Brexit!!! Silver!!! Bonds!!! Deflation!!!

July 5, 2016

It’s a funny title for a segment, but it is appropriate. I don’t want to be too flippant with dismissals of inflammatory market events like ‘Brexit’ as simply hype. There is very real macro fundamental shifting going on behind the hype. But in market management, macro fundamentals play out over long stretches of time and nobody knows exactly how all the moving parts are going to affect the subject of the hype (in this case Britain and the EU), let alone the asset markets we are tasked to invest in, trade or avoid.

This is where market psychology comes into play, hence the ‘!!!’ title. As already noted, I get the feeling that the Brexit drama was an exclamation point on the global deflationary phase that has been in play since 2011, when the acute phase of the ‘Euro Crisis’ first erupted (sending gold to 1900+ an ounce). You may recall that silver and commodities had already blown off and blown out but gold pulled in the risk ‘off’ bid amid a developing deflationary force. It then blew out and global deflation ensued.

The US and its world’s reserve currency got off easy, with a Goldilocks environment pulling capital into its markets, enriching its services sectors while impairing manufacturing in general and exporters in particular. But here we consider the old (albeit true) cliché that the US is predominantly a service economy.

I have had input from people telling me that there is no inflation and the crisis in Europe will panic capital into US markets and drive the US dollar upward. But my question to them is this; have we not had that environment since 2011? Is the Brexit drama not just an alarming symptom of something that began in the Euro crisis’s acute phase in 2011? Do markets sometimes ‘sell the news’ if it is good and ‘buy the news’ if it is bad?

I am not saying to buy Europe. I am however, buying the news about Brexit and its global deflationary implications by putting forth and buying the ‘inflation trade’ we have been projecting, gauging and managing for some time now. As you know, I got a little over excited last week when silver rammed upward vs. gold, advancing the view.

The reason I say over excited is because it is exciting when my tools provide rare signals. It can be boring writing ‘status quo’ reports every week and really, that had been the case since the silver-gold ratio turned down in 2011, until 2015 when we began the Macrocosm theme, last July. The implication had been global deflation and a bearish view for many global markets, commodities and of course, the precious metals.

Still, I may be too deliberate for excitement seekers, but I can only be me. Being me meant fleshing out said Macrocosm theme and the potential changes forthcoming as gold asserted leadership over commodities. We looked ahead to a time when gold would lead currencies and importantly to the gold mining case, stock markets. Well it’s ✓, ✓ & ✓ with a bonus ✓ in the form of our recently added ‘gold vs. US and global bonds’ ratios. We will update the whole cavalcade in the now-standard ‘Gold vs.’ segment below.

But to close this segment, let’s consider one of the most sensitive ‘gold vs.’ of all, gold vs. silver. On the first chart below, it is the only item that has broken down (i.e. silver vs. gold has broken upward, which we have been watching for like a hawk; no pun intended).   While I am as concerned about the next guy about the speculation in silver, I’ll be damned if I am going to abandon a thesis that is working perfectly because I am afraid of the wild speculation, momentum and what looks like short covering currently in play. We will abandon the thesis only if Silver-Gold is head faking and bull trapping.

Treasury bonds are screaming higher as capital flies into US markets (potentially a blow off to the ‘global capital flees to the safety of US Treasuries’ story) but it is also fleeing to the precious metals… only with silver now leading. That implies that next play is risk ‘on’ relative to 2011’s risk ‘off’. People chasing the Euro Crisis trade now may have already missed it, forming a large counter party to a developing risk ‘on’ scenario.

One variation of an inflationary scenario could see the US Fed jerk back to hawk mode once the market gets a load of underlying strength in the Semiconductor Equipment sector, its implications for Semi manufacturing and for general US manufacturing (ref. again the persistently firm ‘prices paid’ components by US manufacturers).

The market could initially punish silver and gold if it gets wind of hawkish Fed rumblings, but the silver-gold ratio and commodities may have already painted the Fed as being behind the curve. They may not be able to raise rates fast enough, one day.

The above is not analysis.  It is a viewpoint.  This market is in motion and the thrust of it is ‘e’motion.  NFTRH 402 spent 40+ pages (lots of graphics and easier to read than it sounds) subsequent to this opening segment fleshing out where markets are at, post-Brexit.  We focused on the speculation going on in silver and defined the danger out ahead for when this blow off of Stage 2 of the precious metals ‘launch’ phase* flames out.  We are defining danger with a lower case ‘d‘ compared to 2011’s terminal blow off ‘D!!!‘.  Meanwhile, the markets move forward and danger or not, the miners (HUI) have now taken out our target of 251 and new objectives have been set.

* As defined on March 4:  Launch!

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Gary Tanashian of successfully owned and operated a progressive medical component manufacturing company for 21 years, keeping the company’s fundamentals in alignment with global economic realities through various economic cycles.  The natural progression from this experience is an understanding of and appreciation for global macro-economics as it relates to individual markets and sectors.

Most silver is produced as a byproduct of copper, gold, lead and zinc refining.