So China tightening credit is the ultimate bearish sign for commodities, and commodity stocks! Well that is what the press would have us believe and on the face of it that is what appeared to happen last night. But beneath the scenes this is far from the case. It seems that the smart money isn’t budging on their inflation outlook and by default the outlook for commodity prices, notably gold and silver. Since March last year the inflation premium being attached to TIPs has been gradually but surely on the increase. You may say “big deal” the market is only factoring in a marginal increase in inflation. Yes here and now that is the case but look at the most important aspect of the chart below – the upward momentum. An up-trend is in place for inflation premiums and it appears a healthy uptrend. Look how much the inflation premium hasn’t moved over the last few days. This to us suggests the sell-off in commodities over the last week is merely the market’s attempt to shake weak hands out of the market – i.e. a false move!
US Breakeven 10yr (the difference between TIPs 10yrs and standard 10yr treasury prices)
