What's Up With Gold?

Fundamentals

The producer price index came out with the biggest number in 40 years. Gold was down, but we are beginning to see a bit of a correction.

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Source: YCharts.com

The CPI is at 6.8%. These types of numbers are not transitory. It puts pressure on the Fed to raise interest rates sooner rather than later. Doing that will be a challenge, with debt far above where it was in the 1970s, when it was below a trillion dollars. Interest rates hit 19%. Today, we have negative interest rates in effect and massive debt. Today we have a very different dynamic than in the 1970s. The 10 Year Note is at 146.70, up 4 basis points. It is not reacting to the inflation fear that we seem to be seeing in the markets and record levels on the CPI and PPI.

(Click on image to enlarge)

Source: YCharts.com

“It is abnormal for gold to be down at these levels,” Equity Management Academy CEO Patrick MontesDeOca said. “We have inflation at highs not seen since the 1980s, yet gold is down.”

Gold is down 6 or 7% for the year and silver is down 14% or so for the year against these levels of inflation, which are at 40-year highs.

(Click on image to enlarge)

Source: YCharts.com

Precious metals have been around for thousands of years. We are in the midst of a monetary system that is adjusting to these new levels of inflation. This acceleration of inflation has been caused by the Fed’s massive expansion of the balance sheet to record levels. There is a lot of money in the system, which is causing price inflation. We also have less supplies than anticipated, since companies did not store much inventory in expectation that the pandemic would continue to suppress demand. Now, demand is far, far above supply.

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Source: macrotrends.net

A key issue now is whether this level of inflation has become integrated into the system. If it is not transitory, then the Fed and the markets are in a dilemma. The Fed will have to talk about tapering and raising interest rates, which could devastate the economy. The past few meetings, the Fed has just talked the markets down, but has not actually done anything. The digital markets, precious metals and other markets have come down far below their mean.

“We could be seeing a sell the rumor about tapering and raising interest rates, and when the Fed makes its announcement, the markets could run up, having already discounted the possibility of an interest rate rise,” MontesDeOca said.

Strategy

E-Mini 500 S&P

Source: ema2trade.com

The E-mini S&P is down 30 points on the uncertainty, activating a short trigger from 4687, according to the Variable Changing Price Momentum Indicator (VC PMI). If we come down below 4632, then a bearish price momentum will be activated with targets of 4524 to 4469. We are turning bearish in the equity markets and we may be making some kind of a double-top.

Gold

Source: ema2trade.com

Gold has a bigger trend that is bearish, but within that trend, the short-term momentum is bullish. If it closes below $1783, it will negate the bullishness to neutral. If you are short, take profits at $1771 and $1756, then reverse and go long. Take profits if you’re long at $1795 to $1807. We have a weekly trigger in gold with the target of $1783. Gold seems to have identified the extreme levels of the market.

Silver

Source: ema2trade.com

The weekly trend momentum at $23.79 is bearish with a bearish sentiment. If you are short, take profits at $21.81 to $21.40. We had a buy trigger at $21.81 with a target of $22.63 to $23.84.

Bitcoin

Source: ema2trade.com

Bitcoin weekly trend momentum is bearish. If you’re short, take profits at 46,005 to 44,120. If long, take profits at 50,098 and 54,080.

“We are at an extreme below the mean, so the market is most likely to revert back to the mean,” MontesDeOca said.

The chart in Bitcoin looks similar to the gold chart. The gold-to-Bitcoin ratio appears to be narrowing. Gold is in an area of accumulation of supply, where you should add to your positions. Bitcoin is in the same situation; an excellent area to add to your position. It activated a weekly buy signal from 46,005. We are trading at extremes below the mean in gold and Bitcoin. Silver is almost the same pattern as gold and Bitcoin. Silver is also at an extreme level below the mean and in an area where it is good to add to your positions.

Opinion

Inflation is running hotter than expected, mirroring the 1980s. Then gold was at $850 and interest rates were double digits, with the Dow Jones at about 1,000 - almost at par with gold. Now stocks have rocketed up, while gold has not. Interest rates are at almost zero or negative and debt is in the trillions of dollars. If interest rates do go up aggressively, it puts the world economy at tremendous risk and defaults will become common. It is a global problem, so governments will have to find a way to hedge against this tremendous debt bubble by allowing inflation to run at higher levels than expected. It is the only way to monetize the debt; by devaluing the currency, much as Mexico did in 1981 creating hyperinflation. All of these factors are extremely bullish for risk assets like gold, silver, and Bitcoin.