NFTRH+; When inflation works for gold

As a core inflation number comes out today and causes some market hype, as per usual the gold stocks are doing nothing. Considering the state of mining cost drivers like oil and certain commodities/materials, it makes sense fundamentally, as I’ve belabored.

When it might start making sense for the miners to have an improved fundamental view is when the economy starts to grind and gold starts to out-perform these mining cost inputs, which tend to be positively correlated with cyclical inflationary economies.

We’ve been through all that before, but I wanted to repeat it and also add that fundamentals don’t always stop the bugs from bulling. Sentiment has gotten creamed and a rally (from 2020 crash pattern support) could start any time if gold and silver also rally (each are at least firm today). But as things stand today it would not have the macro fundamentals behind it and we do have lower potential HUI targets.

For gold and silver the fundamentals are a somewhat different story, however. Silver is more inflation sensitive, so there’s that. Also, there are a few considerations for gold as well.

This is a weekly chart of gold and the CPI/10yr yield ratio. It is quite dated, as it stops at July 30th due to CPI reporting. But you can see that as long as the ratio keeps rising (it tanked during the Goldilocks phase that began in spring of 2020) the chart’s history implies that it would be supportive of gold if it were to continue to rise.

On the very long-term, a monthly log scale chart shows a mostly positive correlation as well.

Now let’s also consider that the 10yr-2yr yield curve is hinting to turn back up to steepening, and that would also be supportive of gold, assuming an inflationary steepener, which it currently is set up to be.

Meanwhile, nominal CPI went on to post another high in August. So that’s another month of visibility we have.

The 10yr yield has done some catching up as of today. Again, we know that inflation’s effects (as measured by CPI) are not backing off as of today and we know that the 10yr yield is well below the high of last spring.

So especially with silver setting up to find a bottom, the precious metals appear fundamentally okay and would become more than okay if inflation keeps rising and long-term yields do not keep up.

And what IF yields keep up? They’ll croak the economy eventually as part of a Stagflationary backdrop. It’s an economy that needs more credit creation and high bond yields are antithetical to credit creation. It could be a long grind before shaking out, but eventually the Stag would await in my opinion. The Stag would impair the economy and so it follows, benefit the gold mining sector if/as gold starts to out perform cyclical commodities like oil, steel, etc.

I was going to include the material above in NFTRH 675 this weekend but decided to post an update instead here on Inflation Expectations Friday. This will allow a trimmer report more focused on investments and trades per the current backdrop.

I know it is probably a little bit confusing so if you have any questions or corrections please send them along using the contact link above and I’ll address them in the weekend report.