NFTRH; ‘Inflation Trade’ Update

In US pre-market silver is +2.47% and gold is +.72% at 7:00 Eastern.  The silver-gold ratio closed like this yesterday, still above the daily SMA 200.

While the trend has not changed conclusively, the ratio continues to march toward a signal that would indicate many assets and markets could gain the inflationary bid similar to the bull market instigated by Greenspan from 2003 to 2007.

Yesterday, crude oil got some bad fundamental news for the here and now, but managed to hold its SMA 200 as well.


And the Energy sector was actually positive after dropping and reversing back above the SMA 200.  XOI and XNG are shown below, although XLE is the ETF we have been using to track the sector.  The market seems to have given us a positive signal for the current stance by not tanking the Energies on the widespread media news.



Treasury spreads are still not confirming a rise in inflation expectations, but gasoline has been rising slowly but surely at the pump lately and Healthcare and other services continue their grind higher over time.  We have been conditioned by the macro backdrop of the last few years not to expect inflation.  But it is there and in some cases, embedded.  A rise in oil would increase the public’s perception of inflation.

Gold was the first mover as we noted it should be.  If silver and commodities play catch up and start to surpass gold’s performance it would be time not to turn our back on the gold stock sector, but certainly not to obsess on it as if it were anything special in an inflationary environment.

The economy has not cracked and if the market starts to think inflation is the play (and why shouldn’t it, given policy makers’ stellar efforts to promote it?), it would go hand in hand with a failed bear case on the stock market.  With the indexes up again this morning in pre-market that is the indication.  Can everything reverse and negate what seems to be in play now?  Sure.  Has it yet?  No.

I did as I said I would and took a loss on the IWM short with the Russell 2000 closing above its SMA 200 yesterday.  What is the difference between RUT and the Energy charts shown above?  Not much, with respect to the SMA 200.

If the current trend moves from short-term to intermediate, continues and solidifies a view of positive inflationary effects on asset markets, gold and especially silver would do well and as for the stocks, I would say Royalty companies (I bought SAND yesterday to replace a partial position sold in SBB.TO) and exploration would be better options than gold producers, given that cost creep would enter the picture for mining operations.

But that is out ahead.  If we are on track to a changing phase things are making sense because the gold sector was supposed to have moved first (it did) and then within that silver would eventually wrestle leadership from gold (it is still in the process of that attempt, but bears close watching) and markets most sensitive to inflation would start to change trends by getting above their SMA 200’s (see Emerging Markets, Energy and even US Small Caps, which prefer a weaker US dollar).

The bottom line is that if/when a real inflationary phase comes about we can take positions and ride it ala 2003-2007.  The liquidation will come, but that is a story for another day.  If deflation is getting played out, the public’s fears will knee jerk the other way, into the things that benefit from rising inflation expectations.  Let’s see if pre-market indications sustain through the day and then the week.  The longer this goes on, the firmer the prospects.