Back in July I called the gold breakout and doubled down a month later. This has been a great trade for me and I am still long gold because the charts are beautiful - but I am starting to take off some of my position. This post is about my thoughts on the dollar, gold, and bonds headed into the fall. I am taking off some long gold and readying myself to build a short bond trade. The big picture reasons for this are simple - growth and inflation appear ready to surprise higher in my opinion. The current narrative at the Fed, on Wall Street, on financial media, and on FinTwit seems to be no more hikes for a year or two, no inflation, and just enough growth to keep everything peachy. Traders are positioning for this, the media is saying this, and the Fed is pushing this. I think this narrative is wrong and will look to explain.
First up, an important chart via Brent Johnson from Santiago Capital: most gold investors think of inflation as great for gold and deflation as bad. Sometimes that is correct but not right now. As his great chart shows us, in the past four years, deflation has helped gold and inflation has not. Now of course this could change but for now I am going forward expecting inflation to hurt the price of gold this fall (if I am right and it runs hotter than expected).
Gold is outperforming in the dollar big time. I outlined that gold is doing well in most major currencies in my last update, but as you can see from Marin Katusa's chart - a lot of this has been dollar weakness only.
The price of gold is in a beautiful uptrend and I will keep at least half of my position on until my trendline is broken (I drew it on a 4 hour time-frame). With that said price is approaching a level of supply that appears capable of at least causing a pullback (possibly to the longer term up trendline that started in 2016). When I entered my long gold trade, I liked the positioning and sentiment levels but both are now at uncomfortable levels for me. That is why I took off a chunk of my position.
A lot of folks called a bottom and got bullish on the dollar last week which I doubted publicly on twitter, and the chart shows a retest of an old trend and an ugly rejection. We clearly have a bit further to go. For me...I see no help until the little green triangle I drew on the chart below. That is the trendline dating back to 2011 with the last retest in July of 2014. The top line was the high in 2010 and a nice demand area from the 2014 explosion higher. A lot of dollar bulls are going to give up at $91-$90-$89 and the specs will run wild. That will be the time to get long - not right now. There is still some pain left to put to the dollar bulls. With that said dollar and euro sentiment and positioning are demanding a resolution before too long in my mind so I will be watching closely.
So I said I want to sell gold, I would like to rotate that money into a short bond trade for the same reasons. I expect inflation to surprise and I want a way to express my thesis in something that looks good technically, and has lopsided sentiment and positioning. Bond bullish sentiment is about 75% (gold about the same) and specs are starting to really take off as dealers have started to go short. Still some room to build up pressure here, but I expect it soon.
Below is $TLT which is about to hit its gap very soon.
Below is the 10 year yield which is nearing an important channel line, strong demand, and stronger demand at the base of its large gap. I will start shorting bonds when $TLT hits its gap and add if the 10 year yield hits its gap. I will also add a futures position if the down trendline is able to break this fall.
Below is a look at the positioning via Adam of Movement Capital and freecotdata.com.
Okay so enough about all of that - why do I think inflation and growth may run hot? Let's take a look.
First up is the ISM...which is starting to really break out and this matters. A lot of bears expected this to roll over this year and it is surging.
Global PMIs are getting away from bonds and inflation and expectations for growth and inflation.
ISM Manufacturing index is taking off as we witnessed, well so is real wage growth in US manufacturing.
If you have not looked through these NFIB numbers you are missing what is coming in my opinion. Credit and CAPEX in the small business arena are blasting off as are plans to raise wages. Here is one showing some wage inflation that may be building in the months ahead.
Inflation is tied to the price level of the dollar and as the DXY finds new lows as we speak, expect inflation to follow.
Jobs balance and wages tend to follow pretty strongly and if the correlation holds up (may not) we should expect wage inflation and thus some CPI surprises.
This one only matters if you see oil moving higher in the months ahead I suppose, but inflation is tied to the oil price which of course is tied to the price of the dollar. Well, if oil is able to break out (shale is starting to quietly struggle) so should inflation. This one remains to be seen but I found the chart pretty interesting. As you noticed most of these charts were from Macro Ops. If you are not reading Macro Ops and following their work, you should start. Alex, Tyler, and the guys are doing great work and I am a really happy member of their community.
Chinese PPI is about to drop which will be important for what is to come this fall with inflation. Watch that closely. I am expecting a surprise CPI print this month and the rest of the year and believe this will drive my thesis for bonds. The next US CPI print is in a week and I think that number may be where narratives and price and central bank hot air begin to shift.
Bonus chart for inflation doubters: Commodities