Is Higher Inflation Coming?
Yesterday we addressed the recent price action in gold.
Specifically, I noted that gold was rallying because central banks had sent a clear signal that they would be forced to cut rates and launch new QE programs.
This has meant that globally bonds have begun to pay negative yields. In this situation, the lender is actually PAYING for the right to lend the borrower money!
Gold, with zero yield, is actually attractive relative to the $19 trillion in debt that has NEGATIVE yield. For this reason, gold has been rallying alongside bonds in the last few months.
The below chart shows how gold has been tracking the Long-Term Treasury ETF (TLT) almost tick for tick.
This raises a larger question. Is gold moving based solely on negative yields… or is it also rallying based on the belief that higher inflation is coming?
To answer that question, we turn towards the entire commodity index (symbol: CRB).
Commodities: A Real-World Indicator of Inflation
Commodities typically perform well during periods of higher inflation. With that in mind, the chart of the commodity index will give us a decent idea of what is coming down the pike.
The below chart shows that commodities have repeatedly held support (lower orange line) in the last few years. The big question is whether they can finally break their multi-year downtrend (upper orange line).
If they do, then higher inflation is coming…
I’m keeping my eye on this chart… particularly because if higher inflation IS coming, it is going to mean SEVERE currency volatility.
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