Blog

In light of the recent flare up in inflation anxieties, which we were well prepared for, I want to call your attention to indications that will help guide our preparation for what comes next.

The declines in the Gold/Silver and Gold/Copper ratios logically came against the backdrop of rising inflation angst. Gold got bent but not broken relational to Silver and Copper. Gold is less cyclical, less inflation sensitive and less risk ‘on’ than the other two. Hence, it is a market liquidity and/or inflation/deflation indicator when compared to them.

As you can see, the Gold/Silver ratio (GSR) pulled back hard, but barely maintained its uptrend. The risk, in my opinion, is on the side of silver as compared to gold. If gold holds and rises vs. silver it would go hand in hand with a reduction in inflation anxieties at best, or a market liquidity problem at worst. With the stock market already well into correction, I might guess that it would be a reduction in inflation anxieties and maybe even a joyous Goldilocks revival. If GSR were to rise impulsively, that would be the ‘liquidity problem’ signal. If GSR unexpectedly (by me) breaks down, we’d likely be back to inflation hysterics.

The Gold/Copper ratio (GCR) is in an even better uptrend, despite the hard pullback of late. Copper is more cyclical than silver, and despite the headlines it is gaining, gold is having none of it. Copper is bullish nominally, but we are looking inside markets to see what hidden secrets they hold. The message here is that while the economy is holding up (by outward appearances, at least) and inflation has remained sticky, gold is grinding against both of those cases.

Bottom Line

Despite the recent declines in Gold vs. Silver and Copper, its uptrends remain intact vs. those items. If gold holds its relative uptrends we could see a return of disinflationary Goldilocks as relief envelops the land. One day, however, if/when the GSR and GCR rise hard, the anticipated market liquidity event will be indicated. This the favored scenario, given the intact uptrends.

If, on the other hand, gold breaks down vs. these two metals the indication would be worsening inflationary pressures, which may or may not benefit the ‘inflation trades’, depending on how seriously the market would still be taking the Fed. This is my less favored scenario.