My Bet On Inflation & Market Outlook

This is source I found from another site, main source you can find in last paragraph


It's been a while since I've written an article on gold, part of which has been a result of my moving to a new city. I want to wish everyone a belated happy July 4th last week, and also hope everyone enjoyed their weekends. Now, onto the markets!

I want to start off by talking a bit about the macro-outlook for gold, which I think still remains bullish despite this "higher interest rates" narrative that has caused a frenzy in the bond market. I will then narrow down the focus to the recent economic data, movements in the bond market, the dollar, and GLD, and then finish off with some technical analysis.

Higher Interest Rates Narrative May Not Be Bearish For GLD

The gold ETF (NYSEARCA: GLD) has been falling since its most recent top of 123 back a month ago on June 6th, and now sits with a 115 handle. The general narrative in the markets has been that since the Fed hiked rates in June, and revealed its intentions of unwinding the balance sheet, known as quantitative tightening (QT), the macro environment for GLD looks grim. Higher interest rates supposedly bode ill for non-yielding bullion, and are bullish for the dollar. They are also bearish for bonds.

ChartGLD data by YCharts

However, market participants must remember to distinguish between real and nominal interest rates when evaluating the movements in the currency, commodity, and bond markets. As we can see from the graph below, when Nixon removed the US from the gold standard in 1971 due to the inflationary policies of LBJ in the 60s, gold rose together with higher interest rates. It was because interest rates were following gold and the stagflationary environment of the period, not the other way around. Only when interest rates rise with low inflation, and real rates increase, does GLD suffer.

When inflation precedes interest rate hikes as it did in the 70s, gold will rise even in a rising rate environment. That is because although

nominal fed funds rates are rising,

real rates are falling, and gold moves higher to weakening real interest rates.


(Data Source: Macrotrends, Analysis by David Luo)

With a high inflation rate of 12.34% in 1974, then Chair of the Fed Paul Volcker was forced into raising rates to over 12% to match inflation. Since real rates still remained around 0%, inflation remained a problem, and gold rallied from $200/oz to over $600/oz in 1980. Volcker finally stamped out inflation with his then-unpopular nominal fed funds rate of 20%, with a real interest rate of around 7%. The inflation rate in 1980 was around 13%.

Inflation fears then subsided significantly, and we got the Greenspan easy money policies, commonly called the Greenspan put. This was followed by more of the same from his successors Bernanke and Yellen. All of these policies resulted in lower and lower nominal interest rates, until we hit ZIRP and QE during the financial crisis, which has resulted in zero nominal and negative real interest rates.

Gold has responded in tune with a parabolic ending in 2011 that looks similar to what bitcoin has recently been experiencing. These tiny 25 bps hikes in the nominal fed funds rate won't be able to catch up as inflation increases, and real rates stay where they are or fall. When investors realize this, GLD will move up once again.

The Bond, Currency, and Commodity Markets: Someone's Wrong

What we've been observing in the bond market recently has been rising yields and falling bond prices. Since the Fed hiked rates on June 14th, yields on the 10YR have rallied from 2.15% to 2.37%. That's more than a 10% move in yields, which has clobbered bonds. If yields are rising simply to match inflation, that is bearish for bonds, and bullish for GLD.

Meanwhile, in the commodity space, gold (which I would also consider as a currency), silver, and other commodities such as oil have been weak. Oil is down from 47 to 44 so far in July. GLD has been falling since its local June 6th peak on the narrative that the higher fed funds rate and recent low levels of inflation from the CPI have resulted in higher real rates.


(Data Source: TradingView, Analysis by David Luo)

What is strange, however, is that in the currency markets, the dollar has been extraordinarily weak as well. It has now fallen to the 96 handle, down from its highs of 103 at the beginning of the year. That's a 6.8% drop in price. The dollar moves higher to increases in real interest rates, and lower with higher inflation, which is the complete opposite to GLD. For GLD and the dollar to move in tandem together since the month of June means that one of these is mispriced.

Let's work through this. As nominal yields rise as evidenced in the bond market, inflation must be low and real rates high for GLD to have fallen. But, if real rates are high enough to beat down GLD, why has the dollar fallen concurrently? Higher real rates are supposed to be bullish for the dollar.

It is far more likely that inflation is ticking up before official numbers measure it, so that real rates are falling to drive down the dollar, while also driving down bond prices, since inflation is a bond's worst enemy. I will place my trust that the bond market and currency market are pricing bond yields and the dollar correctly. That means they think that inflation is ahead, yet GLD has not picked up on that yet. Since yields are rising in response to inflation ahead, GLD will move as it did in the 70s, that is to say, much higher. The recent decline in GLD looks temporary and it is on sale at these prices.

On a purely technical note, the downtrend in the dollar is much more protracted, and will likely continue, while GLD looks ready to reverse. This further confirms to me that bonds and the dollar will keep moving down, while GLD will turn.

Short-Term Factors Drive Down GLD

In the previous section, I concluded that the bond market and the dollar were falling on expectations of higher inflation to come, and that GLD simply hasn't priced that in yet. That means there must be some reason that GLD has been mispriced in the short term to have suffered such a decline in price. I will show where this temporary mispricing comes from below.


(Data Source: TradingView, Analysis by David Luo)

If we look at the graph above, we can recall the bizarre selling on June 27th, where a flash crash in gold occurred at 4:00 AM. 1.8M oz were sold in a minute. Clearly, this sale did tremendous technical damage, as someone tried to drive GLD down. From what I can tell, automated trades followed breakdowns in the technicals, and if you look at gold priced in euros, it has been declining ever since that day. Of course, priced in dollars, GLD hasn't suffered as much, because the dollar has been falling as well. In fact, GLD even opened higher on the day of the flash crash. Nevertheless, I think the short-term technical damage has been the reason that GLD has been weak despite sustained weaknesses in bonds and the dollar.

Revisions to 1.4% to the upside from 1.2% for Q1 GDP didn't manage to stymie losses in the dollar. The dollar actually fell around 0.5% that day. The NFP numbers we got last Friday of 222k vs. an expected 179k should have strengthened the dollar considerably. Instead, the dollar only moved up 0.2%, and GLD fell 1% to 115.28. Data that comes out in favor of a stronger dollar hasn't moved the dollar to the upside, and shows signs that GLD may be recovering soon.

Technical Analysis


(Data Source: TradingView)

Looking at the technicals, we can see that GLD has just skimmed the bottom oversold territory on the RSI. From recent trends, we can see that GLD has been behaving quite cyclically, and that it looks like there could be another leg up ahead. I think this chart looks bullish for GLD, as long as the price doesn't drop below 114, or $1,200/oz for spot gold.

The SAR has yet to turn, but its been down for a while, and the price is already touching the bottom of the Bollinger Bands. We should be reverting to the mean soon, and getting a nice bounce back up in GLD. Looking at gold priced in euros in the previous section's graph, we can see that gold has been oversold in terms of foreign currencies for some time now, and this means that on a technical basis, we should be due for some days in the black ahead for GLD.


The nuances of nominal interest rates, inflation, and real interest rates show that gold is falling temporarily on technical and short-term factors while the bond market and dollar traders look for inflation ahead. The generalization that higher rates is bad for GLD doesn't always hold true, since we actually care about real interest rates. If inflation is higher as the bond market and dollar traders are pricing for, then GLD's mispricing can only last so long before it reverses.

Despite stronger than expected economic data, the dollar hasn't been performing, and I expect its weakness to continue. Ultimately, gold will pull away from the downtrend it has been experiencing with the dollar. It is only the short-term data and the technical selling pressures that have been artificially suppressing GLD prices.

On a technical basis, the time looks ripe to buy GLD while it's on sale.

Disclosure: I am/we are long GDX, GDXJ, JNUG, VARIOUS GOLD & SILVER MINERS.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I own gold bullion. This article is based on public information that I assume to be true and correct. My assumptions and forecast may be wrong. This investment may not be suitable for all investors. Always consider your specific investment goals and styles before investing money.

This is source I found from another site, main source you can find in last paragraph

Source :



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