If the Fed has been wrong about inflation risk all this time, gold could be the beneficiary.
Editors Note: The Fed has been using economic models that have been seriously underreporting inflation levels in the real economy, as per John Williams of Shadowstats. Therefore, we believe that the possibility of a fed misstep, as outlined in the following commentary, has a very high probability of playing out.
Gold may be entering a golden age
By Michael A. Gayed
“Inflation is when you pay $15 for the $10 haircut you used to get for $5 when you had hair.” – Sam Ewing
The Golden Age in Greek mythology was a beautiful period to live in. As legend had it, this was a period of time where people never had want, work was leisurely, and peace reigned. Men lived like gods, and there was no struggle or strife. Makes me wonder if quantitative easing was around back then, given that the Fed seems to think we are in or about to re-enter a time when asset values will never fall, the economy is improving, and money is plentiful for all.
Of course, the Golden Age was fantasy. However, I do think we may re-enter a period where gold has its own Golden Age.
Take a look below at the price ratio of the SPDR Gold Trust relative to the S&P 500 SPDR ETF, overlayed with the ratio’s 20-day moving average (MA). As a reminder, a rising price ratio means the numerator/GLD is outperforming (up more/down less) the denominator/SPY.
The ratio appears to have bottomed in early June, and has essentially kept up pace with equities after severe underperformance for three years straight. Yellen and the Fed have made it a point to reassure markets that on balance, they believe inflation risks are transitory and that low rates must remain in place for an extended period of time.
If we assume inflationary risks are not transitory in the short term, then that means the Fed may ultimately be behind the curve and be considerably lagging in terms of responding to inflation (which I personally do not believe is a real threat just yet). Gold tends to do well in negative real-rate environments, whereby inflation is higher than interest rates.
We may be on the verge of that happening again, which in turn explains some of the more recent strength in commodities generally. Our equity-sector ATAC Beta Rotation Fund is currently overweight materials relative to the S&P 500 as momentum persists there, consistent with the idea that inflation expectations are altering.
So while the Golden Age never actually happened, the Age of Gold still might for those interested in diversifying away from the honey-badger U.S. stock market, which doesn’t seem to care about risk until it actually does. I don’t know about you, but when I look at a chart of Newmont Mining, that sure does seem like an interesting spot to position in.