"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput


Friday, June 20, 2014

Inflation Expectations Rise this week

I made mention of this chart not too long ago as another way to try to keep tabs on what market participants are thinking in regards to inflation expectations.

Here is the longer-time frame chart showing the TIPS spread and the gold price.

The chart is valuable in the sense of seeing how well or not so well, gold is tracking the ebb and flow of inflation expectations currently in the market.

I wanted to pull a close up and take a look at this chart on a bit more shorter-term basis so below is the same chart using November 2013 as a starting point. I chose this month late last year as a starting point because gold lost around $100 during that month before a final plunge to $1180 in December.

Here is the close up look:

This week, the TIPS Spread has run up 6 basis points as of yesterday afternoon. It is currently sitting a 2.25. Interestingly enough, the spread bottomed out early this month at 2.17. These changes may not seem like all that much but interest rate movements and gold are tied quite closely together. As a matter of fact, the TIPS spread is now at its highest level in nearly 6 months ( Jan 22, 2014). What this is telling us is very simple - there has been a shift in regards to the rate of inflation that the market is now expecting as we move forward.

The sharp spike upward this week, I believe, can be laid completely on the shoulders of the Janet Yellen Fed, especially in regards to her testimony and comments. For whatever the reason, and I suspect that the market is beginning to grow increasingly nervous about this Fed, traders are starting to worry about inflation.

It could be that to some, the Fed is already behind the curve on raising short term interest rates.

That being said, can you see why the price of gold has shot up as sharply as it has this week? With the breakout higher in the Goldman Sachs Commodity Index, and this move to a 6 month high in the TIPS spread, gold is reacting to these increased inflation expectations. Silver, especially, being much more sensitive to inflation concerns than is gold, is reacting ever better.

The market is obviously sending a message to Ms. Yellen and to the rest of the Fed - the question is are they hearing it?

One suspects that they are not.

One sign that they might finally wake up from their stupor and see what their policies of ZIRP ( Zero Interest Rate Policy) is doing to the commodity sector would be a rash of speeches and appearances from various Fed governors starting to talk hawkishly about raising interest rates. That would support the Dollar and undercut some of the strength in the commodity sector in general. If they do not do so very soon, they are going to have some real problems on their hands as the markets will have gotten way out ahead of them.

Keep in mind something that I have mentioned for a while now - I believe that the Fed actually did not want to see the gold price collapsing lower, along with the rest of the commodity complex - that would be a dangerous signal ( to them ) that deflation is gaining the upper hand, and we all know that the Fed, as well as all modern Central Bankers, are terrified of the deflation spectre. They believe that they can handle the inflation genie but the deflation boogey-man is an altogether different and quite unwelcome entity to them.

The problem for the Fed is that they might be able to generate some upward pressure on commodities, perhaps by design, perhaps not, but they run the very real risk of letting things get completely out of hand. One cannot give speculators a green light to blindly buy commodities in general without unleashing a dangerous wildfire. Apparently the Fed thinks that they can handle a campfire but they had better watch out!

Let's continue to track this, along the GSCI, and the Dollar, to see how things proceed as we move forward into this summer.


  1. Thanks for all of this commentary on the metals, Dan.
    I searched but can't find a tips spread chart that looks like yours, can you post a link to one?

  2. the Fed hasn't gotten much (anything?) right in ten years. so I'll play those odds.


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