What are the Fed and Gold Telling us about Inflation?

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“There’s nothing in this world, which will so violently distort a man’s judgement more than a sight of his neighbor getting rich. ”

J.P. Morgan, 1907

Important Headlines Last Week


Gold Miners, a Rates Trade

In recent years, many gold bugs still haven’t figured out trading gold and the miners has become far more of an (interest) rates rather than a inflation trade.

Let Us Explain

Heading into the last two Federal Reserve rate hikes (December 2015 and 2016), each time the gold miners $GDX lost 43% in the six months preceding the rare FOMC action.  Many of gold’s loyalists have been sucked into losing investments by focusing on deficits and money printing as gold’s chief price influencer.   They didn’t get the joke.  It’s been all about interest rates and negative yielding bonds, but is this all about to change?

Global Government Bonds with Negative Yields vs. Gold

2017 March:  $9.3T vs. $1234
2016 December: $7.8T vs. $1125
2016 October: $9.6T vs. $1265
2016 September: $12.4T vs. $1350
2016 July: $13.8T vs. $1375
2015: $1.4T
2014: $175B
2013: $0
2012: $0
2011: $0
2010: $0

Bear Traps Report and Bloomberg data

If we gave you one billion dollars would you put it in a negative yielding German government bond or 0% gold, both offer similar liquidly.   Bottom Line: as you can see above, the amount of negative yielding bonds on earth has been the KEY driver of gold prices in recent years.  So much of gold’s price action has been tied to interest rates and anticipating Fed policy from Janet Yellen and Company.

Our Sell Call to Clients from Early February:

“Last week, the Fed statement was very dovish relative to expectations, now it’s likely the governors on the Fedspeaking (coming speeches from Fed) tour will come out on the hawkish (point to a March rate hike) side in the near term.  Positioning the gold miners is a rates trade, very similar to Eurodollars.  As we’ve stressed in recent years, the Fed “shows it to you and then they take it away.”  This is classic Lucy and the football behavior from the FOMC, we’ve seen this show so many times. Likewise, as we move through the middle innings of the Trump reflation trade unwind, the risk – reward in owning the gold miners has become less attractive, it’s time to SELL our Gold Miners $GDX.”

The Bear Traps Report, February 7, 2017

Where’s the Trade?  Join us here:

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The Federal Reserve has been Gold’s Biggest Driver, NOT Deficits

GDX vs Fed FundsGold is off 2.4% its recent highs, while the miners ($GDX) are 15% lower since their February 8th high, that’s a profound underperformance.  As you can see above, in the months and weeks before that only two rate hikes in the last 11 years, the gold miners $GDX plunged an average of 43% each time.  Now, what about the next rate hike from the FOMC?

Fed Fund Furfures for a March 2017 Rate Hike vs. the Gold Miners $GDX

Today: 94% vs. $22.20
One Week Ago: 40% vs. $23.17
Three Weeks Ago: 26% vs. $25.71

Bloomberg data

Recent speeches from Fed governors have driven rate hike expectations MUCH higher for a hike this month, but this time the gold miners are only off 15%, not 40% +?

What’s Going on Here?

There’s no question in mind, gold’s price driver eventually will shift from FOMC interest rates policy and negative yielding bonds globally back over to inflation expectations.  Getting the timing right on this future development will present us with a colossal trading opportunity.  Click on the link below and join us. 

Where’s the Trade?  Join us here:

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The Fed Funds Rate and Financial Crisis’ Evolution

FOMC Policy 1970-2017

Fed Funds Long TermAs you can see above, since 1970 Federal Reserve accommodation has grown both in scale and duration ahead of each financial crisis.  More disturbing facts lie in the explosion of destructive power found in the last three global wrecking balls, as the financial panics have become far more deadly.  As the next Lehman moment comes at us, the opportunity will be found in gold and the miners.

Where’s the Trade?  Join us here:

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