Gold Becomes Inflation Hedge As Bond Markets Are Manipulated By Central Banks

Includes: AGOL, GLD, IAU, SGOL
by: EconMatters

Gold Breakout Coming?

An interesting dynamic is taking place in financial markets on Thursday as gold saw some substantial buying interest up $22 to the $1,295 an ounce area. It is obvious that inflation is picking up considerable steam as we just blew a 0.4% on the CPI Inflation Breathalyzer and believe it or not the 10-Year Yield is at a 2.57% yield. Welcome to mispriced and manipulated markets in the Central Bank manipulated markets era that we call free markets or bubbles galore.

Hot Philadelphia Fed Survey

At any rate since bonds are being bought and only sold when there is risk associated, i.e. Employment Reports, Fed Meetings, 10-Year Bond Auctions, Inflation Reports, and as soon as those are finished the buying frenzy continues now that risk to their positions has subsided and they can load up on more free money chasing that Yield Carry Trade.

However, look at the Philadelphia Fed Survey - hot on all accounts. For example the prices paid component was 35. This is an extremely hot reading so there is definitely hotter inflation in the economy than the Fed is willing to admit. The small business optimism metric is near record highs, and job creation is really percolating right now, all fueling into the hotter inflation equation.

Gold as an Inflation Hedge

Therefore Investors need some way to hedge their portfolios to this trending inflation concern, and since bonds are massively manipulated they are desperate for inflation hedging vehicles and believe it or not it looks like gold is starting to serve as this substitute for inflation hedging. Whereas investors were weary of using gold due to its lack of Yield and the Central Banks raising rates, and since they are stalling on that front for the time being, maybe investors feel more comfortable using gold for this inflation hedging purpose.

Gold Highly Manipulated Market

Gold has its own problems with manipulation. It was almost a daily occurrence that traders would make a small fortune smashing through stops every 7:30 a.m. trading day like clockwork, and there are many other manipulative trading techniques utilized that require an entire article just on that subject alone. Financial markets really are as wild west as ever, and they will only get worse once the Central Bank Shenanigans come back to bite financial markets and volatility shoots off the charts.

Danger Zone for Retail Investors

I would recommend that retail investors in equities move to cash right now, not bonds but actual cash. Sure retail investors will lose out to inflation eating away at their investment in real terms, but this is still a better outcome than losing one's principle in addition to the nefarious hit of inflation on one's principle. But the Federal Reserve and the Bank of England can only stall for so long in raising rates substantially from here, and given that many asset prices are artificially supported like equities and bonds through cheap liquidity, investors are potentially risking boatloads of principle trying to keep pace with inflation, and the risk reward profile has a negative expected value over a substantial investment window.

Gold Is a Commodity - Commodities by Nature Are a Highly Volatile Asset Class

However pay attention to gold and see if this uptrend continues and the reason for any strength will be due to it being used as an inflation hedge, I don't recommend retail investors using gold via the futures market as an inflation hedge because there are just too many crosscurrents going on in gold, and the gold futures market is highly manipulated, and I will just leave it at that.

Maybe place a small bet in the Gold ETF GLD, but don't get carried away. Purchasing physical gold would be my preferred method for using gold as an inflation hedge, but stay proportional to one's overall investment allocation and do your due diligence on the best physical storage of value and vendor.

Don't go putting 35% of your investment funds in some gold investment vehicle. It's not the holy grail as some would have you to believe - it is a freaking commodity for goodness sake. And commodities are called commodities for a reason, and more investors have lost their shirts investing in commodities than bad poker stories.

If one is a trader that is a different story - let the technicals be your guide to staying on the right side of the gold trade. I will do a follow up later on the technicals in the gold market, but for now this is just a heads up to what is potentially going on in the gold market and worth paying closer attention to going forward.

Inflation Worries and Portfolio Hedging Instruments

But inflation is starting to bust out on investor's worry list, and it is only going to get hotter for the remainder of the year, and some financial vehicle will be required to fill this inflation hedging purpose if the bond market being more manipulated than any other market by central banks fails to serve this role for investors who need to hedge the inflation risk in their portfolios.