• J

Precious Metals and Inflation

Several members asked us to provide a fundamental update regarding our precious metals positions. We focus mainly on charts and our developed system. However, we are also mindful of the cause and effect relationships that may contribute to longer term shifts in sectors. We will be reviewing these relationships for Gold and Silver.

Where did we last leave off?

We posted that we favored a bullish response after Jackson Hole and we got just that. We provided option trade suggestions to members so they could weather any downside price spike as well. Silver rallied over 5% and caught up to Gold. There's still more catching up to do but we're getting there.

Where are we in the grand scheme of things?

Weekly chart of /GC Futures for $GLD

Inverse Head and Shoulders pattern

Monthly Chart

Cup and Handle Pattern

Monthly chart of /SI

As you can see $SLV has yet to play catch up with $GLD on a monthly basis.

Many have asked, why hasn't Gold and Silver increased more because of all of this inflation? The answer is that there are two schools of thought that majority of traders have suggested. One is that inflation is "transitory" and the other is that inflation is accelerating and consistent. The "transitory" argument is that there are occasional spikes but inflation is always occurring due to the growth of the economy. Those who believe it is accelerating at a rapid pace claim that the government spending has triggered a highly inflationary period and prices should increase rapidly.

We believe that price appreciation will be seen in waves with certain target dates that will have significant pullbacks or drops. This will be similar to, but not as significant as, the recent flash crash which caught many retail traders off guard and essentially captured premiums for the months of August and September. These swift pullbacks can be influenced by the upcoming actions of the president in deciding whether to continue with Powell as Fed chairman , the Federal Reserve's continued policy decisions and largely due to shortages. We believe these will be mere headline risks which will more than likely coincide with a short term drop and flat choppy period for metals to capture option premiums and frustrate short term traders.

However, the domino effect is at play here and inflationary spikes are set to occur. Longer term options will produce great profitability and we encourage readers to dedicate a portion of their portfolio for that. Our system will be focused on short term and long term profitability to compound returns significantly for members.

Fundamental perspective

In recent earnings reports many retailers mentioned in their calls there has been a shortage of supplies and increased costs for their products.

What can be causing this inflation apart from Fed Spending?

Shortages are materializing in different types of equipment, appliances, and electronics. Rubber has been one of the latest supplies covered by mainstream media. Apart from the global semiconductor shortage automakers now have to deal with rubber shortages and also a reduction in employees in certain departments. These shortages have shut down auto assembly plants around the world for weeks at a time with no real consistent outflow of inventory to keep up with demand.

As a result, the auto industry is prioritizing their most profitable units. Large rental fleets took quite a bit of a hit last year during the pandemic due to reduction of demand. Hertz eventually filed for bankruptcy and the future seemed bleak. However, after over a year of being indoors many individuals wanted to experience the freedom of the outdoors and turned to renting cars and purchasing used vehicles outright. This lead to significant profitability for rental car companies as they have sold off old fleets and a revival of Hertz from bankruptcy.


These rental car companies are nearly doubling their mileage on the vehicles they sell and are still profitable on many of the models they are selling used. Fewer cars are being supplied to auctions/dealerships.

In addition to this, a container shortage is occurring. Just outside the ports of Los Angeles and Long Beach, a record 44+ container ships were anchored and waiting. This has led to other ships being rerouted to different ports which creates more lead time for supplies.

Several events caused this to occur but a main one is a backlog for railroad and trucking companies. As individuals shift careers, retire or just refuse to work with added COVID procedures conductor and driver shortages develop. Containers are hung up in rail yards which results in a bottleneck. Railroads stop routing trains to those rail yards that are backed up until the backlog is cleared. The same goes for trucking companies. This adds to the pileup of containers at these ports.

This has resulted in a sharp increase in shipping rates of well over 500+%

Nordstrom and Abercrombie were two notable retailers who saw their stock price drop significantly(charts below).

Nordstrom disclosed how the brands they sale have had trouble producing, shipping, and restocking their merchandise. As a result, many brands have prioritized selling directly to consumers online.

Abercrombie mentioned shipment delays, plant shutdown and reduced personnel has led to additional expenses which will ultimately be passed on to the consumer.

Weather storms such as the one in Texas has caused shortages in petrochemicals such as plastics.

The latest is hurricane Ida which has disrupted production in majority of the Guld Coast and will lead to further supply shortages in the short term.

When supply is reduced higher priced higher profit margin items get prioritized. And with shipment delays consumers are willing to pay for the higher prices as they are unsure when their item will be in stock again. The added stimulus funds and increased savings last year have allowed for this increase in discretionary income. This has lead to continued inflation.

Inflationary Figures

The US consumer price inflation rate remained unchanged at 5.4 percent in July 2021. A 13-year high and just above expectations of 5.3 percent. The coronavirus pandemic established a low base to begin with. However, what remains to be seen are the longer term effects of the re-opening of the economy and continued supply constraints. Pressure has been seen from food (3.4 percent increase vs 2.4 percent expected). This category is led by sharp increases in food at home (2.6 percent increase vs 0.9 percent expected) and food away from home (4.6 percent vs 4.2 percent); new vehicles (6.4 percent vs 5.3 percent); and shelter (2.8 percent vs 2.6 percent).

Source: US Bureau

There has been moderate inflation in previous areas that were already undergoing substantial price increase for months leading into summer. They are as follows: energy (23.8 percent vs 24.5 percent); used cars and trucks (41.7 percent vs 45.2 percent); apparel (4.2 percent vs 4.9 percent).

Major cities such as Los Angeles and New York have significant inflation increases in many categories. Above figure depicts categories for New York. One notable exception, rents(eviction moratorium). We will discuss housing in a later post and the influences of this sector in another post.

Housing Prices continue to lead the way in inflationary categories

Source: Standard & Poors

The S&P CoreLogic Case-Shiller 20-city home price index in the US increased 17% year over year in May of 2021, a new record high. Prices increased the most in Phoenix (25.9%), followed by San Diego (24.7%) and Seattle (23.4%). A move further out to suburban areas.

For those interested in more content

Feel free to sign up for a monthly membership if you are interested in our member trade suggestions, market recaps, and research.

Talk soon!


7 views0 comments

Recent Posts

See All