Gold Says Wheat Prices To Drop

I like getting answers ahead of time.  Some traders can just go with the flow and react to whatever seems to be happening.  That makes me uncomfortable.  I prefer having an idea of what is supposed to be happening, and then I turn to real-time indicators to tell me whether in fact the forecast is working as expected.  When it is, I can trade with more confidence.  When things seem broken, I step away. 

I don't trade wheat futures, but I am an end user.  And I know how important grain prices can be for the economy generally.  So it is for that reason that I care about the relationship in this week's chart.  I showed this once before in a Chart In Focus article back in April 2011, when gold was forecasting a surge higher in wheat prices.

We did get that surge, but now the message has changed dramatically.  The big drop we saw in gold prices into gold's June 2013 bottom is saying that a similar looking drop is coming for wheat prices.  The key point in this chart is that the plot of gold prices has been shifted forward by a year to reveal how wheat generally follows in the same footsteps a year later. 

Why one year?  I truthfully do not know.  I just see that it has been working for the entire history of gold prices ever since they began trading freely in the early 1970s.  That's long enough to prove to me that it is a legitimate relationship, even if I cannot explain the "why" of it. 

I do know that gold has proven itself as a great leading indicator for a lot of things in the past.  Back in the days when there was a CRB Index (before it was bought by Reuters, then Jeffries, then discontinued), gold prices would lead the overall commodities market by about 4 months.  I don't know why that same 4 month lead time did not also work for wheat, but the chart evidence is sufficient to say that it is different. 

Generally speaking, gold is driven by the perceptions and the actuality of liquidity.  So those same liquidity waves which can drive gold up or take it down can also reach other shores later on.  That's the best explanation for why gold's price movements matter for forecasting the movements of wheat prices. 

As for the larger macro implications of an impending drop in wheat prices, such a drop would be good news for people like me who are end users.  There are about 7 billion of us, minus those who have problems with gluten.  But good news for consumers is often bad news for producers.  So if wheat prices do indeed fall into Summer 2014, that's not going to be bullish news for farmland prices or for makers of farming equipment.