As we head into the final stretch of 2021 after a volatile third quarter, the reflation trade remains intact. We continue to see broadening inflation with seasonal tenancies; therefore, we recommend being selective in your strategy. The recent rebound in the dollar and rise in real interest rates of 35 basis points within a three-week time frame led to a swift decline in Gold. However, one must ask themselves, is this rally in the Dollar and rates for real?
Our analysis makes us believe that the Dollar will fail again at this upper band resistance, and quite frankly, commodities don't believe in the dollar rally either. The Fed is trying to tighten to curb the impact of higher inflation; however, the Fed cannot resolve logistical bottleneck supply constraints, unfavorable growing weather leading to food inflation, and pent-up demand from the economic reopen. These are the reasons why every investor should have a "real-assets bucket" in their portfolios. If you have never traded futures or commodities, I just completed a new educational guide that answers all your questions on how to transfer your current investing skills into trading real assets, such as the 10 oz Gold futures contract. You can request yours here: Trade Metals, Transition your Experience Book
While searching for ideas to gain exposure in the inflation trade within the coming quarter, we based these high conviction ideas while taking into account the predictive fundamental, quantitative, technical, and weather models to flag several markets.
Bullish Catalyst: After forming a multi-year high in July 2021, prices have pulled back, digesting the effects of the severe frost that led to extensive damage in Brazil. Expectations indicate that over a quarter of the production has been lost and will take multiple years to recover while supply chain constraints simultaneously prevent a steady flow of new supply from Vietnam, another major producer. We believe that the reopening demand is in the beginning stages, where prices could challenge those in 2011. See referenced chart below:
Bullish Catalyst: One would be discouraged from making an openly bullish call after the run to new all-time highs in August of 2020 and hardened resistance recently seen from $1820-$1835 an ounce. Bulls have repeatedly been knocked down, but I do not believe they are out for the count. Although the Fed has openly done an excellent job of presenting their "tapering" case and will most likely go through with it, the problem they will face in the second quarter of 2022 is the same mistake they made in mid-2019. That was when they were tightening policy into an economic slowdown which eventually led to a disaster. See December 2019 highlighted below. To further help you understand the quantitative analyses of the precious metals markets, we created a free "Gold Trends Macro Book." You can request yours here: Free Gold Trends Macro Book.
Bullish Catalyst: Besides Goldman making a $90 year-end Brent Crude Oil call and besides China's Vice Premier Han Zheng ordering top state-owned energy companies to secure supplies for the approaching winter "at all costs," we are focused on the numbers. Current EIA inventories of 418 million barrels show a widening production deficit from the 5-year average of 450 million barrels, leaving us with a yearly change of -73 million barrels. I'll leave it with this; you fill up your gas tank, you know where prices are heading. One year chart below:
Bullish Catalyst: Everyone knows about the chip shortage and how it continues to weigh in on US auto inventories. With sales figures due to decline next week, is there no low insight? The reality is that supply chain bottlenecks will get sorted out eventually. With 2022 right around the corner, automakers will be halting production to push for new year deliveries. We have seen platinum reach a seasonal low in early October and run into early November 8 out of the past 10 years. See chart below "searching for a bottom"
Bullish Catalyst: Dry conditions in growing regions have resulted in sharp declines in wheat production, and with food inflation on the rise, Governments globally are scrambling to restock inventories. End-users are having an equally challenging time forcing them to "pay at all costs."
Due to space and time constraints, I limited this list to just five high conviction "real assets" to keep on your radar. We strongly believe that many others will benefit and potentially outperform, such as Silver prices coming on sale this week or Sugar's ethanol demand picking up due to rising energy prices. Cocoa is another threatening multi-year highs today, and don't forget the seasonal tendency for the Dow Jones to rally from the last week of October into early December. If you would like to know more about our strategies in the futures and commodities markets, please register for a Free two-week trial of our research by clicking on the link here: The Blue Line Express Two-Week Free Trial Sign up.
Chief Market Strategist
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