Broad-based selling continued this week in commodities markets, where ‘inflation concerns’ have turned into ‘recession fears’. Looking back on several of my trading journals, I can tell you that volatility is highest in a deflationary/recession-like environment. Financial conditions will continue to deteriorate until the Fed pauses/pivots back, with corporate earnings, growth and liquidity all strained at the same time. The spillover effect will see cryptocurrency, real estate, and tech companies accelerate layoffs well into the fall.
Daily chart of 10-year Treasury yields
Cross-asset class correlations show a repeating pattern in markets where inflation expectations rise as crude oil prices rise, causing yields to rise, giving a boost to the dollar, which slightly weighs down the gold market. That cycle was abruptly disrupted on Friday as traders realized that the most likely outcome in the event of a recession will be falling Treasury yields, giving way to liquidation of gold with panic buying in the Treasury market to secure higher interest rates.
Daily Gold Chart
Copper, platinum and silver were knocked down from multiple directions on Friday. General Motors reported that nearly 100,000 vehicles were not completed due to supply chain issues. At the same time, data from ISM Manufacturing in the US showed that orders had fallen to a two-year low. Keep in mind that industrial manufacturing accounts for most of the demand for these three metals. We expect them to rebound significantly once the Fed declares victory over inflation and focuses on stimulating the economy. As such, positioning in these metals must be viewed as a long-term investment in extreme washouts such as we are seeing now. Any new positioning should be in December 2022 or into 2023 when buying futures contracts. If you’ve never traded silver futures, we’ve created a new educational guide to answer your questions about how to transfer your current investing skills to trading “real assets” like the 1000 ounce silver futures contract . You’ll also receive a free two-week trial of our flagship report, The Morning Express, which provides you with key support levels at resistance in both gold and silver. You can request your book here: Trade Metals, Transition your Experience Book.
Our strategy
We remain bearish and take tactical short positions in US equities if a significant upleg targets the Nasdaq and Russell 2000. The leveraged stocks that make up these indices are most at risk during a recession. We also maintain our bearish stance on crypto and traditional currencies like the British pound, euro and yen. We are also bearish and target cyclically sensitive commodities such as cocoa, corn and soybeans as they recover. We maintain our bullish stance on China as it continues to boost its economy. Crude Oil should remain firm for the first few months while weakening over time as we move deeper into the recession. Therefore, we will look at leveraged options bets to make another correction. To help you identify different technical analysis formations, I’ve traced back 20 years of my trading strategies to create a free new “5 Step Guide to Technical Analysis for Gold But Easily Applied to Silver”. The guide provides you with all the steps of technical analysis to create an actionable plan to use as a basis for entering and exiting the market. You can request yours here: 5-Step Gold Technical Analysis Guide.
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