Inflation expectations in the United States are now rising according to data from the New York Federal Reserve. Their September 2021 Survey of Consumer Expectations shows that short and medium-term inflation expectations are now rising to their highest levels since the inception of the survey in 2013. Americans are expecting the price of food to rise 7% over the next twelve months and their rent to go up 9%. This has huge implications, because we have, in reality, seen inflation slowly creep up in the past fifteen months, ever since commodities and oil made a secular bottom in the Spring of 2020, but inflation expectations, which rise this quickly, historically have led to sustained inflation that lasts for years.
Now you can see how inflation expectations had been relatively stable for years. That began to change this Fall.
According to the New York Fed, “The SCE is a nationally representative, internet-based survey of a rotating panel of approximately 1,300 household heads. Respondents participate in the panel for up to 12 months, with a roughly equal number rotating in and out of the panel each month. Unlike comparable surveys based on repeated cross-sections with a different set of respondents in each wave, our panel allows us to observe the changes in expectations and behavior of the same individuals over time.”
To me this is more confirmation of my overall macro view that this decade is going to see similarities to the stagflationary period of the 1970’s. At the moment we are going through a quarter in which the rate of inflation is higher than the rate of GDP.
In the 1970’s the best things to invest in were real estate, commodities, materials stocks, select foreign markets (such as Korea back then), and precious metals. The overall stock market had one big bear market during the decade, but failed to rise at the rate of inflation.
Right now we have seen big rises in commodities, stocks, and real estate in the past twelve months, while gold and silver have been in a long-drawn out consolidation correction. In my view there are some similarities to what happened with gold and silver to what happened in 1976.
In that year both went through a big correction AHEAD of a brand new cycle of the Federal Reserve raising interest rates.
They bottomed before the first rate hikes came and then once they began soared to begin an epic rally. At the same time the stock market rallied into that rate hike cycle and then rolled over several months after it began. Gold has historically fallen into new rate hike or tightening cycles and then rallied as they began. Jordan Roy-Byrne did a video on this topic last week, which is worth checking out, but something similar also happened in the Fall of 2018. During that year gold dumped in the summer as the Federal Reserve became more hawkish and then began to rally into the end of the year at the end end of September.
We are now heading into a more hawkish cycle for the Fed, in which they are poised to announce the start of a QE bond buying reduction program that is likely to set the stage for a rate hike or two by the end of next year. Gold and silver both fell ahead of that announcement, while the dollar has rallied. It appears that gold and silver have already made a new bottom and are now getting into position to rally even further once the QE reduction announcement is made next month.
There are two key indicators on the chart of gold that suggest that the overall trend for it is now up.
My favorite indicator in tracking the gold trend is the GDX/GLD ratio as it tends to lead the price of both gold and mining stocks. It measures the performance of the mining stocks to gold and declines when gold stocks perform worse than gold. When it bottoms it indicates that corrections in both are over.
That is the indicator on the bottom of the chart.
Another indicator is actually more powerful, but tends to trigger less often and after the GDX/GLD indicator does. That is the performance of gold versus the US dollar.
Historically gold trades opposite to the US dollar – and that is actually the most reliable trading relationship when it comes to gold. There have been times, at the end of gold rallies in which gold stops going up while the dollar continues lower which have marked peaks for gold, and times in which the opposite has happened.
While gold pulled back from the end of May to the end of September the dollar rallied.
That’s no surprise.
But two weeks ago the dollar made a new high on this rally and gold rallied too.
That is a powerful confirmation that gold did indeed make a major bottom at the end of last month when it got to $1720.
My conclusion: the overall trend in gold, silver, and mining stocks is now up. We can still see a dip down to $1750 or movement around $1800 before that trend results in another big move up, but any dips are now buying opportunities.
-Mike
