Baltic Dry Index – An Important Index To Help Measure World Economic Activity
The Baltic Dry Index, or BDI, is an index of twenty-two key dry bulk shipping rates and is compiled daily in London. This index provides an assessment of the price of moving raw materials such as iron ore, grains, coal, and cement by sea. This index does not include wet goods such as crude oil.
Since this index is not a tradable contract, it does not have a direct speculative component. Although contracts that do contain a speculative component can influence the cost of shipping. One component that has a speculative component, by as much as 30% as this is being written (October 2007), is crude oil. Another is the U.S. Dollar. Since the index is being quoted in dollars, the sharp fall in the dollar is partly responsible for the recent near vertical rise in the index.
So why would an investor or trader care about how much it costs to ship dry goods by sea?
Transportation by sea can be a good barometer of the volume of world trade. This index can be a good economic indicator for future growth and production, since the raw goods being shipped are precursors to production. Also, since the number of ships available is relatively fixed, the price of shipping can go up or down based on supply and demand. If world growth slows, the cost of shipping raw goods will decrease. If world growth accelerates, the cost of shipping raw goods will likely increase.
Today a large portion of the demand for raw goods comes from China. The growth cycle in China influences the profits of many companies around the world. Having an index that can give a clue to when the trend of the demand for raw goods is increasing or decreasing can give important clues to possible changes in broader economic activity.
A century ago the Dow Theory was gaining in popularity, and it is still in use. However, it is much less effective in the new global environment. Part of the Dow Theory requires that a new high in the Dow Jones Industrial Average is to also be confirmed by a new high in the Dow Jones Transportation Average. A failure of both averages to confirm a new high, at least within a reasonable time, would usually imply a potential reversal of trend, to be confirmed by the price action itself. On the other hand, if both averages confirm the new high, the trend is assumed to be intact, and prices can be expected to move higher. The same theory in reverse can be applied to confirmation or non-confirmations of lows, therefore buy signals could be derived from one index making a new low while not confirmed by the other. The basis of this theory is that if goods are manufactured, or raw materials are mined, it is important for the companies that move these goods around the county to also be increasing in value. Using an average of stock prices doesn’t directly measure the cost of transporting these goods, as it does by actually measuring the cost of shipping, but if the transportation companies are making more money, one might infer that there is more transporting activity, and therefore more economic activity in general.
Now that the economy has become more global, with China and other emerging markets becoming a more important factor in the world economy, a different type of transportation index is required. The Dow Jones Transportation Average is composed of stocks of companies beyond just the components that transport raw and finished goods. For example, airlines moving people and small packages are also included. While that may indicate current economic activity, it does little to forecast future economic growth in the way raw goods can. Also, much of the activity is domestic, so it does not represent the global picture. While there are some companies represented that deal with global delivery of goods in general, it is quite diluted, and not an accurate measure of the shipment of raw goods. Measuring the actual cost of transporting the raw goods, rather than the value of the stocks of transportation companies, can be a more direct indication of the trend of economic activity. If a transportation average fails to confirm an industrial average at a new high or low, it might be a good idea to also check to see if the BDI is making a more meaningful confirmation.
The BDI isn’t always a leading indicator. At times it is coincident, and at times it can lag. It has flaws, as does any index. It can have short term swings that can be more influenced by dollar and oil gyrations. But using the BDI in a longer-term context to view the trend of the cost of shipping can give important clues to the trend in world economic growth or contraction. It can be an important piece of the puzzle to determine longer-term trends in the world economies.
Click on the link in the resource box to view many charts of the BDI as it correlates with other indexes.
The Relationship Between the Dollar Value and Gold Price
An individual, who is aware of the ongoing trade of US$ gold price and the Dollar Index, would definitely be aware of their being opposite each other in directions.
The basic reason for gold and dollar being in complete opposition is that gold is more of a currency. It is being traded in the global market as money, and because of this very reason, dollar happens to lose its value on the foreign exchange market over a prolonged duration. During the same period, gold price is expected to gain a rise. At this point, the fact cannot be overlooked that when ever dollar gains back its value, even if after a lot of months, price of gold is going to decline.
Whenever the charts or the graph of dollar and gold are compared, the vast difference becomes clear along with the fact that both of them have been inversely correlated ever since the currency system came into being around the early 1970s.
Gold is generally perceived as a long-term hedge against inflation. It would not be very long that periods of uncertainty would instigate an increase in the price of precious metals. There is an inverse link between the precious Metal Price Index and the US Dollar Index. The World Gold Council has even substantiated this fact that they both share an inverse relationship.
During the recession of the US Dollar, it typically appreciates in worth and the cost of silver, platinum and palladium usually face a decline. There are periods of recessions when gold and the US Dollar appreciate together, and that helps fail the inverse relationship over the short-run. However, during the long-term, this inverse relationship does not lose its grip and the reciprocal trend continues.
Therefore, the aforementioned points indicate gold as not a long-term hedge against inflation. It very vividly puts forth the fact that gold, unlike any of its companion metals like silver, platinum and palladium, is definitely a short-term security hedge against recession and decline.
Gold definitely has an edge above the US Dollar in the global market as it tends to benefit its consumers in the long run. It is not so that it loses its value when dollar gains back its worth. Gold has an edge of benefit still left behind, and the fact remains that when gold reaches its peak, dollar is nothing more than mere piece of paper. Due to these very reasons, they both share a reciprocal relationship where either one side benefits or the other one suffers. Yet, both are the commodities that investors do not refrain from investing in.
The Coming Economic Collapse
Protests, civil unrest, economic crisis, spiking food and oil prices are all symptoms of a greater problem that unfortunately will not be solved by governments because they lack the political will to change course. An Economic Armageddon is on the horizon. The protests in the Middle East have brought attention to our current financial crisis that affects the entire global economy. Many factors play into the recent unrest in the Middle East, but particularly in Egypt where food prices are very high and employment pay is very low. The World Bank’s food price index climbed 15% between October 2010 and January 2011, and now is 29% above its level a year earlier, and only 3% below its June 2008 peak. The grain price index remains 16%below its peak mainly due to relatively stable rice prices,which are much lower than in 2008. The increase over the last quarter is driven largely by increases in the price of sugar (20%), fats and oils (22%), wheat (20%),and maize (12%). (Taken from Food Price Watch).
However, according to the United Nations Food and Agriculture Organization, the Worldwide Food Price Index is at an all time high, exceeding the 2008 levels which caused global rioting and pushed more than 64 million people into poverty. Egyptians are hardest hit with the new price spikes, who spent more than 40% of their monthly income on food, more than any other emerging economy. By comparison, Brazilians spend 17%, and 20% in China and Saudi Arabia. In the United States, we spend only about 13% of our total annual expenditures on food but over 34% on housing.
The National Inflation Association estimated that by 2015, that Americans will be spending almost 40% of their income on food and as little as 10% on housing. This will be due to the US Governments printing of trillions of new dollars to pay for toxic assets from the housing/sub prime crisis, and government debt which the current administration spent like drunken sailors. Americans will pay off their mortgages with depreciated US Dollars but our food cost will skyrocket due to the hyper-inflation that is knocking at our door. China’s Central Bank states that, ” Quantitative easing by the Federal Reserve and other central banks cannot address fundamental economic problems but may lead to excessive global liquidity and competitive currency depreciation..” The Chinese believe that this monetary easing is pushing up global commodity prices.
Unfortunately, most of the mainstream press and analysts have their heads in the sand and are ignoring the signs which are continually becoming more and more pronounced. Financial experts that disagree with the ‘part-line’ are ignored or ridiculed such as Barry Wilkerson, Porter Stansbury, NIA and many others. Barry Wilkerson, a partner at the London-based consulting firm, Oliver Wyman, was denied full access to the all important World Economic Forum at Davos Switzerland (2011). Mr Wilkinson stated that,”The fundamentals haven’t been addressed at all…the things that caused the previous crisis – loose monetary policy and trade imbalances – they are actually bigger now than they were then.” He also warned in March of 2010 that rising interest payments on the United States’ national debt, increased government healthcare and entitlement programs spending will certainly guarantee that the US will see hyper-inflation by 2015.
Instead of awakening to the reality of the coming economic crisis, a veritable economic Armageddon, Americans continue to spend their time watching American Idol and engaging in other useless entertainment. We cannot wish away the problem nor will it be solved by ignoring the key reasons for it. For those of you who are now awake, start buying silver and gold to create a hedge against the coming hyper-inflation. My wife and I buy silver every two weeks or so because the real money experts are saying that Silver prices are starting to rise. I would also urge some Food storage as well, dry goods which will keep. Some time ago we also invested in a seed bank that has various packages of heirloom seeds of varying kinds to be used to grow vegetables and fruits in your own backyard. Do not buy seeds from your local store since most of them are Genetically Modified. When it comes to your survival it is best to plan and be prepared.
Educate Yourself:
http://www.inflation.us
Read AFTERSHOCK, Protect yourself and Profit in the Next Global Financial Meltdown by David Wiedemer, PhD
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