A Eulogy for the CRB 6/23/05
By Ed Steer
June 23, 2005
In light of the deliberate disinformation coming from within the American government regarding the Consumer Price Index (CPI), the Producer Price Index (PPI) and the (un)employment statistics from the BLS; it should come as little surprise to anyone that one of the most watched benchmarks that highlights commodity prices is about to be radically altered.
This benchmark is the CRB.
In a May 10th Reuters article that broke this story, it was described as follows…"The CRB Index is a leading global benchmark for commodity price movements. The Index is constructed of commodity futures contracts from the energy, industrial metals, precious metals, grains, livestock and soft sectors and offers diversified exposure to the commodity markets."
The one very important thing that the above definition didn’t mention was the fact that each commodity of the current CRB has equal weighting. Well, that characteristic will end next month.
As the article points out, the CRB has been revised quite a few times in the past…ten times to be exact. But this time it’s totally different…as it’s getting the medical equivalent of a frontal lobotomy. This ‘new and improved’ CRB will now become a moving target…with a life span of exactly one month. At that point, the index can be revised, depending upon the whims of the architects of this index. The architects in this case are Reuters and an outfit called Jefferies Financial Products, LLC.
The article goes on to say… “Effective June 20, 2005, the Index will undergo its tenth revision, amending its components to include three additional commodities (unleaded gasoline, aluminum and nickel) and remove one commodity (platinum). Component weightings will now take into account the relative significance and liquidity of the various commodities markets. In addition, the Index will rebalance its component weightings monthly and will derive its value from nearby futures prices.” (The highlighting is mine – Ed)
The highlighting in the previous paragraph should indicate to any rational intelligent person that the fix will probably be in for the CRB…whether commodity prices are rising or falling.
The question then begs to be asked is…who decides (or defines) things like "relative significance" or "liquidity" as it applies to "Component weightings…as these are very subjective terms. The CRB may now become whatever ‘the powers that be’ want it to be.
I would like to venture a guess as to how it may be used to prevent the full force of commodity price inflation from showing up in this new CRB index. Firstly, both gold and silver will be relegated to bit parts in this new index and will most likely have very small weightings. Note the quote regarding "relative significance and liquidity" in the article. Both precious metals would fall well within that category. Secondly, since the index can be revised every month, a commodity may be weighted higher if it is in a declining trend…or the price of that particular commodity is being managed lower. The opposite would apply if any particular commodity (or group of commodities) were in an extended bull market. Thirdly, if this new CRB index is not equally weighted between all commodities (which they have already stated it won’t be), who’s to say that the index itself has to ‘add up’ to any predetermined number? In other words…if the CRB is under weighted in oil, natural gas, and the precious metals; does it have to be over weighted in something else to add up to say…100.00? If not, then what this means is that this new total CRB value could be made larger or smaller…depending on whether prices are rising or falling…anything to prevent asset inflation from becoming as noticeable to the general public.
Looking at the really big picture, let’s not forget about the ongoing war that we are all involved in…commodity money vs. paper (debt) money…and all the money and power in the world that’s trying to maintain our current fiat system. And…as has been presented ad nauseam by myself and others… here, once again, are Peter Warburton’s three famous paragraphs in his landmark essay "The Debasement of World Currency: It is Inflation, but not as we know it". Please read them very very carefully! Never has what Warburton said had more significance than it does now…
"What we see at present is a battle between the central banks and the collapse of the financial system fought on two fronts. On one front, the central banks preside over the creation of additional liquidity for the financial system in order to hold back the tide of debt defaults that would otherwise occur. On the other, they incite investment banks and other willing parties to bet against a rise in the prices of gold, oil, base metals, soft commodities or anything else that might be deemed an indicator of inherent value. Their objective is to deprive the independent observer of any reliable benchmark against which to measure the eroding value, not only of the US dollar, but of all fiat currencies. Equally, their actions seek to deny the investor the opportunity to hedge against the fragility of the financial system by switching into a freely traded market for non-financial assets.
It is important to recognize that the central banks have found the battle on the second front much easier to fight than the first. Last November, I estimated the size of the gross stock of global debt instruments at $90 trillion for mid-2000. How much capital would it take to control the combined gold, oil and commodity markets? Probably, no more than $200bn, using derivatives. Moreover, it is not necessary for the central banks to fight the battle themselves, although central bank gold sales and gold leasing have certainly contributed to the cause. Most of the world’s large investment banks have over-traded their capital (bases) so flagrantly that if the central banks were to lose the fight on the first front, then their stock would be worthless. Because their fate is intertwined with that of the central banks, investment banks are willing participants in the battle against rising gold, oil and commodity prices.
Central banks, and particularly the US Federal Reserve, are deploying their heavy artillery in the battle against a systemic collapse. This has been their primary concern for at least seven years. Their immediate objectives are to prevent the private sector bond market from closing its doors to new or refinancing borrowers and to forestall a technical break in the Dow Jones Industrials. Keeping the bond markets open is absolutely vital at a time when corporate profitability is on the ropes. Keeping the equity index on an even keel is essential to protect the wealth of the household sector and to maintain the expectation of future gains. For as long as these objectives can be achieved, the value of the US dollar can also be stabilized in relation to other currencies, despite the extraordinary imbalances in external trade."
Peter Warburton’s entire April 2001 article, archived at David Tice’s Prudent Bear site, is hyperlinked here.
As I mentioned before, this revision to the CRB index is just another attempt by ‘the powers that be’ to forestall a rush to hard assets from paper assets. They want everyone to go down with the fiat currency ship. Now it appears that the boys are trying to extend their influence over all commodities, rather than just the two they are actively managing right now…gold and silver; and two others that they are trying to manage…oil and natural gas.
One of many persons that can see this commodity freight train getting up to top speed pretty soon is the always erudite Doug Casey. In one of his latest offerings he had this to say…
"But you may be asking: Casey, what makes you so sure that this actually is a major secular bull market for the resource stocks?
There are lots of reasons. But in brief, we’re coming off the longest and deepest secular commodity bear market since the depression of the ‘30s. Commodity prices are still far closer to historic lows than historic highs, at least in “constant” dollars, which is what counts. The world economy is evolving away from the debt-burdened U.S. and towards China, India, and numerous smaller countries; their growth will be volatile, but it’s for real, and they’ll consume unbelievable amounts of raw materials in the coming years. There’s been very little mineral exploration for a full generation, the industry has come nowhere near replacing reserves, and a historic supply crunch in many commodities is in the making. Governments will always act stupidly, but the long-term trend is inevitably towards freer markets, higher standards of living—and higher resource consumption."
Doug’s entire article, which is well worth the read, is hyperlinked here.
It is just such a commodity boom Casey and many others are forecasting, that this newly revised CRB is meant to blunt. This attempt will fail. The index may become so discredited as a ‘benchmark’ that it might be abandoned entirely, and another index compiled to take its place…or run concurrently with it….such as the HUI has done with the XAU. They may manage the index, but they can’t manage every commodity on the planet that’s in it…or the ones that aren’t.
Doug Casey is right… "Governments will always act stupidly." That would also apply to central banks and investment banks as well.
Based on this upcoming revision on June 20th, it would be my opinion that these banks (and their ilk) will keep a lid on all critical commodity prices until such time as this revised version of the CRB is up and running. Time will tell whether my musings in this essay have any basis in fact. I’ll find out soon enough.
But in the meantime, as we all wait in breathless anticipation for this new "30-Day CRB Wonder" to come shambling forth, I’m going to get out my bucket of holy water and read the current CRB its last rites. It has served us well, and may it rest in peace. |
