Full Frontal ‘Inflation Trade’ Ahead?

[edit] Subsequent to this post the precious metals and US dollar have reversed their upside.  This is not at all inconsistent with the article’s premise of a coming inflationary phase, which would require a reemergence of a risk ‘on’ mentality.  Of late, gold and the US dollar have been risk ‘off’ havens.  Here is a look at the in-day activity of USD, gold and silver.

A brief trip through recent history…

Gold bottomed and turned up in January, signaling a coming ‘inflation trade’ bounce, which then engaged in February as silver, commodities and stock markets finally got the memo.

We noted the compromises this made to gold mining fundamentals and that things needed to go counter-cyclical (and risk ‘off’) for the gold sector’s fundamentals to be renewed. Below is one of three primary charts we have used to gauge the macro fundamental backdrop, gold vs. stock markets.  The others are gold-commodities (and silver) and gold-currencies, which are both back on the bull message for gold sector fundamentals.

As for gold vs. stock markets, it’s full bull again across the globe as the consolidations to the key moving averages have held.

[edit] Here is the updated chart (replacing the one originally used that did not show the status at today’s close) of gold vs. stock markets, taking into account the ‘damage’ done after originally posting… looking at this one might think gold simply got ahead of itself and was due to be tamped back down.

gold.stocks

This is not a gold sector post, however.  The metals and miners will move as they move going forward (and NFTRH will surely track and manage them closely) as fundamentals and price are separate things.  So let’s move on to the inflation/deflation picture, which is central to all markets.

On June 2nd we began closely tracking the decline in ‘inflation expectations’, which would be beneficial to the gold sector.  Here is the most recent in a long line of posts since then.

‘Inflation Expectations’ Update

In that update you will see one gauge of inflation expectations, the TIP-TLT ratio, declining to what could be a double bottom.  You will also see the risk ‘off’ liquidity repository, TLT (long-term Treasury bond fund) making its upside target.

Now, let’s remember that gold is a hound dog; among its other utilities, it sniffs out future inflation problems.  That is what it did in January prior to the recent ‘inflation trade’ bounce, that is what it did in 2001 prior to the great Greenspan-instigated ‘inflation bull’ and that is what it (along with silver to a degree, this time) is doing now.  If a real deflation were brewing, gold and silver would not be strong.  Indeed, see this morning’s pre-market post illustrating an important new high for gold.

[edit] A new high has been marked, regardless of what corrective activity may unfold if markets go risk ‘on’, ironically at inflationary instigation.  Here is the weekly chart after a nasty in-day reversal…

gold

Look at this compelling chart of the 30 year Treasury bond pulling in herds of frightened casino patrons to the deflationary view.  That is where they belong because any decent trade in precious metals, commodities and certain global markets is going to need this counter party snuggled safe and secure at Uncle Sam’s teet.

usb

Does the above look familiar?  Well, it is the mirror of our favorite indicator, the Continuum, otherwise known as the 30 year T bond yield.  We have used the monthly TYX to call a halt to each and every ‘inflation trade’ along the TYX downtrend continuum.  If a new one comes about, we will look to the limiter, AKA the 100 month exponential moving average, once again.

tyx

Now I give you Michael Ashton, the “inflation guy” who has forgotten more about the mechanics of the inflation-making machinery than most of us have ever known.

Post-CPI

“Nothing at all soothing, indeed. A day after the FOMC chose to stand pat on interest rates, core inflation pushed back higher and median inflation is about to push above 2.5% for the first time since 2009 (when it was on the way down). Of course, nothing about this inflation picture, and the rotten internals that suggest higher figures are in store, would have changed the Fed’s decision yesterday. As noted previously in this space, the Yellen Fed fundamentally does not believe that inflation is a threat; if it is a threat, they believe a little inflation is okay if allowing inflation to run hot helps the overall economy and the little guy; and if they later decide inflation does need to be addressed, it can be easily reined in.”

Just “a little inflation”?  Cue the genies and bottles references.

So many people (and entities) are huddled en mass in US Treasury bonds and other low or no interest bearing assets across the globe.  The reason I think that a coming ‘inflation trade’ can be a whopper is because gold is not indicating deflation, T bonds (and yields) are at or near technical limit points and inflation is slowly building, especially within the US services sectors, under the surface.

Inflation is actually being nurtured each time the Fed rolls over and plays dead.  And this is not even including the Semi Equipment ‘bookings’ revival, improving manufacturing backdrop (per recent ISM and Empire reports, which each include notable increases in ‘prices paid’) or other reasons I don’t think the economy is quite as weak as the last two Payrolls reports indicated.

In short, the Fed may be looking back at the last war and continuing to fight it.  They will I suppose, when deemed appropriate, try to contain inflation.  Again, genies and bottles to your stations.  The list of things that could increase in price ranges from precious metals to commodities to various stock markets.  But first we have to finish herding the counter party to its proper station.

[edit] Seriously, go have a look at the post showing the in tandem hit to USD (UUP), Gold (GLD), Silver (SLV) and GDX if you have not already.  Risk ‘off’ got hammered (check out the VIX reversal today as well).  While the hit was fierce to the risk ‘off’ items, it seems to indicate a reversal to risk ‘0n’.  Watch Treasury yields and yield curves now, as the next indication of inflation.  They are still following TIP-TLT and other inflation indicators down but folks, we are looking ahead.  Isn’t that our job as speculators and investors?

Subscribe to NFTRH Premium for your 25-35 page weekly report, interim updates and NFTRH+ chart and trade ideas or the free eLetter for an introduction to our work. Or simply keep up to date with plenty of public content at NFTRH.com and Biiwii.com. Also, you can follow via Twitter @BiiwiiNFTRH.