Dollar And Gold Hint Inflation Out Of The Cage

| About: SPDR Gold (GLD)

Summary

The Fed term "behind the curve" is good for gold.

Investors showed their cards when understanding the dollar and gold's moves in relation to the Fed and GDP.

Inflation is picking up and the Fed can't do anything about it. That's why inflation gets our Out Of The Cage rating.

We've been expecting inflation for a couple of months and this will be an important week of data.

We love gold. We discovered a new gold bug song too at the end of the report.

The dollar had a mini collapse after the Fed meeting Wednesday. The main reason that we think so is that investors worry the Fed could be [market term] "behind the curve." That is an inflationary term to say that inflation is [Elazar term] "out of the cage." Once you let the lion out of the cage it's very difficult to get it back in the cage. That's the issue with inflation running rampant. The Fed on hold because of elections and now GDP is letting inflation out of the cage. We think that is great for gold (NYSEARCA:GLD). If you didn't know it we love gold. We love it for the next five years no matter what. (Gold gets our No Matter What rating.)

Let's review what happened last week and why we're so excited about these turn of events.

The dollar had a mini collapse last week. Let's see.

Click to enlarge

In three fast days the dollar had a mini collapse. Above you see the euro (NYSEARCA:FXE) versus the dollar (NYSEARCA:UUP). (Up means dollar down)

Let's put this three day move in context.

What in the world is going on here? These two moves are very exciting developments for US inflation and gold.

First Wednesday.

The dollar dropped because the Fed did.... NOTHING, again. Investors sold the dollar hard because they are now worried about inflation. There are only a couple of reasons to sell the dollar after a Fed meeting. After Friday's move we are going to show you it is mainly because of inflation.

3 main possibilities for selling the dollar post-Fed Wednesday

Possibility 1) Sell the dollar because the carry-trade isn't going to be there because you're not going to get the higher rates that you expected in the US.

We don't buy this for one reason. So far a rate hike would sputter rates further making the yield worse on the long end as investors expect a further slowdown. Maybe you will not want to do the carry trade.

Possibility 2) The second possibility is that you worry about growth being out of the cage which can drive inflation. That is bad for the value of the dollar which will be able to buy less goods that cost more: inflation.

Possibility 3) The last possibility is that you don't believe there will be growth but inflation alone has been let out of the cage. That is bad for the value of the dollar which will be able to buy less goods that cost more: inflation.

We lean to #3 because of Friday's Action

Choice 3 says dollar selling was purely because of worry that inflation is out of the cage.

Elazar how can you make such grand statements as if you know what everybody is thinking? How 'bout some humility? C'mon already.

Fair point. That means we'll have to prove it to you. Ok? Fair?

Ok.

Let us ask two simple questions in sequence.

What happened Friday morning? Friday saw GDP miss expectations. Very good.

Why would the dollar drop further on that? I have no idea.

It wasn't because of the GDP.

We think the dollar dropped on GDP when the world realized:

A) The Fed is behind the curve and inflation could be out of the cage.

B) Because of a WEAK GDP the Fed can't do a "blueberry" thing about it. How can the Fed hope to raise rates if GDP is slowing? They'll spiral the economy into a recession by their own hands.

The Fed's hands are tied because of GDP.

Now you see why the dollar worried about inflation on a WEAK GDP? Now do you see why we say that dollar move was because of the fear that inflation is out of the cage?

We don't see why the dollar would spike down on Wednesday after another no decision then again see the same spike on a WEAK GDP number. A weak GDP number means the Fed's hands are tied and they can do nothing. So the dollar sells off.

If that's not enough for you we'll show you gold as well. It tells us the same story.

Good For Gold

Let's see how gold reacted since the Fed meeting and GDP.

Here's the Gold ETF GLD

Click to enlarge

The first jump in the middle of the chart saw gold rally strong while the stock market in blue (NYSEARCA:SPY) went down. Gold rallied because the Fed did nothing. Price action tells us the Fed is now officially perceived to be "behind the curve." Look at gold's jump after a Fed "no decision." What's that tell you? Out Of Cage!

Let's look at Friday. GDP was weak before the market opened on Friday. Gold should go DOWN on a weak GDP because it typically means less inflation. Less growth is usually associated with less inflation. Fair?

We are however in a stagflation nation. That means, as we've been saying, weak growth with high inflation. (See here, here, here, and here). That is not a fairy tale economy.

Gold jumped Friday morning not because GDP was weak. We think gold jumped because the Fed can do nothing about inflation now that GDP is weak. Add that the Fed is worried about elections and they are totally tied up in knots of nothing to do.

For anybody who loves inflation or gold, you are now in the spotlight. Enjoy.

PCE this week is incredibly important and may be a catalyst to break out gold

PCE reports this Tuesday and becomes an incredibly important report. If dollar and gold reactions are correct that the Fed is behind the curve and inflation is out of the cage we'll see it in Tuesday's number.

Here's a longer term GLD chart showing a 5 year line that will breakout on good inflation news. (Can we call inflation news good? If you love gold we can.)

Click to enlarge

GLD above is at a critical 5 year support/resistance line. Any good news and we have an important fundamental and technical breakout working together. The chart will start to make sense to many more investors if they see inflation is ..."out of the cage."

Conclusion

We love gold. We expect continued inflation. The market FINALLY understood this with the move in the dollar and gold post-Fed and post (weak) GDP. The combination of the two show you how handcuffed the Fed is. They can't do anything and may have let inflation further "out of the cage."

Please be safe. Love gold.

Now for a quick new gold bug song...

Now we're going to sing to the tune of "War what is it good for."

Fed, huh, what can they do? Absolutely nothing.

GDP. Say it again.

Fed, huh, what can they do? Absolutely nothing.

November Eighth.

Please be safe. Love gold.

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Disclosure: I am/we are short SPY.

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.