The technical uptrend in the SPDR Gold Shares (GLD) and the iShares Silver Trust (SLV) has been strong. Recently each has dipped. With the in line China CPI of +5.5% for May and the PPI miss of +6.8%, Chinese inflation looks set to continue. In fact expectations are that it will go up over 6% in June. China lifted bank reserve requirements immediately by 0.5 points in the wake of this news. This should dull the inflationary effect of the too high PPI, but it will not completely remove it. After the predicted move up in June, Chinese inflation is expected to drop, but one will believe that when one sees it.
The technical view of GLD and SLV is in the charts below - (click to enlarge):
The 1 year SLV chart:
The 1 year GLD chart:
Both of these charts show strong up trends. Neither is really oversold, but the new inflation data from around the world indicates that there is significant worry about worldwide inflation. China’s higher than expected PPI is sure to translate into a US import cost increases. Further the rising Yuan versus the USD (estimated to rise at 6%-7% per year for several years) may keep inflation down in China, but it will add to inflation in the US. The US is China’s biggest trading partner, and the US is a net importer from China. A stronger Yuan means added US inflation.
China is not the only country with inflation concerns. The latest inflation data I could find showed the following rates: China (+5.5%), India (+9.06%), Russia (+9.6%), Brazil (+6.55%), the EU (+2.7%), and the US (+5.3% if you annualize the first 5 CPI readings of 2011 -- Yahoo Finance). Other than the US’s, these data are the data from the latest month (EU data is a EUROSTAT estimate for May). The data indicate inflation is not only alive, it is in thriving. This should mean that GLD and SLV will thrive too. The people of China, Russia, and India are buying gold and silver as a hedge against inflation. Their governments are buying too, although this seems more likely to ease over time. In the case of silver the industrial demand is also rising.
If that wasn’t enough, the US has been printing money with QE2. This is set to end June 30, 2011. However, no less an economist than Nouriel Roubini is now suggesting that the Fed may well start a QE3 program by the end of 2011. The US Congress has been spending money with abandon. It has done nothing to rein in the costs of Medicare, Medicaid or Social Security. In contrast, most EU countries have already raised their age requirements for retirement. The US federal government took over responsibility for Fannie Mae (FNMA.OB) and Freddie Mac (FMCC.OB). This was huge QE. Some might say Obama is avoiding the inflation issue. Others might say he is asleep at the wheel. Still others might say he is afraid to alienate the AARP, since his popularity has ebbed consideraby. The result is the same. Inflation is coming.
The Japanese central bank has done huge amounts of QE after the earthquake, tsunami and subsequent nuclear disaster. It didn’t want its stock market to completely collapse on top of everything else. It created a liquidity flood to stop this from happening. This seems likely to lead to a devaluation of the Japanese Yen -- inflation.
The ECB has been accepting securities of questionable value for loans to EU member countries. This is QE (printing money). The ECB’s actions in this area seem to be escalating. Plus the credit worthiness of the governments it is accepting collateral from is falling. This seems likely to leave the ECB on the hook for many billions of Euros. That number could eventually even reach into the trillion or more range. Currently the thought is that the central banks of the member countries would have to eventually pay back this money. However, if the collaterals turn out to be as troubled as some are expecting, such an action would bankrupt the central banks of the various countries, or it might cause a cascade effect leading to the bankruptcy of all or virtually all of the central banks. The only alternative to this I see is for the ECB to print money to substitute for the shortfall of any of the seriously troubled debt instruments (the bulk of the collaterals are debt instruments) the ECB has accepted from its member countries. This would be huge QE for the EU. It would mean huge inflation.
I could go on, but you can get the idea that there is serious inflation risk. Yes, there could be another recession that might tilt the scales in the other direction. It is important to keep this in mind. SLV and GLD would probably fall in that case. However, investors would likely get some notice of this. For now you have to play the current situation. That is high inflation.
To some extent GLD and SLV have been falling as the overall equities markets have fallen. The S&P 500 (SPY) and other indices seem to be finding support recently. This could be a sign of an imminent turn, or it could be a head fake before more down movement. It would likely be best to "leg into" this trade. As you feel more confident you can buy more. Still the fundamentals and even some technicals are there. This should work.
