As subscribers know we have not written frequently in recent months as there has been less transpiring with markets on a version of QE autopilot. Even though we just sent out a significant note over the weekend, we felt that considering what has transpired this week already, it warranted updating you as we believe the action has been material.
 

Specifically, early in the week we saw interest rates rise, an event that has caused young traders to consistently sell gold. This week however a very noticeable trend change occurred, and the metals held steady while rates rose.  Additionally, we are seeing fixed income standouts such as the high yield indices begin to break down, another sign inflation is more than transitory which is also good for the metals.

Then today we had another major data point – Headline CPI showed inflation again higher than expected and we have now had four consecutive months of inflation reports greater than 5%. Again, on the headline the metals sold off … but then reversed sharply as if indicating the markets were beginning to think about the inflation that is irrefutable and realizing this is good for gold.

Tomorrow (Thursday) we are looking for incremental data supporting the reality that inflation is stronger than the Fed admits with a PPI report and nat gas update. 

Lastly consider that amidst a sea of rising commodity prices, gold and silver have underperformed YTD attracting momentum shorts.  With large numbers of traders short gold, rising metals prices could pressure shorts to cover their positions to manage their risk.  Reiterating our position from the weekend, such large short positions have in the past heralded upswings in prices.

We believe the urgency to have a physical gold and silver hedge is increasing in light of recent notable if not dramatic events.  We encourage you to revisit your allocation and be sure you have at least a ½ position in place as soon as possible. Historically 10% allocations to gold have hedged much of the pressure related to turbulent markets.