy game. I feel safe with it. We had a buyer here recently for one of our bulls, employed in the nuclear power industry somewhere. He wasn’t really commenting on the safety but felt the world has already gone down the nuclear energy track too far to reverse out any time soon.

  • 31 Lachlan // Dec 18, 2011 at 6:33 pm

    I like a discount 😉

    http://www.sharelynx.com/chartsfixed/600yearsilver.gif

  • 32 Stillgotshoeson // Dec 18, 2011 at 6:47 pm

    @Don.
    I have shares in a Silver miner, hoping for a 400% Gain in 12 to 18 months on them. They have a portion of production hedged for next year. If things pan out well for them they may well be paying dividends = to the purchase price in maybe 2 years.. Not sure if I would sell out on the capital gain or take the dividends on those then… Decision will be made closer to knowing what is most likely to happen with them.

    Nuclear power is with us for some time yet. (and will expand)

  • 33 Don // Dec 19, 2011 at 4:57 am

    It goes up and down Lachlan. I remember when I first got into mining over 20 years ago living pretty much where I am now. The pay was ok, isolation was not too bad but the lack of women was a bit of a bummer. All in all I was wondering if I made the right decision. I had to do about a dozen interviews to get that job so things were not as crazy as they are now.

    Back in the early nineties I went to a conference where a paper on historical (over 300 years) metal prices (copper, lead, zinc, steel etc) was presented (adjusted for inflation) and all the lines were going straight down ie metal was going down in value more each year. Not a really rosy outlook indeed!

    Then the boom happened and I still cannot believe the prices I am seeing. If you went back in time and told me that a copper price of over $3 per pound was considered bad, I would have not made eye contact and crossed the road. If you had said that lead would be over 80 cents (let alone a dollar), I would have presumed that WWIII was underway and we were running out of bullets and so on. Needless to say that this too will pass although the timeframe is unclear. Then I will turn into one of those old farts who will bore the pants off the young engineers about the “good ol days” and all that. In fact maybe this post is a rehersal for my future role…

    So I guess what I am saying is that it is cyclical – to give you an idea there was a joke (recycled from another context no doubt) going around in Perth in the late 90’s:

    What is the difference between an exploration geologist and a large supreme pizza?

    The pizza can feed a family of four…

    How times have changed…for now.

  • 34 Greg Atkinson // Mar 31, 2012 at 11:39 am

    Here’s an interesting update on some shipping lines and the Baltic Dry Index. From an article in the Nikkei today:

    “TOKYO (Nikkei)–Shares in Nippon Yusen KK (9101) and other major marine shippers, which have long moved in tandem with the Baltic Dry index of shipping costs, are now drifting apart from the benchmark in a sign that investors approve of the companies’ efforts to diversify earnings.

    Calculated by London’s Baltic Exchange, the index is based on prices for single shipments and short-term agreements for transporting iron ore, grains and other commodities. For years it has been regarded as a benchmark for buying and selling marine shipper shares.

    Sensitive to fluctuations in the global economy, the index has been languishing since the start of the year on speculation of sluggish Chinese steel production. It has plunged some 50% since the end of September.”

    Source: Marine Shipper Stocks Tack Away From Baltic Index

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