Over my trading lifetime I would say the number of times I've seen a geopolitical event take place, 9 times out of 10 the markets did exactly what they have just done this time. The market reaction was typical. All markets moved dramatically up or down, then returned to the pre-event level. This doesn't mean that the event is over; it just means that the shock to the markets is over. The one out of ten times that is different, is when an event like 9/11 occurs. That event changed the direction of most markets for years. The reason is that it led to two wars, affected the deficit, interest rates, the GDP, and inflation. Markets are telling us this is not such an event.
Gold (NYSEARCA:GLD) is back to trading within its recent range of 1325 to about 1360. The stock market has resumed its upward trend, and interest rates are higher as money stopped running for cover. The 10 year bond has bounced back above where it was before the Russian incursion.
So, here we are back to square one. Where to now? Well, we're nowhere near normality yet. As I said in my last article: "All the markets are acting a little perverse lately. My guess is the markets will reunite this spring in a return to more normal behavior. I will be looking for this day of reckoning and look to go long or short, whichever market is out of kilter."
We aren't there yet. It will be a while before this divergence reconciles itself. I can tell you this however: every market sees the future differently. The bond market sees slow world growth and low inflation ahead. The gold and commodity markets are telling us higher world growth, inflation, punctuated by possible crises are likely. And the stock market sees a snap back of growth after this lull, with higher earnings ahead and is looking over the valley toward better times. Reality will reveal which market is right -- and not too long from now. I will be looking to play that revelation.
The key is to set yourself up for the big gain and avoid the big loss when that move comes. That's exactly what I'm looking to do as this divergence between the markets resolves itself. Only one of these markets can be right. Things are starting to get interesting.
Has the bond market finally run its course and ready to fall for years to come? Has the stock market discounted the best of the 2014 and ready for a correction? And has gold and commodities just begun their run, or is this a bear market rally in what will end in a return to the deflationary/recessionary malaise of the past few years?
I sold gold short on the Russian news using DUST as a vehicle and covered to switch back into GDXJ, long junior gold stocks. My sense of the future has not changed since the first of the year. (See my 'Looking Forward" article at paulnathan.biz.) I think the mega trend has changed from years of stagnation and recession around the world; from disinflation and deflation plaguing various nations; moving instead toward higher world growth and inflation ahead. This reversal in trend should lead to exceptional profits for those who pick up beaten down quality resource companies as demand for goods and a mild inflation set in.
Europe is looking stronger than expected as its service index rose to a 32 month high. GDP and inflation both also increased more than anticipated. Draghi reversed his concerns for deflation and emphasized his goal of reaching his inflation target of 2%. This as the US economy is doing exactly the opposite. But even with the weakness in the US economy, inflation continued to move higher. And that is what the two continents have in common - inflation.
Now add Japan which has reversed its deflation to inflation and sees higher growth rates ahead and we have a picture of a growing world economy with higher inflation - the exact opposite of the last two years' performance.
That's the macro picture. That is the predominant trend. All the other issues are transitory. This is the main mover of gold. This is why the CRB continues to move higher as it broke through 300 and is now at 307. If the US economy firms and snaps back in the 2nd and 3rd quarters, prices and growth should move higher along with demand for most commodities.
Gold fell as the employment figures came out better than expected. The thinking is that a weak report is bullish for gold and a strong report is bearish. I disagree with the premise. It is higher inflation and growth rates that will be bullish for gold, and in that scenario, the employment rate will improve. Today's move down in gold is a result of consensus thinking, but the consensus has not yet gotten their minds around the change that's occurring. Gold bulls are still looking for bad news to increase the price of gold, and gold bears go short every time there's good news. This sets up an excellent contrarian trading opportunity since the exact opposite is true.
As next week begins take note that the 1333-35 level in gold has been touched several times and has held. The broader range is 1325-1360. A break of either side should lead to a further run in that direction. Meanwhile interest rates continue to move higher along with stock prices and commodities. This is all consistent with a growing world economy and a reversal in expectations from disinflation to inflation.
Disclosure: I am long GDXJ. 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.