The One Investment You Need as Inflation Spikes

The markets were just waking up on Wednesday when news came along that upended the bed … and dumped them on the floor.

Bam! Stock futures plunged, while bond yields soared to 2.902%. That’s a four-year high!

That led to a back-and-forth free-for-all as stocks plunged, then soared. Some traders, completely befuddled, sat on the sidelines. Heck, in a market this volatile, I wouldn’t blame investors for hiding under their desks. 

What news am I talking about? Inflation data. The Consumer Price Index (CPI) rose 0.5% last month against projections of a 0.3% increase. Meanwhile, the index for all items less food and energy (because who needs those, right?) increased 0.3%.

Source: Bloomberg

The rise was driven by spikes in clothing, dining-out food and drugs. Meanwhile, for those people who use energy, that soared, too.

On an annualized basis, headline CPI rose 2.1% against expectations of 1.9%. Annualized core CPI increased 1.8% vs. estimates of 1.7%.

Now why is that 2% familiar? Oh right, that’s the goal the U.S. Federal Reserve had previously set for inflation.

The Fed currently has its benchmark rate pegged at 1.25% to 1.5%. Now, that might be too low if the inflation pace is sustainable.

So, no wonder yields went higher and stocks went lower. At first. But by the end of the day, stocks had roared back in a massive rally. That’s because investors refocused on healthy earnings and an economy that appears to be pretty solid.

The fascinating thing at the end of the day was that bond yields were up AND the dollar went down. Usually, yields and the dollar go hand-in-hand. I’ll come back to that.

Meanwhile, do you know what looks good when the dollar goes lower? Something that is historically seen as a hedge against inflation. And that something jumped more than 2% on Wednesday … a big move for this investment.

I’m talking about gold.

Source: MarketWatch

I’ll point out that not only did gold spike higher, but it just made a higher low. That’s bullish.

The conventional wisdom is that rising yields should detract from the appetite for gold because precious metals yield diddly-squat.

But conventional wisdom is wrong. It’s not bond yields that are important. It’s real rates — the Fed Funds rate minus inflation.

The fact is, the Fed is unlikely to hike them fast enough to keep pace with inflation. And that means gold could continue on its merry way.

But there’s one other explanation for gold going up. One that would also explain yields going up while the dollar went down.

And that’s if our financial situation is worse than the government is letting on …

See, investors seem to be worried about the fact that the U.S. is going to run a trillion-dollar deficit this year. That means we’ll likely see our Treasury try to sell more bonds to bridge the gap. So of course bond prices went down, and yields went up.

Then why did the dollar go down? I mean, inflation is heating up, which means the U.S. Federal Reserve may have to raise its benchmark interest rate more than the three times it has been hinting at. At least, that’s what the jaw-waggers on CNBC would have you believe.

But here’s the thing: In the past week, the Dow Jones Industrial Average has lost a thousand points not once, but twice. There are stresses and strains on our financial system, compounded by the fact that the damned fools in Washington can’t balance a budget.

That undermines faith in the U.S. dollar. At least in the intermediate term. Longer term, we could see the U.S. dollar go higher for all sorts of reasons. But for now, it’s headed lower.

If you want to ride that trend, buy gold and gold-leveraged stocks.

On Tuesday, I gave you “Two Sizzling Charts on Gold.” In it, I told you how gold could move to $1,640 very quickly.

The VanEck Vectors Gold Miners ETF (NYSE: GDX) isn’t just a bullish chart; it’s a great way to ride this rally.

And before that, on Saturday, I told you about “Nevada’s New Gold Rush.” In it, I named three gold mining and exploration stocks — all of which are doing very well as gold rallies.

Do your own research. But don’t sit on your hands. The gold rally bell is ringing. Get busy … or get left behind.

All the best,
Sean Brodrick