Our plan has been for 2026 “inflation trade” including a wider range of commodities. But the plan was subject to an interim market liquidity problem/deflation scare that would, not so ironically, help trigger the forces of inflation (Fed & Government) into further action.
January has begun in a fashion that would have us believe we go straight to inflation trade, leaving out the interim liquidity scare. The US dollar is still trending down (despite another bounce to test the underside of its 200 day moving average) and the would-be Yen Carry Trade unwind has not manifested either.
Stock markets have ticked new highs, TSX-V has been ramping and gold, silver and the miners have held firm despite some volatility.
The one fly in the ointment is the one we initially focused on as a concern. The extreme low in the Gold/Silver ratio, an indicator that implies tightening liquidity when rising. Well, the GSR continues to grapple with the downside target area we set back in early December. This is a warning.
The long-term view shows the vulnerability quite well. The 2011 low and snap back preceded a bear market in the precious metals (and commodities). The 2021 low and snap back preceded the broad market correction that many thought of as a bear.
The 1998 low and upward grind preceded a precious metals (and gold stock) bull, which was a righteous fundamental development (as was early 2025, see below). *
If we are forming a low here and GSR rises, especially if it spikes, the implication would be poor for precious metals and commodities, and for “inflation trades” in general. It may or may not be bad for areas like Tech/Growth. I would think a hard spike in the GSR would bring on Seinfeld’s Bad Chicken (“it’s not gonna be good for anybody”)…
…but if it grinds out a rise, the precious metals and “inflation trades” could grind out a correction in prep for a later 2026 inflation trade while certain stock markets/sectors benefit from a Goldilocks situation (a possible condition with a gently rising GSR).
If – and this is still in the realm of probability, not actuality – the Gold/Silver ratio rises I see these options:
- Hard spike, taking down most markets hard. PM & Commodities get the worst of it.
- A bottom and upward grind, putting PM and Commodities into corrections, along with some stock markets/sectors, with a possibility of a whiff of Goldilocks benefiting Tech, Growth, etc. Especially if yield curves start to flatten.
- Move along. Nothing to see here. The chicken is fine, silver is going to zoom above 100 and gold will break down vs. its little bro on the big picture.
My view? I am going to stick with the “interim liquidity problem” view featuring a bottom and rise in the GSR. Whether today’s pre-market weakness is the trigger or after a January bull fest (as the GSR continues grinding out a low). Further, I’ll lean toward a bottom and upward grind, bringing a correction rather than bear market to PM & Commodities, in prep for inflation trades later.
We should watch the US dollar and perhaps the Yen and associated Carry Trades. I would think one or both of those items would join the GSR if it rallies.
Risk of GSR reversal is high and so general risk is high.
“Ah, but Gary, you yourself made a big deal about how gold stocks rose earlier in the year with a rising GSR.”
Yes, indeed. But I think the situation is a different animal now with silver having put on a laser show, dragging all sorts of sordid sponsorship into the precious metals (unlike early 2025).
* When gold stocks rise with a rising Gold/Silver ratio, it implies a rise with their best (counter-cyclical, anti-inflationary) fundamentals. It happens all too rarely, I suspect due to relative speculation in silver.
