Inflation Trade: Gold Lags, Silver Leads As Expected

Finally we have movement in the precious metals sector…but unfortunately for gold price cheerleaders, the movement was in the ‘inflation trade’. If you are looking for excitement about gold during inflationary phases, please look elsewhere because my articles are not going to satisfy.

Amid the hoopla of spiking US Treasury yields, spiking inflation gauges like the 10-year breakeven inflation rate (along with the TIP/TLT & TIP/IEF ratios), spiking Industrial metals and yes, spiking silver came this lame response by gold; a sag toward the 50-day moving average. This is as it theoretically should be.

Gold is still trending up on the daily chart however, and I for one was pleased to see the price not get excited. But I like logical things (amid so much macro confusion) and in an inflationary bout it is logical that gold, which had been firm into the event would give up leadership to the more inflationary excitable items. On the bigger picture (ref. the monthly chart reviewed last week) the gold price continues to lurk below bull market resistance in the upper 1300s.

With the inflationary excitement the Silver/Gold ratio rammed upward to the 200 day moving average. As such, it has not changed trend. So have that caveat in mind as when managing the ‘inflation trade’.

As for nominal silver, we noted here last week that…

“Silver continues to lurk below the daily moving averages and significant lateral resistance. We have been watching this paint dry for many weeks now and we’ll do so for many more if need be (though I doubt it will take that long) for the silver price to break up or break down. RSI and MACD are constructive.”

As suspected, it did not take that long as silver rammed above the SMAs 50 & 200.

But the silver price banged up against the next resistance level in the low-mid 17s. Considering the positive Commitments of Traders data we have been noting week after week, silver can be considered in leadership mode for the precious metals and a candidate to break through this next resistance level, possibly after some grinding below it.

Gold’s Commitments of Traders continues to be uninspiring but not particularly dangerous. Silver’s CoT (below) continues to be constructive as large Specs reduced their rare net short positioning to near flat and Commercials eased from their rare net flat positioning, increasing net shorts. But theoretically at least, if a new trend is beginning, there would still be a long way to go before the Commercial net shorts and spec net longs get back to high risk territories.

Bottom Line

If an inflationary phase took root last week, the expected happened as silver took over leadership from gold. However, the trend in Silver/Gold is still down and until that changes some caution about an inflationary party atmosphere is warranted.

We did so much more work this weekend in NFTRH 496 that is beyond the scope of this article, but suffice it to say there are many elements involved, ranging from current short-term inflation signals to past longer-term inflationary episodes and their resolutions, which are not pleasant. I may post part of that analysis at https://nftrh.com/, so keep an eye out. A key point to keep in mind is that an acute inflationary episode is a cycle, not a structural condition. These episodes tend to eventually end in liquidation as per 2008 and 2011.

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