Inflationist Gold Bugs Have Driven The Rally

The post began as a simple view of the inflationary dynamics in play within the precious metals market but as sometimes happens it, err… expanded.  Please excuse the wordiness. But I would rather be wordy and try to make points backed in facts and data than backed only by my biased ego.

Not that I have proof (re: the title), but I do have some charts to help make the point that people who bought gold and gold stocks due to inflation fears have been driving the gold sector higher since March.

Back in January and February HUI rammed upward amid much doubt and skepticism because the general market backdrop was bearish and even more importantly, the commodity focused ‘inflation trade’ was nowhere to be found.  At that time we were calling the deflation story “long in the tooth”.

Then silver made a higher low vs. gold in early April, took off and the formerly over sold indicator became very, even dangerously over bought by late April.

A silver rise vs. gold is a signal we had long awaited in order to call an ‘inflation trade’, which is another way of saying an anti-USD trade, a Greenspan-era type situation, after the global deflation and US Goldilocks environment of the last few years.  Gold, silver, commodities, emerging markets, etc. would benefit (with developed stock markets likely remaining aloft), and so they have. The inflation-sensitive items were good for a bounce at least and maybe more out in the months ahead.

But commodities, emerging markets, etc. were due to weaken when silver began to weaken vs. gold (silver having more commodity-like characteristics than gold). The interplay between silver and gold is a sensitive indicator on several conditions, but one of them is definitely the market’s ability or willingness to perceive and act upon inflation. So far, the downside in silver-gold has just been a modest reaction, not a correction.

The Commitments of Traders for gold and silver are indicating, and have indicated for weeks now that speculators are driving a precious metals ‘launch’ phase and driving a bull market into existence. One point (among others, like ignoring conspiracy theories) I tried to make in this post about the CoT is that while speculation has been driving the metals, it is also going to flame out at some point.