The limitless money printing by the central banks throughout 2020 has forced the hands of investors to chase any yielding asset that can and will outperform cash or low yielding debt. As the market bounced back sharply after the initial lockdown induced collapse, investors first chased Corporate Bonds, then Junk Bonds, Technology, then off to Gold, with the latest craze being Silver. As fundamental and logical as that may be, timing is critical. After bouncing 40% from March lows of $1200/oz., it got all the way up to $1700/oz. and consolidated there. But in the last 10 days it just broke higher and moved up by 40%. What is happening to cause this?
We all know the secular theme of buying hard assets as central banks print more and more, and debase our fiat currency. This has and will stoke inflation taking real yields lower. That has aided in the gold price moving higher, for the right reasons. During bull markets, Silver outperforms Gold as it's like Gold on steroids. As money supply increases, investors look for the asset class to benefit the most, then after that is done, it chases the next one that benefits from the same momentum. As the market reaches its heights, then come the "laggard" trades when shrikes of "what else has not broken to the upside" echo over the trading floor. When this happens, it usually means we are nearing the peak of the euphoric greed or FOMO trading. In this case, on Friday we saw commodities like Platinum and Palladium, all rally aggressively as well after they had been underperforming quite a bit. Today when traders scan all their charts to see which ones "have not broken yet", it heeds warning.
A commodity should always be bought when its demand/supply inventory balance matches its top down macroeconomic rational to own the commodity. It may make sense in Gold and Silver but one would need to do their work in chasing the entire complex. Also, if the entire move happens in a period of less than a week, it is also a worrying sign. When the rate of change of a commodity in 10 days is greater than 10% in an uptrend, it usually means we are nearing the end of euphoric phase.
The Fed FOMC deliberates on the July 29th. After four months of heavy aggressive monetary policy and asset purchases, this meeting will be crucial to determine what the Fed is thinking. Not only will they assess what the economy looks like, but also where asset classes are and the dollar falling, this may give cause for concern. Rates are most certainly going to be left at zero, but the path of stimulus and asset purchases will be important to gauge the thinking of the Fed. Will they take their foot off the pedal for a bit? Treasury and MBS purchases have slowed down over the past month as the Fed's balance sheet has remained closer to $7 trillion, but not increasing at all. This is yet another reason why the S&P 500 has not moved over the past month.
The index may have stayed within a 100-150 point range, but underneath the surface there is a lot more going on. Sector rotation was vicious all last week as money comes out of Technology chasing laggards, and then back into them again as earnings are very supportive. The market has been very volatile the last few weeks and themes disjointed, almost synonymous with positions blowing up and people chasing last minute themes.
All eyes are on the Fed. Will the Fed be happy with what it has accomplished over the pasts few months, or will they continue to boost their purchases and stoke risk assets higher?