by Kevin Klombies, Senior

Tuesday, September 9, 2008

Two quick notes. First, we are going to be gone from Sunday through Thursday although if all goes well an issue will be sent out for Monday. It is long past time, we suspect, for a short break.

The second point has to do with gold. Please!!! stop asking us if we like gold, where we will like gold, or when we will like gold. We do not like gold on a boat, with a goat, here or there, or anywhere. We do not know if the next time we start to like gold it will betrading at 1100, 650, 550, 400, or even 300. What we do know is that we do not like gold today and do not anticipate liking gold for some time.

Some time back the Baltic Freight Index was changed to the Baltic Dry Index but all of our charts include the original name. The BFI is an index of ocean shipping rates for dry bulk cargo over a variety of routes so we use it to represent not only the trend forcommodity pricesbut also as a measure of the health of global trade.

We tend to view a rising trend for shipping rates as a positive for commodity prices as well as a positive for Asian growth. Conversely we have argued that when the BFI turns lower it tends to reflect a weakening trend for Asian growth that usually goes with falling commodity prices.

The BFI has a broad relationship with the trend for the U.S. dollar. The chart below compares the U.S. Dollar Index(DXY) with the BFI from 1994 into 1997.

The dollar’s last major bottom was reached in the summer of 1995. The charts shows that the lows for the dollar were made at the peak for ocean shipping rates.

Below we feature the same comparison from 2005 to the present time period.

To be positive on the dollar- as we have been- we have to be negative on ocean shipping rates and since one of the key drivers behind the trend for the BFI is Chinese demand for iron ore the argument leaps from the dollar and shipping rates to the trend for metals prices and the mining sector. If we are dollar positive we are necessarily metals and mining negative and while the price of gold can most certainly outperform base metals prices when interest ratesare falling there is still a good chance that another two years will pass by before we finally turn back to positive on gold.