Another Look At The Recovery Trade

Conventional wisdom now believe that gold and silver are suffering because of the recovery trade, which makes industrial metal more valuable because economic recovery increases the demand for those metals. The "Daily Trader" as Seeking Alpha has another take: given the power of the industrial metal's bull market, they're not just discounting recovery. They're primarily discounting inflation.

There are perhaps a number of reasons as to why gold has gone up over the last 12 months. I guess the central one is inflationary fears. I prefer not too get too caught up in reasons. Rather, I look for inter-market behavior to identify the underlying theme driving a security.

Now it stands to reason that if gold is genuinely weak then there should be associated weakness in related or associated markets. Gold is a precious metal (currency) but it is also a "hard" asset, i.e. a commodity. In any event, if base metals (copper, Al, Tin, Zinc, Nickel etc), other precious metals (like silver, platinum, and palladium) and the broad commodity group were showing weakness then I would take the current weakness we are seeing in gold seriously. From the charts [in the article] it seems that base metals, other precious metals, and the broad commodity group are all making new highs daily (actually record highs in a number of cases).

In other words, record highs in base metals make gold and silver the odd metals out in a rising trend. That trend should pull the two inflation hedges up along with the rest of the group.


To sum up, the recovery-trade meme is just another brick in the wall of worry. Read properly, the metals part of the recovery trade is signalling recovery plus inflation.