NFTRH Update, Precious Metals & ‘Inflation Trade’ After Fed Roll Over

Here is what the US Fed did to the currency it is supposedly a steward of yesterday.  The USD plunged below an important support level.  If this breakdown holds below 80.50, it measures to the mid-70’s.  Enter an ‘inflation trade’, in which we’d look to fan out from the precious metals and include other commodity and global stock items.

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It appears that this is how our projected final leg (into 2014) of the cyclical bull market is going to be fueled.

The Fed has exposed itself as little more than a delivery vehicle for inflation (Captain Obvious speaks…).  I feel almost a little bit soiled for having even entertained the idea that they might have had some guts about them.  With the economy doing okay by outward appearances, they had a chance give the impression that they were on the job, and they rolled over.  How desperate is that?

Checking in on some fundamental underpinnings for the precious metals…

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Yield curves continued the short term trend we have been noting and reacted in a highly gold-positive way yesterday.

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Gold vs. Crude Oil made a big white candle yesterday.

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Gold-Base Metals surged.

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As did Gold-US stock market off of important support we have been noting.

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Finally, our most important indicator, gold vs. broad commodities surged back above the short term and 50 day moving averages.

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Keeping alive our biggest picture thesis (by Gold-CCI monthly chart), which is an ongoing and secular economic contraction against which policy makers systematically promote inflation.  Counter cyclical gold out performs cyclical commodities over the long term span of an ongoing contraction.

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If the TIP-TLT ratio (inflation protected bonds vs. unprotected T bonds) finally moves upward strongly from its bottoming pattern, we could have compelling evidence that an inflation trade – confounding a majority that think inflation is no longer a problem – in the making.

In the weekly letter we noted bottoming patterns in things like Agricultural commodities and REE’s.  We also noted this big picture status of the GYX (base metals).

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Add GYX as a would-be green light to an inflation trade if 350 is retaken.

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The likes of Palladium could be a good play if/as it holds the support we noted in NFTRH 256.

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Probably the most sensitive indicator to an inflation trade would be the silver-gold ratio.  Above is the silver-gold ratio’s status after it made an important bullish reversal candle last Friday as noted in #256, and then did even more good downside work yesterday before a hard upward reversal.  A break to new highs in the SGR would be a good inflation indicator.

As it stands, the precious metals are the early indicator to inflation.  The dollar is breaking down and the Fed seems to want to maintain/create a bubble.  That bubble would likely not be in US stocks, but would now transition to a global status with the precious metals as the early indicator.

Bottom Line

The Fed has opened the door to a closet full of commodities that could gain strength.  Global stocks (see Asia, see emerging markets) have already kicked open the barn door as we have been noting.  Per the brokerage graphic at the ‘Model Portfolio’ page Asia, Russia and Canada are held.  I would look for additional opportunities.

Silver should out perform gold if an inflationary phase is ahead.  For this to be fundamentally healthy for gold stocks we want to see gold out perform general commodities (especially oil) and the US stock market.

While I am at 33% committed to precious metals, I seldom go more than 50-70% committed in total (i.e. I almost always keep substantial cash levels).  So I would like to try to add to these items but also hold cash in reserve to fan out to other areas if a general inflation issue is brewing.

As for commodities, I already bought Agriculture as noted in the Brokerage graphic at the ‘Model Portfolios’ page and per the bottoming pattern we have been noting in DBA.  I am also interested in Palladium, REE’s, Copper and possibly Uranium if the signs continue to indicate inflation.

Within this, I’d expect the current trade in T bonds to be just that, only a trade.  With what the Fed is doing we cannot rule out that they could put the final nail in the bond bull’s coffin.  As it stands T bonds went up after FOMC, ostensibly because the Fed is going to keep buying them.  That is a racket and should be faded eventually if real inflation chickens come home to roost as a result of the Fed’s actions.

The market is now officially F.U.N. because the cards are on the table, a new trend is getting established in the precious metals (assuming that the short term correction of the rally off the June bottom ended yesterday) and this may indicate other areas of interest as well.  The analysis now happily shifts to maintenance, definition and opportunity mode going forward.