Gold: 1970s Bell Bottoms And Inflation Are Back

The 10-year bond yield is falling in most developed countries. Switzerland and Germany are in negative interest rates on the 10-year bond. The highest yield is in Australia, which is at about 1.75%. That's the highest interest rate being paid right now on a 10-year bond. Therefore, there's a lot of money going to Australia into their bonds. The disparity between Germany and Australia is about 2%. The US got up to almost 147.70 a few days ago, which caused the stock market sell-off and gold and silver came down to the levels where we are now with gold at about $1700 and silver at $26.

Courtesy: Investing.com

Given the tremendous amount of debt now, any rise in interest rates is going to affect the ability of countries and other debtors to pay. The Treasury, therefore, is under tremendous pressure. We may be moving toward higher interest rates. Given the huge amount of stimulus entering the markets, the market is saying that it's going to be inflationary, which is why interest rates are beginning to rise. Commodities, such as wheat, soybeans, crude oil and corn are all rising rapidly. Bitcoin also is up significantly.

The Commodity Index shows most commodities are increasing in price. We are beginning to see a commodity bull market as a result of this aggressive monetary policy. The market will need more stimulus than they are offering right now. We still have high unemployment rates. Many companies are out of business. The damage done is still coming to light.

The market is afraid that if interest rates rise, gold will collapse. It's a contradictory argument because interest rates are rising because of a fear of inflation caused by supply chain problems. However, if the economy gets going again, demand may outstrip supply and lead to price inflation with more money chasing fewer goods. As we print more money and inject it into the economy, prices will rise, including gold.

Already we are seeing shortages, such as of 1,000-ounce silver bars, which are used for industrial purposes, gold, and various essential chemicals used in medicine, not to mention the vaccines. We may see a stronger than expected economy igniting pressure to raise interest rates. That will put pressure on the Fed, since they know that if they raise interest rates, debt payments will rise considerably - unless they take control of the yield curve. The Fed may cap the 30-year bond rate, which is where most of the debt is located.

If interest rates even rise one percent on the $30 trillion in debt, payments become extremely difficult to make. No matter what they say, the Fed must keep interest rates low or even negative to finance our way through this record debt that we have while managing the pandemic. The situation is similar to the 1970s when inflation rates hit 14% in 1981 after the US went off the gold standard. At the same time, the US dollar collapsed against gold more than 90% in purchasing power, debt exploded to record levels, and gold ran up to new highs.

Gold and Silver

We had another session of short selling with the average price of about $26.56. We came down right into the Variable Changing Price Momentum Indicator (VC PMI) Buy 1 level of $26.13. We also are getting a lot of volatility in the silver market. The paper and cash markets appear to be diverging, with a shortage developing in the cash market.

Silver is at a bottom and is testing a lower level of support. The VC PMI is identifying that, even though there is an overwhelming bearish sentiment in the paper market, silver has come down into an area of accumulation of supply, according to the VC PMI. The VC PMI is based on the reversion to the mean. It identifies daily, weekly, monthly and annual average prices, as well as extreme levels above and below those means.

On March 2, silver came down to $25.82 and then reverted right back up. It tested the previous low and showed that $26.13 is an area where buyers are likely to come into the market. The weekly Buy 1 level is $25.75. The low was $25.82, close to that level - within 10%, which is what we use as a rule of thumb. Therefore, it confirmed that the market had reversed. Today we see another test of this level. The price came down and we found more buyers than sellers. Therefore, the price reverted back up.

You don’t have to listen to all the chatter in the media. We just focus on what the market is telling us through the VC PMI. All over the Internet is news about the short squeeze in gold and silver. The price came up to $30.35 on Feb. 1 on the news about the short supply. Then the market discounted that news and returned to its equilibrium price or mean. Anyone who bought at the top got slaughtered. Do not follow the herd. Do not listen to the mainstream media.

Experts in the media talk all about how gold and silver were in short supply, yet they then went down. Instead of listening to the chatter, focus on what the market is telling you. The markets are contrarian by nature. They do not go the way everyone says they should go. Markets tend to go where no one is. Even after this correction, gold and silver have never been so bullish. Use the corrections to increase your long-term long positions in gold and silver.

Silver

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Courtesy: TDAmeritrade

For silver, the daily VC PMI Buy 1 level is $26.13 and right below that's the weekly Buy 1 of $25.75. The daily Buy 2 is $25.39 and the Buy 2 weekly is $24.79. We are entering into this area that starts to increase the odds that the market will find buyers down at these levels and is likely to revert back up. You can use this information to buy stocks, ETFs, futures, options or other derivatives. The gold and silver mining shares are very well priced right now to go long.

Gold

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For gold, either it will come down to $1694 or revert back up above $1715. In this area, the VC PMI says not to sell. You don’t want to trade around the average price, because there is a 50/50 chance of the market going up or down from there. You want to trade the extremes above or below the mean.

The Buy 1 and Sell 1 levels have a 90% chance of a reversion back to the mean. So if gold hits $1715, there is a 90% chance that the market will revert from there back to the mean. The Buy 2 and Sell 2 levels have a 95% chance that the market will revert from there back to the mean. These numbers match the Fibonacci fan lines and the Bollinger bands.

We are within weeks or even days of a huge rally in precious metals. This rally will begin when the sentiment is at its most bearish. Buy corrections and hold on for the long term.