7/13/2021 7:00am EST - Trading Lab Morning Email

In a few hours we will receive US CPI data for June. The median forecast is for a year over year increase of .5% in both the 'headline' number and the core CPI. A .4% or .5% print will likely cause risk assets to rally, while a .6% or even .7% print will probably cause the opposite.

UPDATE: US Jun CPI Ex-Food & Energy +0.9% vs. Consensus +0.5%

However silly this may be, it is the reality of the situation we find ourselves in in July 2021. Gold, which has long been known as an 'inflation hedge', has begun to trade like the opposite of an inflation hedge. This is due to the fact that future Fed monetary policy is likely to be more hawkish in the event of 'too hot' inflation readings, and to be more dovish in the face of inflation data that leans more to the disinflationary side.

In many ways we are living in a place I am beginning to call "Ass Backwards World", allow me to explain. Stable and relatively low inflation readings give the Fed cover to continue expanding its balance sheet in an effort to stoke inflation and support its full employment objective. However, stubbornly high inflation readings (above 3% inflation for 6+ months) will likely motivate the Fed to begin tapering its asset purchases and pull forward its first rate hike.

Continued Fed balance sheet expansion and ZIRP offers tailwinds to long term inflation expectations, and lends a strong supportive tailwind to the so called 'reflation trade'. However, a more hawkish Fed that is beginning to tighten policy and raise the price of money does the opposite. Therefore, the higher that actual inflation rises (as opposed to future inflation expectations) the worse it is for the reflation trade (and the lower that future inflation expectations are likely to be).

Hence my term Ass Backwards World.

Enough of the macroeconomic monetary policy discussion.

Turning to the weekly chart of gold I would like to point out that the recent consolidation (basically all of the price action in 2021) is nothing more than a standard digestion within the context of a long term uptrend:

Gold (Weekly)

For me, gold will need to post a weekly close above $1923 OR below $1750 before we can proclaim with any degree of certainty that the current digestive range has been resolved.

A breakout above $1923 (the 2011 high) would be incredibly bullish for the shiny yellow metal, AND a breakdown below $1750 would be quite depressing for gold bugs.

With that being said, the weekly chart of gold in USD terms is unmistakably bullish, and the fact that sentiment remains so pessimistic while prices remain above $1800 is a bullish phenomenon.

Admittedly, gold miners are not far from 52-week lows and have felt like death for the last few weeks. However, it is important to recognize that 2019 and 2020 both saw very strong performances for the gold sector (nearly a 100% gain from year end 2018 to year end 2020) - it is far from unusual for this cyclical sector to experience a flat, or small single-digit percentage down year, after two years of strong gains.

UPDATE: Gold now faces a major test - can it rise in the face of a Fed that is going to taper faster than the market previously expected? If gold can hold above $1800 after today's red hot June CPI numbers (an economic data point that would normally sink gold) it may very well be an extremely bullish omen. 

DISCLAIMER: The work included in this article is based on current events, technical charts, company news releases, and the author’s opinions. It may contain errors, and you shouldn’t make any investment decision based solely on what you read here. This publication contains forward-looking statements, including but not limited to comments regarding predictions and projections. Forward-looking statements address future events and conditions and therefore involve inherent risks and uncertainties. Actual results may differ materially from those currently anticipated in such statements. This publication is provided for informational and entertainment purposes only and is not a recommendation to buy or sell any security. Always thoroughly do your own due diligence and talk to a licensed investment adviser prior to making any investment decisions. Junior resource companies can easily lose 100% of their value so read company profiles on www.SEDAR.com for important risk disclosures. It’s your money and your responsibility.