Stimulus Talks Dusting Off Opportunity In Gold And Silver

Gold & Silver Unusual Option Activity Report

Since the original CARES Act expired at the end of July, gold and silver have been backpedaling. However, as stimulus talks appear to be moving quickly toward a deal, the prospects for gold and silver are more lustrous. The early sign of this was the bullish option activity in the ETF products yesterday.

For some, this is a natural conclusion but for others, they may not have made the connection about gold’s role as a stagflationary asset. Yes, I used the term ”stagflation” and not “inflation.” This is because gold doesn’t generally outperform during more inflationary times like silver can. Gold’s role is capitalizing on a falling dollar.

When the Fed is temporarily able to stimulate the economy with their printing press, frequently, the dollar will lose value against other foreign currencies but will strengthen in real terms. How do I know this? Because gold prices are falling.

Gold History Lesson

For this lesson on gold, we’ll have to go back to late 2011 to early 2016. The global economy was poised to enter recession and in late 2012, global central banks were on the warpath. This path led them to inject liquidity that surpassed the financial crisis in size. Initially, the Federal Reserve’s “Operation Twist” parlayed into QE infinity.

From October 2010 to December 2104, the Fed increased the size of their balance sheet from $2.8T to $4.5T. Over that period of time, gold prices declined from nearly $1800 to around $1200. The price of the S&P 500 increased from around $1180 to close to $1850, and the dollar was flat.

Looking at the chart below, you’ll see this dynamic playing out. Gold prices are represented by the green area graph, the red line is the S&P 500 and the black line below is the price of Invesco DB US Dollar Index Bullish Fund (NYSEARCA: UUP).

(Click on image to enlarge)

Interpreting the Move

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