Baltic Dry Index And Gold

The Baltic Dry Index crashed to an all-time low. What does it mean for the gold market?

In February, we reported that the Baltic Dry Index had plunged to the lowest level since 1986. We stated that this was a sign of a slowdown in the global economy, since the index measures the cost of shipping freight around the whole globe, which is very sensitive to demand for vessels, driven by increased global production and demand for raw materials. We also pointed out that the BDI was considered to be a leading indicator, which has a habit of foreshadowing major turns in the economy and the stock market by about 3 to 6 months. Interestingly, in August, i.e. about half a year later, there was a stock market sell-off.

The Baltic Dry Index staged a recovery mid-year, however, it has been declining since August and on Friday it plunged below 500 for the first time in history. It is a little disturbing, because November is usually one of the busiest months of the shipping season due to the upcoming holidays.

Chart 1: Baltic Dry Index from November 20, 2014 to November 20, 2015.

Source: quandl.com

The reason for the decline is that the world trade is stagnating, as you can see in the chart below.

Chart 2: Merchandise World Trade (volume) from January 1991 to August 2015.

Source: CPB World Trade Monitor.

The take-home message is that the current levels of the Baltic Dry Index are not encouraging. It signals a further slowdown in global economic activity. Given that the shiny metal is the best asset during slowdowns, it should be positive news for the gold market in the long run. However, gold is usually a bet against the U.S. economy, not against the global economy. As long as global turbulences do not affect the U.S. economy, gold will not get a boost.

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Arkadiusz Sieron

Sunshine Profits‘ Gold News Monitor and Market Overview Editor