Executive Summary

• The entire commodity complex is breaking down
• What to expect next
• What will happen with gold
• What all this means for the future

If you have not yet read Part 1: Deflation Is Winning – Beware! available free to all readers, please click here to read it first.

Commodity Bust

Copper

'Dr. Copper' is so named for the metal's uncanny ability to both diagnose current economic activity and deliver a prognosis on future activity. Right now, it's saying the patient is very sick and not likely to recover any time soon:

Copper has just broken through key support (in dotted circles) and looks like it could fall further. Notice the behavior of copper in 2008/09 and you’ll see that paying attention to copper is a good idea.

Oil

Oil has obviously fallen by a lot, with WTIC crude well under $50 again today signaling a lot more pain for the shale companies. Remember, nearly all of them couldn't make money when oil was at twice the price. 

Looking at commodities more broadly in a basket that includes grains, metals, energy and fibers, we see this:

(Source)

Ouch!  That’s a huge decline.

And while the central banks are fiddling around trying to prop up equity markets for optical gains, real companies are crashing and burning.

This is a huge disaster, because while commodity prices may be back at 2002 levels, the debt loads of the associated companies sure aren’t:

The world’s largest mining companies by market value had accumulated nearly $200 billion in net debt by 2014, six times higher than a decade ago, according to consultancy EY, while their earnings only increased roughly two-and-a-half times.

Even if top mining companies devoted all their earnings less investment spending to paying down debt, it would take up to a decade to clear the decks, according to a Wall Street Journal analysis of EY data.

(Source – WSJ)

That last sentence in bold is really something. Even if the top mining companies devote all of their earnings less investment to paying down their debts, it will take a decade to dig out from under them.