Inflation Update

Just for perspective, ref. Michael Ashton’s post about the CPI and inflation.  He is a specialist in inflation-sensitive investments and makes the interpretation of inflation and inflation expectations his business.

The FOMC is meeting tomorrow and it is always risky to speak in definites when such a potentially market roiling event (one way or the other) is in play.  But a few things are happening in inflation sensitive markets that should be watched.

First, as we noted in an NFTRH+ update yesterday, Treasury yields are rising.  Here is the 10 year in a bullish looking pattern.


This is not necessarily a sign of inflationary pressure on its own, as rising yields can happen for a variety of reasons.  But when combined with the spread between TIPS (inflation protected) and TLT (regular long-term T bonds), we can draw the conclusion that in the short-term at least, the market is getting sensitive about inflation.

TIP-TLT’s pattern looks similar to the 10 year’s.


We have also been following the short-term constructive looking bounce in crude oil and noted that the gold sector could bounce after putting in the Hammer candles on Friday.  With silver leading the bounce, that only adds strength to the situation in the short-term.

Now for the mitigating news; silver vs. gold is only bouncing as of now and is still locked in a firm downtrend.  Could this change?  Anything can change in these markets at any time.  It is FOMC week and as noted ahead of time, market participants (and black boxes) are thinking in overdrive and this was likely to get into the markets.

So as of now, any talk of ‘inflation trade’ remains in ‘bounce only’ mode.  And the bounce could be quite brief, depending on FOMC and a skittish market’s reactions.  Traders can trade as they will, but inflation traders waiting for a real counter trend rally might want to wait until silver gets a sustainable upper hand on gold, for instance.  As of now, it remains in a downtrend below the down-sloping 50 and 200 day moving averages.


Or, using the gold stock ETF’s as an example, wait for a real trend change before significant commitment.  That only begins to happen above the descending 50 day moving averages.

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Turning to commodities, here are the general commodity and crude oil ETF’s.  As noted in NFTRH 360, oil has a constructively bullish looking short-term consolidation flag, but is still below the MA 50’s.


Since I do not try to predict markets, I certainly would not try to do so during a noisy week like this.  As far as precious metals and commodities are concerned, one day a real trade-able rally is going to happen.  But we have been observing for years that taking the bait on bounces or bullish hype (the “drop dead gorgeous bull wedge” on GDX, pumped so boldly by a popular source, failed 40% higher than today’s price) is risky business, unless you are a nimble trader.

A real rally would give time to get on board on pullbacks.  The bonus is that it would have real inflation signals like silver making a big move vs. gold or bond yields and TIP-TLT breaking to new highs, as opposed to just bouncing.  What is happening this week is an inkling at this point, and little more.  Especially given the big event tomorrow.

[edit] Adding the Energy sector ETF, as we have correlated a buy on XLE (55-60) with a coming inflation trade that itself would be predicated on a topping out of the gold-silver ratio.

Note how XLE as well, is only bouncing within its downtrend.  If/when this changes (and silver rises vs. gold) we will be happy to note it, especially since it is part of our forward plan.  But as yet, XLE too, has done nothing definitive.