Gold: Inflation Has Peaked

Summary

• The latest jobless numbers were higher than expected. Jobless claims rose to 373,000.
• Everyone appears to be worried about inflation. The media is saturated with talk of inflation.
• The bond markets anticipated a slowdown in relation to jobless claims.
• The real issue is not inflation, but is actually stagflation or deflation.
• Looking for a portfolio of ideas like this one? Members of Mean Reversion Trading get exclusive access to our model portfolio. Learn More »

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Fundamentals

The latest jobless numbers were higher than expected. Jobless claims rose to 373,000. It created some volatility in the stock market, with a bit of a correction. The E-mini S&P went down from the highs around 4350 yesterday. Our proprietary artificial intelligence algorithm, the Variable Changing Price Momentum Indicator (VC PMI) recommended taking profits at the higher levels before the reversion to the mean. Now we are trading at about 4292, below the VC PMI mean.

Everyone appears to be worried about inflation. The media is saturated with talk of inflation. The 10-year Note is down to about 1.28. The bond markets anticipated a slowdown in relation to jobless claims. The higher unemployment rate is not good for the general economy. President Biden just announced another stimulus package on the way. We appear to be seeing the implosion of the US dollar if the government continues to print money. In March of 2020, the Fed announced they would commit up to 10% of GDP or $30 trillion to come out of this pandemic. The Fed buying $120 billion in repos a month is keeping the market afloat. Any talk of tapering is going to turn the market back down to the mean. The economy has a huge amount of debt and any increase in interest rates is going to be devastating. Even rates of 4% or 5% will be a disaster for the world economy.

The real issue is not inflation, but is actually stagflation or deflation. The government has to continue providing stimulus, but for every dollar they print, the dollar loses a bit more value. If the dollar is devalued 20%, then assets valued in the dollar can go up 20% and they are really worth the same. Even if the assets you have valued in dollars are rising, you are not really making any money because the underlying dollars are worth less. Unless you price those assets in gold, you are not going to get the real intrinsic value of the assets. For this reason, virtual currencies are becoming far more popular, because they are outside the banking system and the US dollar or any other fiat currency. The silent destruction of the purchase power of the dollar is not discussed much, if at all.

The supply chain is strained, with prices rising fast as demand returns to various markets, from real estate to cars. If retail stores believe that we are going into an inflationary cycle or devaluation of the currency, they will begin to hoard inventory in anticipation of even greater shortages in the future. Worse, the pandemic is not over. Australia is back in lockdown. California is recommending wearing masks again. People are nervous and may begin to sell equities as panic sets in, particularly if they have been long for a long time. The sell-off could also affect gold and silver. It could, however, be an excellent buying opportunity, as happened in 2020. Assets fell fast, but recovered fairly quickly. Bond yields are falling fast, so a lot of money may leave stocks to seek a more conservative investment, like bonds.

Interest rates will probably continue to fall into negative territory, which will continue to fuel the stock market. Unless we see some real changes in terms of a reduction in the Fed buying of bonds and provision of stimulus, rates will continue to fall. Real currency assets, such as gold and silver, should rise. However, the Fed cannot afford to have gold rise in value against the dollar or people’s faith in the dollar will vanish. Therefore, the Fed has an interest in keeping gold prices low by allowing central bankers to accumulate record large positions in the paper futures markets providing the liquidity until now that Basel III has been implemented. This will cause the Net Stable Funding Ratio to require more capitalization for unallocated metal.

Strategy

We are now waiting for gold to reach $1834, which is the second target for the VC PMI for this move.

Gold is at $1808, up $7.90. Inflation is old news, so such fears are not causing precious metals to rise in price. The real problem is the weakness of the dollar. We are watching the silent destruction of the US dollar, caused by the amount of stimulus entering the market. It does not seem to be ending any time soon, so the dollar will continue to lose value and real assets, such as precious metals, and digital assets, as an alternative to fiat currencies, will continue to rise. We are in the middle of a transformation in what is valued and there is a tremendous opportunity to make a great deal of wealth. Gold is undervalued. It will go when you least expect it. If you aren’t there, you are going to chase it and you’re going to miss it. Be patient with the metals. Build a core position and add when the market corrects. The dollar index is down to 92. We are looking at some support at these levels for the US dollar, but let’s see what happens.

We are expecting a rally in gold up to the $1834 level. For day trading, gold is around the average price so there are no VC PMI trades. There is a bullish momentum with a target of $1834, which is close to the weekly targets of $1824 and $1831. In that area, we expect supply to come into the market. If gold closes above $1806, the $1824 target comes into play. There is a 10% chance of a rally from here, but there is a 90% chance of a reversion back to the mean. If we close below $1806, then we will have a short trigger and a bearish price momentum.

Silver

Courtesy: TD Ameritrade

Silver is a little more bullish. It activated a buy trigger from $26.01. The target is $26.29. If we close above $26.28, it will activate a strong daily and weekly VC PMI bullish price momentum with targets of $26.49 to $26.76, and all the way up to $27.

Featuring Grayscale Digital Large Cap Fund

Courtesy: TD Ameritrade

The Grayscale Digital Large Cap Fund (OTCQX:GDLC) is an interesting digital asset. If you are interested in getting involved in the digital field, but don’t know a great deal about it, this fund might be a good way to get into the market. It is a diversified fund that has about $30.4 Billion under management and has returned 301% in the past 12 months and 122% over the life of the fund. It allows investors to trade in digital assets. The fund seeks to hold large cap digital assets that comprise 70% of the entire digital asset market. It is attracting a great deal of interest.

GDLC traded last at 26.70. The fund is volatile. There is a 2.5% fee, which seems reasonable on something that returned more than 300% in 12 months. However, you must be willing to handle the extreme volatility of digital currencies.

Based on the daily chart, the recent high was 54. On the weekly, the low was on April 13, 2020 at 5.12. Then in about a year, it went from 5.12 to 54; a ten-to-one return in 12 months. From 54, it has corrected back down to the low on June 21 at 18. Now it is coming up again. This is a volatile instrument, which is good for traders.

Looking at the Fibonacci retracements from the low back in April 2020 to the recent high, we can get an idea of where the market corrected. It came down to a perfect 61.8% Fibonacci retracement. If it closes below 78.6%, it will negate the previous bullish pattern that began at the end of last year. It appears that we have completed this pattern and there is a high probability that this is an excellent time to buy GDLC.

Courtesy: TD Ameritrade

We are in the first fan or Fibonacci trendline resistance level. Once we close above this fan line, then we will probably revert back up to the 50% Fibonacci retracement level of 29.78. If we go up to the 38% retracement, then we are looking at 35.48 - a highly volatile instrument. With the interest in virtual assets, this is a great asset to buy and to hold. We believe it will prove itself over the next few years. You should own some of this fund; not a huge part of your portfolio, but it should be represented.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of GDLC either through stock ownership, options, or other derivatives. 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.