For many, it was just too good. In early 2013, gold prices were slammed – twice. Just after QE3 was announced, gold had moved back up to almost $1,800 per ounce as it “should” have, reflecting all that future “money printing.” Rather than keep going, however, gold started to drop and then drop some more so that by the time of the first slam gold was barely holding $1,600. After the second, the LBMA physical price was an incredible $1,200. In light of “money printing”, it didn’t make much sense.

To reconcile what “should” happen with what was actually taking place, economists rationalized this contradiction in gold as successful QE anyway. Rather than picking up coming inflation, they told themselves, gold investors were finally acknowledging that the Fed had been successful and that there was nothing left to fear – the recovery was finally at hand and even stubborn “gold bugs” were being forced to accept it.


I wrote last year that perhaps economists and their media should have been less giddy at the time given these basic contradictions. And they were giddy:

As a result, the falling price of gold is more important than simply being an opportunity for schadenfreude around the likes of Glenn Beck or John Paulson or Zero Hedge…

My hope is that the price of gold will continue to fall, that goldbugs will look increasingly silly, and that as a result Americans with savings will conclude that the best thing to do with those savings is to put them to work in a productive manner, rather than self-defeatingly trying to protect what they have.

Gold prices rose to a high of $1,790 as of the AM fix on October 5, 2012, less than a week before the first MBS transactions of QE3 settled (meaning “money” actually “printed”). It was all downhill from there, both gold and what money really mattered – “dollars.”


The position of premature celebration in light of gold was one of pure emotion rather than evidence, and that weakness extended far beyond the realm of the one metal. Copper prices, for example, sold hard starting in February 2013 from a post-2011 rebound around $3.75 to as low as $3.08 by May 1 – before “taper.” Doctor Copper, as it is often called, was suggesting as gold “something” wrong with money; given the usage of copper and its relative importance in the confluence of finance with economy (especially China), the copper mini-crash should have been more prominent for those (few) economists who beyond emotion truly wanted to understand what was really going on in gold, commodities, and money.

The reason these misinterpretations went on for so long was what followed; it was a continuation of the 2012 economic slowdown that for gold and copper meant the 2011 “dollar” re-crisis was a real economic blow. But for economists, there was no recession in 2013, therefore by that one inappropriate standard alone QE3 was given the benefit of every doubt including gold’s illogicality.

Despite all that, the path of copper and to some extent gold is one that is familiar to economic accounts. From the time of the early 2013 selloff until mid-2014, copper prices traded sideways largely based on these two competing positions. Economists were absolutely sure that the recovery was at hand, while at the same time monetary concerns only festered and in some ways (repo) grew. Like inflation breakevens, it was about fourteen months of sideways uncertainty contained within a narrow range where the market didn’t want to stake out a position one way or the other.


Eventually, of course, the “dollar” proved to be the only influence that mattered, with the “rising dollar” putting an end to all the prior giddiness even if those same giddy economists wouldn’t appreciate it for years afterward (and many if not most still haven’t figured it out). It wasn’t just markets, of course, where the “rising dollar” proved most devastating. The global economy like 2012 found itself with another leg down at a time when to policymakers “overheating” seemed the greatest risk. To be caught so in such the wrong direction is directly related to these mistakes.

The ISM’s Chicago Business Barometer is another example of these inflections and changes in the real economy, as well as why there has been so much difficulty interpreting them. This year perhaps more than at any prior time the index has been especially volatile, wildly swinging at times to extremes from just one month to the next. The October 2016 calculation released today is no different; having jumped to 54.2 in September, the headline number is back to 50.4 again.


This volatility defies traditional business cycle expectations, where the low levels in late 2015 and early 2016 brought out recession fears all over again, only to be incorrectly dissuaded by certain months afterward (such as the May-June change, going from 49.3 to 56.8). As I have written before, what is important is not the picture presented by any single month’s index value, high or low, rather how over time this PMI like other economic accounts displays the same economy all over again.


There is a good deal of copper in that smoothed-out average (above), and it is one that we find all over the world. As I wrote last week about durable goods, the pattern here is the same if slightly altered by that 2013-14 interlude. The fact that the economy didn’t get worse at that time or that copper prices didn’t fall further was not confirmation that the 2012 slowdown had passed, that recession had been avoided and growth was to resume again. That was, however, how it was taken and the statistics like the Chicago PMI that registered minor improvement in 2014 were used in that manner.


It wasn’t actual, meaningful improvement, which would have been confirmed by rising copper, rising inflation expectations, and a serious bond market reversal (steeper curve, significantly higher nominal rates). Further, as with durable goods, there is a tremendous difference between relative improvement and actual improvement; PMI’s like the Chicago version only tell us about the former.

In 2016 all over again, copper, durable goods or the Chicago PMI are all finding another interim period between the last “dollar” hit and a prospective “next one.” The Chicago PMI seems to be all over the place, but really that is due to how it is ill-suited to these conditions beyond the business cycle. Looking at it as a trend, it is sideways like copper at a low rate/price, perfectly reflecting how the economy ratchets lower after each of these “dollar” events.

To economists who still see everything as recession or not, this is yet again taken as a sign that the worst is behind us and growth is just around the corner. But like 2013 and 2014, there is scant evidence for this view, leaving it, as always, more a product of truly invested emotion than legitimate interpretation. Sideways isn’t growth; it is at best the lack of further deceleration due to immediate monetary pressure.

At each of these monetary intervals, the global economy absorbs the hit and weakens but doesn’t recover from it; what appears to be stabilization or even minor improvement is really just the interim between monetary events that transpire only in that one direction (negative pressure). Trying to understand what has been taking place from a cyclical perspective is like what it once was in trying to read ancient Egyptian hieroglyphs before the discovery of the Rosetta Stone.

Copper was one part of the financial translation (gold another) that in 2013 would have helped the mainstream understand that this is all different. The “fear trade” didn’t end; it was replaced by economic circumstances far worse than mere recession, where actual depression can go on for years without anybody who is supposed to know better actually doing so.