Gold: Logic Vs. Emotions, True Vs. Temporary

The bottom line?

With inflationary pressures akin to propping up Germany in the late 1920s, the FED is torn between rocking Wall Street – which occurred on May 4th when U.S. Treasury Secretary Janet Yellen hinted that interest rates should rise – and allowing inflationary pressures to persist in hopes that they’ll calm down on their own. However, with cost-push inflation born by speculation in the commodities market, a summertime surprise will likely force the FED’s hand.

As evidence of the European Central Bank’s (ECB) ‘hope-and-pray’ strategy, the ECB published a report on May 6th essentially outlining a myriad of reasons why it should not raise interest rates. And while the policy stance is bearish for the EUR/USD, and therefore, bullish for the USD Index, the reasoning is another example of why once the dam breaks, the flood will be fast and furious.

Please see below:

Source: ECB

Translation?

As long as inflation expectations are confined to the financial markets and not mirrored by households and businesses, then inflation is synthetic, and raising interest rates will do more harm than good to the economy. However, with the argument flawed on so many levels, history implies that failing to taper creates even more problems down the road.

Case in point: the Institute for Supply Management (ISM) released its services PMI on May 5th. Quoting an excerpt from the report, I wrote on May 6th:

“The Prices Index figure of 76.8 percent is 2.8 percentage points higher than the March reading of 74 percent, indicating that prices increased in April, and at a faster rateThis is the index's highest reading since it reached 77.4 percent in July 2008 ….All 18 services industries reported an increase in prices paid during the month of April.”

And highlighting the significance, notice the strong correlation between the ISM Prices Index and the core Personal Consumption Expenditures (PCE) Index? For context, the core PCE Index is similar to the core Consumer Price Index (CPI). However, the former measures the prices that consumers and nonprofits pay for goods and services and excludes more than just the effects of food and energy.

Please see below:

To explain, the light blue line above tracks the year-over-year (YoY) percentage change in the ISM Prices Index, while the dark blue line above tracks the YoY percentage change in the core PCE Index. If you analyze the right side of the chart, you can see that reconnecting with the light blue line implies a core PCE Index reading of roughly 3% (using the scale on the right side of the chart). For context, the last time the core PCE Index hit 3% was January 1992. Thus, while the PMs continue to enjoy the speculative ride higher, once the FED realizes that reducing liquidity is not only the best, but the only course of action, the positivity will likely be short-lived.

In conclusion, plunging real yields have lit a fire under the PMs, but the rubber band can only stretch so far before it snaps. With inflation bubbling beneath the surface and central banks already diverging in their responses, it’s only a matter of time before long-term yields move meaningfully higher. To that point, with the U.S. 10-Year Treasury yield demonstrating its largest-ever divergence from the U.S. 10-Year breakeven inflation rate, history implies that the reconnection won’t be met with applause by the PMs. Thus, the medium-term outlook remains profoundly bearish, and the PMs often shine their brightest just before the sunsets.

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Disclaimer: All essays, research and information found on the Website represent the analyses and opinions of Mr. Radomski and Sunshine Profits' associates only. As such, it may prove wrong ...

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Carl Schwartz 2 months ago Member's comment

You also mentioned GDX will top at 34 but didn’t it 37.50, HUI. At 300 and crashes, it’s over 301 with a MACD bull cross over. Just saying