I’m 99% sure that the bullion rally this year is being driven by inflationist gold bugs. Inflationary fears breed purchases, resulting in the gold sector going higher since the end of the first quarter.
At the start of the year the gold and silver index climbed in a very bearish environment. Then last month saw silver making a slightly higher low versus gold and some edgy overbuying at the end of April. Around that time we spoke to executives of Pana Mining Holding who described deflation rumors as “old news.”
That was basically the signal for the ‘inflation trade’ to begin with many commodity markets including gold and silver benefiting, as well as a few emerging markets. Not to say there has been no risk in getting involved with buying at this point it just takes a steady mind and some courage to enter the market at such a significant stage.
However, when the gold/silver ratio changed back those same markets would weaken. This shows how sensitive an indicator that ratio is on so many levels, not least the ability of the market to react to inflation. At the moment, that reaction has been minimal and hasn’t really approached the level of a full blown correction.
Everyone loves a gold and silver inflationary bug, even if we die hard traders often complain about Fed inflation policies. A lot of capital inflow usually results and plenty of opportunity for profits. That’s just the fundamental nature of the beast.
Inflation is bound to taper off at some point and those traders who have been doubling down are likely to get burnt at some point. Luckily the inflation has a nifty habit of self-correcting just when you least expect it so it means keeping a keen eye on the ratio and trying to preempt the bounces.
In summary, the last few months have been a journey and not a bad one at all. Silver has led the way rocking alongside inflation and many investors with foresight have been able to read the signs and make some healthy profits in the first quarter of the year. And the greenback has not let anyone down, keeping its dominant bearish complexion, regardless its short term fluctuations.
At the moment I’m not going to commit and say there is a real correction coming in the sector any time soon. I readily admit that the current rally has been unpredictable, especially to those new in the game, and many have just plain got their timing wrong.
However, gold having these cyclical phases, I think we will see this latest cycle ending pretty soon and the whole sector will reset and follow the same pattern.
