Inflationary Winds Blowing Across All Assets

In a stark reversal from the collapse of nearly every market just six months ago, the winds of inflation have pushed the sails of those same markets back to new (or near) all-time highs. The rebound from Covid has been a V-shaped recovery, not an L-shaped, W-shaped, U-shaped, or some-other-letter shaped recovery. The move in asset prices should not be conflated with an underlying economic return to normalcy - far from it. The rebound is simply a commentary on price.

Let’s start with my favorite markets - precious metals:

GOLD

Gold punched in new all-time highs in early August and remains in a strong uptrend. Price now appears to be correcting, which is healthy as the market looks to be building a base for another run higher. I expect price to push up to 2230 and then 2300, but I am not ruling out a significant pullback first. Downside support levels come in around 1900 and 1800. The latter level is the more significant support area in my opinion.

The defining characteristic of the move this year has been volatility. In the long term chart of volatility below, we see that gold volatility broke out to 10 year highs, retested the breakout, and now remains elevated. I expect more volatility ahead.

GDX

Similar to gold, the gold miners recently broke down and appear to have put in a lower high in recent days. This looks to me like another leg down - the C-wave of and A-B-C correction - is in the offing. Once again, I think this is healthy, as miners work off overbought conditions to set up another run higher.

SILVER

Silver, like gold, remains in a strong uptrend, but the market is now showing some signs of exhaustion. The danger here is that silver can plummet through key support levels around $26, $23, and $20 and still remain in a strong uptrend. I would like to see silver consolidate above $26, but a big shakeout is not out of the question.

Similar to gold, silver’s price has been characterized by volatility. Not only did volatility break out of a decade long channel, but it hit levels never before recorded. I expect volatility to remain high.

S&P 500

Despite every conceivable reason to be bearish equities, from disease to rioting to murder hornets, the S&P500 just hit all-time highs this week. In my opinion, a clean breakout would be very bullish, and my thesis posted earlier this year for the S&P500 to hit 4600 long term would be back on track.

COPPER

Dr. Copper seems ready to support the bullish case for equities. Price just broker out today above 3.00, which has acted as horizontal support/resistance numerous times over the last several years, but more importantly coincides with 10-year falling resistance. A breakout here is not insignificant.

COPX

The global copper miner ETF, COPX, also seems to support this copper breakout. It, too, is now nipping out above 10-year falling resistance.

LUMBER

The commodity boom doesn’t stop there. Lumber, which was decimated in March, has not only recovered the entirety of the decline, but is now trading at all-time highs and seems poised for a run to the 261.8 Fibonacci extension at 895.

HOMEBUILDERS

If lumber prices are spiking, we would expect homebuilders to be doing well also. Sure enough, homebuilders (XHB) have also recovered the entirety of the decline and have also pushed to all-time highs.

Another home construction ETF, the ITB, is also at all-time highs, having recovered entirely from the March swoon. Housing is on fire right now all over the country.

MORTGAGE BACKED SECURITIES

Adding further fuel to the fire of the housing market has been ever lower mortgage rates. The Mortgage-backed Security ETF, MBB, is sitting on the throwback to the 2015 highs and looking to break out of a bull flag. A breakout implies lower rates ahead and supports the moves in lumber and the homebuilders, and generally support much higher home prices.