Gold Miners: Are PMs The New Titanic?

Inflation is lurking for investors like a well-hidden iceberg. One false step and there is nothing left but a massive price-drowning.

With the PMs becoming an ocean of optimistic and pessimistic mood swings, their daily waves have disguised a storm surge that’s building off in the distance. With inflation soaring and one policy error liable to capsize their entire vessel, precious metals investors, like the Titanic, are blindly sailing toward their demise – with a band playing aboard.

Case in point: while market participants believe that the U.S. Federal Reserve (FED) has the ability to control interest rates, its powers are actually extremely limited. And with the FED’s bark much more vicious than its bite, the central bank has a monopoly on the ‘confidence’ market, not the bond market. Translation? As long as investors believe in the FED’s narrative, the ‘confidence’ filters across financial markets and allows asset prices to reflect the FED’s wishes. However, as history has shown, if that confidence erodes, all bets are off.

On Apr. 30, I warned that inflationary pressures could force the FED to raise interest rates much sooner than expected.

I wrote:

A material Eurodollar options position signals that a hawkish shift could occur by late August. With the options bet expiring on Sep. 10 – right before the FED’s Sep. 22 policy meeting – the date is rather peculiar. But with the FED’s annual Jackson Hole Symposium held in late August – where Powell unveiled a new policy framework for inflation in 2020 and then-FED Chair Ben Bernanke teased more bond purchases in 2012 – this year’s event could result in similar fireworks.

Please see below:

Source: Bloomberg/ZeroHedge

To explain, Eurodollar futures and options are used to speculate on short-term interest rates. More specifically, the contract reflects the implied 3-month U.S. dollar LIBOR (London Interbank Offered Rate). And with Eurodollar futures currently implying roughly five rate hikes by the FED by Mar. 2024 (contract settled at 98.7700 on Apr. 29), the large trader bought Eurodollar put options that imply roughly seven rate hikes by the FED by 2024. As a result, the "extremely high conviction" trade could be a $60 million windfall if Eurodollar futures fall sharply by Sept. 10.

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