Gold: Inflation 4.2% - The Cat Is Out Of The Bag

Fundamentals

US inflation surged to a 13-year high of 4.2% according to Investing.com. Oil prices are rising. The increase was well above the consensus forecast. The core CPI rose 0.9% last month, it’s largest increase since the 1980s. The ten-year note was clearly anticipating that increase. The ten-year note is up to 1.672; up 2.93%. Rates may have bottomed and they may be headed up.

Source: Investing.com

Fundamentally, we are in a bull market for gold and silver. Higher interest rates are probably going to be needed in response to inflation. Under normal market conditions, the relationship is inverse between interest rates and gold; rates go up and gold goes down. The dollar should also go up, while stocks should go down. However, these are not normal times. Interest rates go up and gold and silver go up. This period is similar to the 1970s when the US had just come off the gold standard. Interest rates rose to 14% and gold ran up significantly. In 1981, gold hit $850 or $900, while the Dow Jones was at about 900 - a one-to-one spread between stocks and gold. We also had far less debt then, and the relationship between stocks and gold is significantly skewed in favor of stocks. The key is whether gold will rise, stocks will fall or some of both will happen. It seems that gold should rise.

The question now is how the Feds are going to handle interest rates with inflation rates above their 2% target. Will the Fed raise interest rates? Unlikely, given the massive debt in the system: almost $30 trillion. If interest rates rise, then defaults will occur and spread rapidly. The Fed is more likely to cap the longer side of the yield curve, so they may limit the rate on longer-term debt. This may be short term. The economy is just reopening and returning to some sense of normalcy. Money is coming back into the economy and causing short-term inflation. But it may continue - no one knows.

Source: Ticker Tocker

Cheap money has put a lot of leverage into the economic system. No one really knows how much leverage is in the system, although $2 quadrillion may be at risk as a result of leveraging in various derivatives. The Fed cannot allow interest rates to rise in the face of all of this leveraging. Therefore, it seems that yield curve control may be the best option for the Fed. They may allow the 10-year note to rise, but cap rates on the 30-year bond. If that happens, it would be explosive for gold and silver.

Gold

We are dealing with a very volatile market in gold. It went from $1823 to $1845 in as little as half an hour. The market has activated a Variable Changing Price Momentum Indicator (VC PMI) buy trigger from the Buy 1 level at $1823. The Buy 2 level was $1808.

Source: Ticker Tocker

We use the derivative markets to manage the risk of trading futures. We have been looking for a reversion down to the Buy 1 or 2 levels, which is where you should cover your shorts or to cover any bearish strategy.

Lumber

Source: Barchart.com

Lumber has reverted back down and could be making a top. It is not a liquid market, but it is an indicator for the economy since it affects construction. Lumber hit a 1700 high and has come down some from there. It may take 30 or 60 days before we see the impact on home prices and in the shortage of homes in the US. Demand for homes outside major cities significantly increased, yet builders had difficulty building because of supply chain issues and increases in the price of lumber.