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The inflation trade and its potential impact on precious metals

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(Kitco News) - Those who have read my work know that over the past few months I have been warning of the prospect of problematic price inflation developing in the coming months and/or coming few years. I have said that basic “Economics 101” classes in college taught that increasing the money supply and its velocity in an effort to stimulate demand in an economy is very likely to produce rising prices for goods and services. History shows this to be generally true. It must be pointed out, however, that the last time major central banks of the world moved to infuse significant liquidity into their financial systems just over 10 years ago, such did not produce price inflation anyone would deem problematic. Still, the amount of monetary stimulus created during the 2008 financial crisis pales in comparison to what has been and will be created during the Covid-19 pandemic. It seems hard to fathom that central banks could be able to print so much money in such a short period of time, and still be able to escape “paying the piper” down the road.

History shows that significantly rising price inflation stimulates demand for precious metals and especially gold and silver.

Let’s take a brief look at markets that will be involved, and which could tip us off on any “inflation trade” that might occur in the coming months.

U.S. Treasury Notes: The 10-year U.S. Treasury note is the benchmark government security that the marketplace watches so closely. This week the yield on the 10-year rose to around 0.66% as of this writing. Just last week the yield was near a record low and trading around 0.52%. (Yield moves in the opposite direction of price.) See on the weekly continuation chart for nearby T-note futures that prices are still in a longer-term uptrend and not far below the record high set this spring. For the problematic price inflation notions to gather steam from a U.S. Treasury futures prices perspective, nearby notes would have to drop below the longer-term support line at the June low.

U.S. Dollar Index: The USDX is a basket of six major currencies weighted against the greenback. See on the weekly chart that the index is presently in a steep downtrend and has just hit a two-year low. A depreciating greenback can be deemed potentially inflationary for a couple reasons. The U.S. dollar remains the world’s reserve currency. A weaker greenback on the foreign exchange market could prompt a move by investors into hard assets like raw commodities, pushing those prices higher due to the increased demand. Also, most major raw commodities on most world markets are priced in dollars. When the dollar depreciates, those commodities become cheaper to purchase in non-U.S. currency—meaning better demand for those commodities and resulting higher prices.

Goldman Sachs Commodity Index: The GSCI is a basket of several major raw commodity prices, including, grains, metals and energies, that is a good gauge of the overall price trends in the raw commodity sector. See on the weekly chart that prices have made a strong rebound from this year’s low—forming a bullish V-Bottom reversal pattern to suggest still more upside for the index.

Nymex Crude Oil: The crude oil market has made a strong recovery from the springtime low that pushed to around minus $40 a barrel. Crude is arguably the leader of the raw commodity sector. If price inflation comes more into play for traders and investors in the coming months, crude oil prices cannot languish and must be trending solidly higher. If crude’s recent rebound fizzles out into sideways and choppy trading, the inflation trade is very unlikely to pan out.

Lumber: This important construction material saw its futures price this week streak to a record high. The lumber market suggests raw commodity price inflation is on the horizon.

Copper: The red industrial metal is also a major construction component, especially commercial construction. The weekly chart shows prices trending solidly up—an indication that global construction activity is rising at a good pace. Copper’s price action also falls into the camp of the inflation trade bulls.

Gold and Silver:  Gold prices a short time ago hit a record high of $2,078, basis nearby Comex futures. Silver futures notched a more-than-seven year high just recently. However, both markets posted very strong losses Tuesday--gold down over $115 and silver down over $4.25 at one point. The major question gold and silver traders are asking is, “Was Tuesday’s price action a signal that both markets have put in major tops?” Nobody knows the answer to that key question, but there are powerful technical tools that a trader can use to try to determine if and when the metals have or have not topped out. Tuesday’s big drops in gold and silver prices are, so far, just big downside corrections in still-strong price uptrends on the charts. Following are price levels that are the last “reaction lows” on the longer-term (weekly charts) uptrends that if breached on the downside would negate the respective longer-term price uptrends in gold and silver futures markets—and very importantly be a strong technical clue that longer-term market tops are in place. GOLD: $1,669   SILVER $17.00. See their other key support and resistance lines on the charts. It’s very important for a trader and investor to look at longer-term price perspectives. One day does not make or break a longer-term bull or bear market.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.