It is painful isn’t it, watching the nonsensical performance of the monetary metals. Nothing makes sense at the moment on why we keep seeing red, day after day, given the macro horizon points everything to the north. It seems traders see any one macro that goes against gold and silver outweighs the other six for it.
Yesterday, gold bounced from the $1800/oz level as the bears once again took control eroding some of last week’s gains after touching a high of just over $1830/oz last week. Inflation figures came in at levels not seen since the crash in 2008 and even the Fed appears to be starting to wobble on their explanation.
The yield on the 10-yr treasury at the time of writing was under 1.2%, and as written about previously, was tanking from its recent highs. This should be a worrying indicator for the stock market indexes as it shows the drive back into bonds and risk off. It is only a matter of time before the 10-year yields head south of 1.0%
For months, yields controlled the price of gold in an inverse correlation. For the last few weeks it has been the dollar which was weakening at a less rapid pace than its peers. It seems whichever measure of gold’s enemies is strongest controls the price. With real yields now dangerously low, gold should be higher—and considerably.
What the eagle eyed would have noticed of late, however, is that while the dollar index has seen bullish pressure, since its dip in June, the dollar and gold haven’t been running in opposite directions. Gold has actually risen at the same time the dollar index has. Silver however, hasn’t. We are now at a stage where the Gold/Silver ratio is at a four month high. Curious isn’t it.
So why, old boy is this the case? Other than what has been proffered above as a reason it is difficult to fathom. Every time inflation figures come out, the higher they are, the more the metals should rally, as the historic correlation tells us this. But they don’t—particularly not Silver, which is still around 50% off its all time high.
Dollar rallies based on the Fed narrative that rates will be rising due to high inflation. These traders are ignoring the 5.9% unemployment level which is the other half of the Fed’s narrative.
Stock market indexes appear to be turning against the Fed narrative now. One has to ponder how long the Fed can keep conning people that it is transitory. Will gold and silver still be at current levels come Christmas time if the Fed is still maintaining 6% inflation is transitory and there is nothing to worry about?
Stock market investors have been programmed to buy the dip. This bull market has gone on for years and years of buying even intra day lows. To change the mentality will require a catastrophic event. COVID wasn’t it, inflation could be.
So if inflation isn’t the key, what will make gold and silver shine again? Yields tanking—check. Interest rates low—check. High inflation—check. Huge debt—check. Geopolitical concerns—check. Rising COVID cases—check. What’s left?
The answer to this may well come in another “flation” environment and that is stagflation. We are in an atmosphere that is ripe for this to occur and this could change the entire spectrum. When the growth slows (and it will as this rebound isn’t sustainable at the current output levels), then the stock market will wake up to it and wobble.
Historically, money has rotated from risk on to risk off, and the Fed will have no choice but to do what they have done for over a decade and can’t get out of, which is print money. The similarity in today’s climate to that we saw in the 1970s is worrying. It is easy to be snow blinded by the economic rebound, however looking six months ahead it is not what it seems. I’d rather be positioned six months early in a trade than six days late.
Gold, and particularly silver, are still somewhat bearish at the moment, however this to us is a contrarian indicator, and they have never looked as good an investment at these price levels. As a not unknown investor once said: Be greedy when others are fearful.