The NFTRH plan is and has been that the gold mining sector, due to the fundamentals implied by the handy graphic below, could eventually lead a world full of inflatables higher. The miners, leveraging gold’s out performance to most everything else during liquidity crises and even deflation, move first and draw in the inflationist bugs later. If the macro goes inflationary the miners will likely continue to perform well (ref. the 2003-2008 period) but would no longer be the go-to sector.
Then the play theoretically spreads far afield into commodities, global stocks (e.g. EM, Asia, etc.) and US markets/sectors that tend to benefit from the rising long-term yields (e.g. banks, materials, etc.) resulting from inflationary macro signaling. These would be aspects of a sustainable inflation/reflation trade IF the signals are in order. So let’s take a look at some of them.
The Silver/Gold Ratio (SGR), a reflationary risk ‘on’ indicator has hit our upside target, which we have tracked in NFTRH updates over the last few weeks using the yellow box highlighting an area near the down-trending 200 day moving average that would at least temporarily halt the party. The SGR is pausing and pulling back a bit here. All normal so far.
For a big picture view let’s flip it over to its evil mirror image, the Gold/Silver Ratio (GSR). If a rising SGR is an indicator of inflation and speculation a rising GSR is obviously the opposite. The big breakout in March gained a lot of attention as frightened herds sold everything that was not nailed down first and asked questions later. Taken at face value, this is still a dangerous situation because this liquidity stress indicator has not broken down on its long-term view.
Copper has played (reflationary) ball by rising to the first real resistance zone at 2.50. The next resistance is the SMA 200 at 2.55 and after that lateral resistance at 2.62. Copper’s trends are still firmly down and risk to the metal to which many ascribe great economic importance is high.
The CDNX/TSX ratio, another of our early inflation indicators, popped above the SMA 200 in early May, which we noted in real time in a subscriber update because it’s another important indicator on the future macro.
Whether this plays out now or later on, a set it and forget it and/or diversified market orientation is not going to work well. If the picture is inflationary, you invest inflationary. If it is deflationary you invest (or hold tons of safer cash equivalents/bonds) deflationary. If it is one of the grey areas in between, well, I’ll leave that up to you.