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Commodity Inflation May Trigger A Gold Rush

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Includes: AAAU, BAR, DGL, DGLD, DGP, DGZ, DZZ, GLD, GLDI, GLDM, GLDW, GLL, IAU, IAUF, OUNZ, PHYS, QGLDX, SGOL, UBG, UGL, UGLD
by: Equity Management Academy
Equity Management Academy
Research analyst, gold & precious metals, commodities, ETF investing
Summary

Gold closing above $1500 to $1503 is extremely bullish.

Inflation, debt and rising consumer prices may cause and explosion in the metals, especially gold.

The daily signals average is $1509, while the S1 target that was activated is $1523.

$1523 is the beginning of distribution of supply for the daily and weekly numbers.

Commodity Inflation May Trigger a Gold Rush

Although the government disagrees, inflation is on the rise. The CPI chart shows that the Consumer Price Index increased 256.36 index points in September from 256.30 in August, 2019. The CPI averaged 113.31 from 1950 until 2019, when it reached an all-time high in September 2019 at 256.36. The all-time low was 23.51 in January 1950. The chart indicates that the CPI, which measures inflation, is at a record high. No one in the mainstream media is talking about it, nor is the government.

The CPI in the US is expected to be 257.52 by the end of this quarter, so even higher that its record-setting level today. TradingEconomics.com global macro models and analysts expect the CPI to reach 259.13 in 12 months. In 2020, the CPI is expected to reach 267.67.

Debt is also at extremely high levels. The US government debt was at 106.10% of US GDP in 2018. Government debt to GDP averaged 62.31 percent from 1940 until 2018, reaching an all-time high of 118.90 in 1946 just after World War II, and an all-time low of 31.80 in 1981. This is an alarming number; government debt is over 100% of our GDP. There is a lot of risk with this number, especially in relation to how the Fed is handling interest rates. Global debt factors are also running at extremely high levels in historic terms.

Consumer prices are also rising rapidly, but not if you discount food and energy. The US core consumer prices, excluding volatile items, such as food and energy, increased 0.1 percent month-over-month in September 2019. It is odd that food and energy are not included, since they are key to most consumers. Food and energy also go into the price of almost everything we consume. Gas in California is running at around $4 a gallon. Food is going up fast.

How can we use this inflationary, debt-heavy environment to make money? This data points toward a trend toward hyperinflation. These indicators could be the canary in the coal mine. No one is expecting commodity price inflation to occur. The government says there is almost no inflation. Gold, as a commodity, is one of the first to show the change in the supply-demand relationship.

Courtesy: TDAmeritrade

When gold broke above $1375, the annual price fractal changed, projecting higher prices. Our latest September 28 yearly S&D report, projected levels up into the $1800s in gold. Besides the Fed and interest rates, which everyone focuses on, there are other factors that affected gold's recent rise. I believe that this is a fantastic opportunity before the mainstream media gets onto this story.

On October 28, 2019, we published the annual report on gold. For the Variable Changing Price Momentum Indicator (VC PMI), we use the weekly trend momentum is the first filter. (For more on the VC PMI, please read the last section of this article). The Weekly VC PMI is the second filter, which is the average price for the week and which we use to identify the extremes above and below the mean.

Coming into this week, the trend momentum was bullish. The VC PMI gives us a protected level; if gold closes below $1505 it would negate this bullishness to neutral. If you are long, cover your position between $1523 and $1540 to go flat. If we close below $1505, the trend momentum or sentiment goes neutral.

The weekly price momentum is $1503. The market closed above $1503, so we came into the week with a weekly bullish price momentum. But if it closes below $1503, it would trigger weekly stops and negate the bullish signal to neutral. In this case it is a buy signal, and identifies two levels of stops: at $1505, the trend momentum level, and $1503, which is the average price.

How you use the information depends on the instrument you trade. If you have multiple positions, you can put stops at $1505 and $1503. The second close below $1503 turns the momentum bearish and activates the levels below where you should exit; the Buy 1 (B1) level is at $1486, and the Buy 2 (B2) level is $1466. The first close below $1503 turns the market to neutral. If it reverses to a short position on second close, cover at B1 and B2. If the market closes above $1503, then go long. Look to take profits at $1523 to $1540, which are the Sell 1 (S1) and Sell 2 (S2) levels.

Since Our Last Report

On October 28, when our last report was published, we said that you should buy at $1486 to $1466. Gold came down on the 29th, activated a set-up the first time that it touched the price level. If it closes above it on the second close, in this case the daily close on October 30, it activated a buy signal. I execute on the 15-minute chart. On the 28th, the gold market crossed below the average price, and activated a short signal at 5:45 am. The mean of $1486 was then activated below as a buy trigger. It the price comes down to the B1 level, there is a 90% probability of the market reverting back to the mean. In this case, the target above was $1503.

On the 30th, the Feds' decision forced the gold market to revert back to test once again the $1486 level. It did not close below it, so you would not have been stopped out. Gold then reverted back up. The buy signal was activated at $1503, and the target was completed on the 31st. It met the target. The buy signal was at $1486 and the target was $1503, a $17 per ounce gain on this trade or $1,700 profit on a futures contract.

I don't trade after the market accomplishes my target at the average price. There is a 50/50 chance of the market going up or down from the mean. I trade the extremes of the market above and below the market, which are much higher probability trades. I'm waiting for the market to complete the $1523 to $1540 levels.

Closing weekly above $1500 to $1503 is extremely bullish. The daily signals average is $1509. The S1 target that was activated is $1523. This matches the daily and weekly targets of $1523 with pretty much 100% harmonic alignment. $1523 is the beginning of distribution of supply for the daily and weekly numbers.

Anticipation or Not

I believe that the stock market is not anticipating commodity inflation to explode. The gold market is anticipating that something is going to happen. Gold and silver are beginning to price themselves not as commodities but as currencies. Record debt globally and the potential for commodity inflation are going to explode over the next couple of years and much sooner than expected. This does not bode well for the US dollar, as interest rates deteriorate, unless there is a dramatic shift in interest rates and the Feds are forced to increase interest rates instead due to commodity price inflation. The equity markets expect interest rates to continue to decline. This could be a black swan surprise for the equity markets.

Disclosure: I am/we are long NUGT. 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.