Hey There Income Hunters,
I have been feeling like a high school kid lately …
You know, like when a cutie that you like is being very friendly and flirty — but then you see her doing the same thing with other boys?
After a while you get so frustrated, you start thinking, “Should I forget about her or get bold and put the press on?”
Then you finally get the nerve to make the move and you get, “I just want to be friends."
Well, that’s the way gold has been treating me.
Yes, Friend Zoned by gold!
You get these moves from the bottom and it’s like, OK let’s go, and you’re already to add on for the big move … then not so much.
It’s just another tease.
However, I refuse to give up on love with gold! I’m Sicilian and as stubborn as they come … so I found the perfect hedge (which I have had on for months) — and it’s working like a charm.
Between the two of them, it’s keeping in a good spot as I wait for my next chance to get bold with gold.
Gold Isn’t Only About Inflation
At first I was absolutely certain inflation was coming. I was like a modern-day Paul Revere riding around and screaming, “Inflation is coming! Buy gold!”
And then inflation arrived — and gold went down.
Somehow being right and losing money is 10x worse than being wrong and losing money.
As I pondered what I was missing, I came across Lyn Alden, whose inspiring story includes her rise from homeless as a child to being a successful engineer and macro investor.
I really like the way she thinks and in one of her talks she touched on people often getting it wrong with gold.
So, looking for some relationship advice, I was all ears …
Lyn made the point that gold tracks real rates — that’s the US 10-year Treasury Yield minus the Consumer Price Index (CPI) — so I put together an analysis … and sure enough she was right on.
The chart below may be disorienting at first, but stay with me. What I did was invert the scale on the price of gold, to put the real yield and gold trend in the same direction. This way you can see how they move in similar fashion:
You see, gold did not move higher on inflation expectations … it moved higher (see the scale on the left for gold) when real rates went down (right scale).
The reason for that is, when real rates are moving lower, that means the 10-year rate is below CPI, or core inflation as it is called.
When 10-year rates are below inflation (negative real rates), investors are losing money holding Treasury securities. Negative real rates fuel inflation because instead of losing money holding bonds, investors are forced to buy goods and services …
And that is what pushes prices higher, which results in higher inflation.
Since I felt so strongly that inflation was coming, I sold the iShares 20 Plus Year Treasury Bond ETF (Ticker: TLT) as a hedge against my long in the Gold trust ETF (Ticker: GLD) …
Now wait until you see this chart:
Pretty cool, right?
The hedge actually went down more than the GLD long.
I still have the hedge while I wait for one of two things to occur
- Either the Fed starts buying bonds to keep interest rates down
- Or the 10-year bond rates reach 2%, meaning prices go a lot lower
Bring It Home
Ray Dalio is the most successful hedge fund trader in history, and he’s one of my mentors…
His main approach in life is to look at everything with an open mind and simply seek the truth.
He also swears by transcendental meditation — I have my first class next week!
Maybe I’ll find some other good hedges in my subconscious.
As always …
Live and Trade With Passion My Friends,