It was a rather lacklustre week again. Equities, fixed income, currencies and commodities in general remain relatively unchanged in a month now with no new mutli-week highs or lows being generated. At a distance things look rather confused at the moment, but that being said there is little evidence that the macro trends that began early this year are in the process of reversing because no key levels (a higher low, or higher high) have developed. At this stage we tend to believe that macro trends are consolidating gains/losses before the next extension of the trends get underway over the coming weeks.
It has only been the action of the precious metals markets over the last week that has really caught our attention due to the multi-week highs in the Big Three precious metals against paper currencies. To us Silver breaking to a multi-week high in AUD terms was the biggest event of the week and hints at the developing primary bull trend in precious metals, commodities in general and the bear market in paper currencies. And it leads us to believe that inflation is coming much sooner than everybody will have you believe.
Yes, something has got to give! It seems that US treasuries and precious metals are going head to head in a battle of attrition, someone here is bluffing. Is it the precious metals market or is it US treasuries? That is, is it going to be the inflation or deflation camp?
We suspect that the inflationists are going to win. We are highly suspicious of the action of the US treasury market due to the Fed and index trackers. It is common knowledge that the Fed has been buying to support treasury prices creating an artificial floor to prices. Perhaps what is more important is the impact of currencies pegged to the USD. Every time the USD depreciates it essentially forces countries whose exchange rate is pegged to the USD to buy US treasuries to depreciate their respective currencies. Now as long as these US index “tracking” nations are happy to have their exchange rates depreciate US treasuries will be well supported. However the minute one of these nations decide to break rank and stop buying US treasuries (and by default decide not to support Americans living beyond their means) other nations will likely quickly follow suit. Who will break rank first? We have no idea but suspect it may well come in the form of a small emerging market nation. We suspect that this is already happening with gold silver platinum and copper moving to multi-week highs against paper currencies including the AUD. Perhaps Mauritius buying 2 tones of gold and India 200 tonnes are cases in point. This leads us to the behavior of precious metals – someone is buying precious metals as aggressively as what happened in the late 1970s which leads us to believe that the big three precious metals (and commodities) are likely to move significantly higher over the coming months perhaps years! Now this leads us to hypothesize – what will happen to US treasuries if we see gold trade at $1500 and silver at $25 within the next 6 months? Will we see yields on the US 30yr below 4%? We think not!
Anyway to the markets, only one new multi-week high/low was registered and that was in silver. Even in the face of strength in the USD Index, silver (and gold and platinum) has managed to climb higher. This is telling us something real loud and clear! The next crisis is now getting into gear. It looks like it is going to be a currency crisis followed by an interest rate/inflation crisis………….
Watch the behavior of gold in AUD terms it reveals most of what is likely to happen. Whatever new multi-week highs/lows we are now observe over the coming weeks they are likely in response to strengthening commodity prices……if equities break down it will suggest that markets are factoring in stagflation, if they break higher it suggests growth and inflation are expected. Either which way we are now approaching important cross roads for most asset classes. Watch and listen to what the market is telling you, don’t try and get too smart!
Our wealth creation portfolio is up around 22.61% since the beginning of the year with approximately 40% of the volatility of the S&P 500. This portfolio is not leveraged.
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awesome post! i can’t believe everyone and their mother keeps talking about deflation.
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